Airlines are Worthless, Except for Their Loyalty Programs

Airline Value vs. Loyalty Program Value

Airline loyalty programs are often more valuable than the airlines which own them, even though the airline's value also includes the value of its loyalty program. This seems like it can't be true because the owner of the asset (airline) should be more valuable than the asset (loyalty program) by itself. But as this awesome video by Wendover Productions explains, this happens because many airlines are not actually operationally profitable. It turns out that in many cases, airlines actually lose a lot of money.

While consumers are always sensitive to the high cost of airline tickets, it turns out that those airlines (including some of the biggest brands on the planet) are essentially worthless on paper. The expense of administering their service is so high that they actually lose money and are generally unable to support the high operational cost of running their business. Luckily, their loyalty programs are there to help offset these losses in a massive way.

Examples

Here are a couple of examples featured in the Wendover video that explain how the value of United Airlines and Delta would be negative if it weren't for their loyalty programs.

United Airlines Value: $10B
United MileagePlus Value: $21B
This means United Airlines alone is worth $-11B

Delta Airlines Value: $20B
Delta Skymiles Value: $26B
This means Delta Airlines alone is worth $-6B

How do airline loyalty programs work?

Loyalty programs certainly help drive revenue to the airlines' primary business (carrying passengers), but they also function as independent businesses. These programs produce tons of revenue and profits that help shore up an airline's bottom line. In addition, they are less expensive to manage and maintain and have much lower overhead (jet fuel anyone?) than the airlines which own them.

Airline loyalty programs effectively produce their own currency, which they issue in the form of points or miles. Third party companies then by this currency and offer it to their own customers as incentives to use their services. You see this all the time when you earn airline miles for using a credit card that was issued by an independent bank. Hotels and car rental companies do this too, as does Lyft, which offers 1 Delta SkyMile for every $1 spent on Lyft Rides.

Airlines as Banks

If airline loyalty program miles and points are thought of as a proprietary currency, then airlines act as the central bank that controls the currency's minting as well as where, when and how it can be put into circulation. In addition, they have sole control of the supply and availability of goods and services for which it can be redeemed. Naturally, when other companies purchase the airline's currency they are purchasing it in dollars. This is how airlines are able to stay hugely profitable even when faced with the steep operational losses that are generated by their primary business.

Final Thoughts

Airline loyalty programs are usually considered a win-win, as customers do derive tangible benefits and significant value from their membership. Such programs are typically held up as the industry gold standard, demonstrating the mutually beneficial nature of building long-term customer relationships. We hope this deep dive has helped you understand what's going on behind the scenes with airline loyalty programs. If you need a refresher, feel free to drop by any time!