As airlines report soaring demand for flights, signs are emerging that a model built over the past four decades is starting to show signs of strain. Airline loyalty programs, particularly frequent-flyer miles schemes, have evolved into powerful, multibillion-dollar businesses that are often more profitable than the airlines’ actual flight operations.
Airlines have long built valuable revenue streams by selling air miles to financial institutions like banks, who then offer co-branded credit cards to customers. As an example, the loyalty programs of the three largest U.S. carriers alone were valued at $73.8 billion in 2023, according to On Point Loyalty.
However, despite this impressive financial success, cracks are starting to appear in the system as many airlines experience record levels of travel demand. During the pandemic, frequent-flyer points surged, and now lounges are overcrowded, with premium cabins particularly drawing more attention. In response, airlines are tightening their programs, making it harder for customers to reach elite status.
A New Kind of Frequent Flyer
Take Matt Jones, for example. His journey from London to Cape Town this winter involved hopping between five flights on four airlines. This painstaking route, which took him over four days, was all part of his strategy to reach “gold” status in the Star Alliance group, unlocking access to over 1,000 airport lounges and special privileges across 25 different carriers. Jones’s experience reflects how far some are willing to go to take advantage of loyalty perks, which extend far beyond just accumulating miles for flights. These programs have now become deeply embedded in the lives of travelers who spend hours optimizing their flying schedules to accumulate points and status.
For airlines, loyalty programs are no longer just about keeping repeat customers; they are critical to their bottom line. Selling air miles to third parties has opened up new revenue streams, turning loyalty schemes into assets more profitable than the flight operations themselves.
The Birth and Evolution of Loyalty Programs
The concept of frequent-flyer programs was born in the early 1980s when American Airlines, faced with increased competition following deregulation, introduced its first loyalty scheme. Initially, the program offered customers rewards based on miles flown, but its success quickly led to other airlines following suit. In 1987, American Airlines partnered with Citibank to launch a co-branded credit card offering air miles for every dollar spent, which transformed the nature of these programs.
What followed was an explosion of loyalty schemes, with airlines selling points to not only financial institutions but also hotels, car rental companies, and retailers. This created a robust, asset-light revenue stream for airlines, as the cost of redeeming points was deferred. In fact, by 2018, it was estimated that there were enough unredeemed air miles in passenger accounts to fund free one-way flights for every airline passenger worldwide.
During the pandemic, airlines became even more reliant on their loyalty programs. In fact, the four largest U.S. airlines used their loyalty programs as collateral to raise debt, demonstrating the staggering value these programs hold.
Cracks in the Model
However, as the demand for flights skyrockets post-pandemic, airline lounges are becoming overcrowded, and many passengers are sitting on large balances of air miles accumulated during lockdowns. Some management teams are realizing that too many passengers now hold elite status, and airlines cannot afford the costs of maintaining these loyalty perks for everyone.
In response, airlines are tightening the rules of their loyalty programs, focusing rewards on high-spending customers. Delta, for example, announced changes to its SkyMiles program in 2023, aligning rewards with spending rather than miles flown. Similarly, British Airways will award tier points based on the cost of the ticket, rather than the length of the trip, a move that has angered some frequent flyers who see the new rules as making it harder to reach elite status.
The Risk of Alienating Customers
As airlines adapt their loyalty programs to focus on higher spenders, they risk alienating a broader customer base. Critics argue that these changes could damage customer loyalty, a cornerstone of these profitable programs. The difficulty in redeeming air miles, compounded by crowded flights and overbooked premium cabins, is leading to growing frustration among members.
Airlines are aware of this risk. Many have introduced ways for customers to “burn” their points beyond just flights, including experiences and merchandise through online shops. British Airways has also maintained a portion of seats on long-haul flights exclusively for Avios redemptions, ensuring that members have access to flights.
The Future of Airline Loyalty Programs
The future of airline loyalty programs lies in balancing customer satisfaction with the need to maintain profitability. While airlines are becoming increasingly skilled at predicting which seats will remain unsold, this approach has its drawbacks. As Tom Peace, managing director of The Loyalty People, points out, “Burn drives earn, it is not the other way around.” If customers cannot use their points, they are less likely to continue accumulating them.
Despite these challenges, the importance of loyalty programs to airlines’ bottom lines remains undeniable. If airlines fail to prioritize customer satisfaction while managing these lucrative programs, they risk undermining the very business models that have made them so profitable.
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