[Note: This item comes from friend David Rosenthal. David’s comment:’Anyone remember Green Stamps?’. DLH]
Airlines Make More Money Selling Miles Than Seats
The golden goose isn’t your ticket or bag fee—it’s the credit card you use to collect frequent flier miles.
By Justin Bachman
Mar 31 2017
Does your wallet contain an airline-branded credit card? If so, your daily Starbucks visits, iTunes selections, and dining habits serve a critical role in keeping the U.S. airline industry fat and happy.
For carriers such as American Airlines riding Citigroup Inc. plastic, or Delta on American Express Co., these programs are a cash cow, a golden goose, or any other fiscal livestock you care to conjure. Each mile fetches an airline anywhere from 1.5 cents to 2.5 cents 1 , and the big banks amass those miles by the billions, doling them out to cardholders each month.
For the banks, people who pay annual fees for those cards to accumulate miles are the closest thing to a sure bet. These consumers typically have higher-than-average incomes and spend more on their cards, which generates merchant fees for the banks. They also tend to maintain high credit scores, which means they pay their bills on time and banks experience fewer defaults.
The airline-miles business, formally known as loyalty programs, has become a high-margin enterprise that’s grown in size and value amid airline consolidation, with carriers keen to expand credit-card rolls and see loyalty members spend more. This year, Alaska Airlines began tying a small percentage of its 19,000 employees’ performance pay to the market growth of its card with Bank of America Corp.
Investors have failed to appreciate how crucial these programs are to airline profitability amid the stability consolidation brought, said Joseph DeNardi, a senior airline analyst with Stifel Financial Corp. in Baltimore. Since August, he’s issued a steady stream of client notes arguing that the market has undervalued the five largest airlines.
DeNardi has repeatedly explained that investors have little insight into the billions of dollars large banks pay for these affiliations. At each airline investor call or conference, DeNardi has steadfastly prodded executives for greater reporting detail.
In many ways, the Big Three U.S. airlines have organized themselves into two distinct businesses. There’s the traditional activity—the one with jets—which involves pricing seats for as much as possible, collecting a bag fee, and selling some food and drinks while keeping a close eye on costs. The other business is the sale of miles—mostly to the big banks, but also to companies that range from car rental firms to hotels to magazine peddlers.
The latter has expanded so much that it accounts for more than half of all profits for some airlines, including American Airlines Group Inc., the world’s largest.