Airline loyalty programs, once designed to attract repeat customers, have now evolved into multi-billion-dollar businesses that, in some cases, generate more profit than actual flight operations. A recent Financial Times (FT) report highlights how these schemes—particularly frequent flyer and air miles programs—have become both a boon and a potential liability for airlines.
The Rise of Loyalty Programs
The concept of airline loyalty programs dates back to the early 1980s, when American Airlines first introduced a frequent flyer system to encourage repeat customers. Initially, these programs were straightforward: passengers earned miles based on distance flown and could redeem them for free flights or upgrades. However, the game changed in 1987 when American Airlines partnered with Citibank to launch a co-branded credit card, offering miles for every dollar spent.
This partnership model proved immensely profitable. Airlines could create points at will and sell them to banks and third-party businesses, turning their loyalty programs into major revenue streams. By 2023, the loyalty programs of the three largest U.S. airlines—American Airlines, Delta, and United—were collectively valued at $73.8 billion, according to On Point Loyalty, a consultancy.
The Post-Pandemic Reality: Overcrowding and Devaluation
While loyalty programs continue to drive revenue, their success has led to growing pains. During the pandemic, many frequent flyers accumulated large amounts of miles due to travel restrictions, while airlines offered generous status extensions to maintain customer loyalty. Now, as travel demand surges, the unintended consequence is overcrowding—airport lounges are packed, and passengers find it harder to redeem miles for flights.
To address this, airlines have started tightening the rules. British Airways (BA) and Delta Air Lines have announced changes that make it harder to earn elite status. Instead of awarding points based on miles flown, these programs are now tied to how much a customer spends. Critics argue that these adjustments favor high-spending corporate travelers while sidelining leisure travelers and small business owners.
For example, BA’s upcoming changes—effective April 2024—will require frequent flyers to spend significantly more to reach Gold status. According to Head for Points, a frequent flyer website, customers may now need to spend around £20,000 per year to qualify, leading many to feel alienated. In response, some customers have written open letters to BA’s CEO, while others have planned a symbolic “wake” for the old loyalty system.
The Business of Selling Air Miles
Airlines have become increasingly reliant on the financial power of their loyalty programs. In 2023, IAG Loyalty, the company behind BA’s Avios points system, reported an operating profit of €321 million—more than the profit of Aer Lingus, one of IAG’s airlines. McKinsey estimated that, in 2018, there were 30 trillion unredeemed air miles in passenger accounts—enough to offer nearly every airline passenger a free one-way flight.
Airlines also benefit from deferred costs: when miles are sold to banks and businesses, airlines get immediate revenue, while customers often redeem them much later—or not at all. Some never use their miles, allowing airlines to keep the profits.
However, some governments are taking notice of potential issues. In September 2023, the U.S. Department of Transportation launched an investigation into airline loyalty programs, citing concerns over devaluation, hidden fees, and restricted redemptions. The agency is examining whether airlines deliberately devalue points over time, making it harder for customers to use them.
The Future of Airline Loyalty Programs
As loyalty schemes continue to evolve, airlines are looking for new ways to keep customers engaged. Some are expanding redemption options beyond flights, offering experiences like VIP concert tickets, luxury goods, and exclusive sports events. Virgin Atlantic Flying Club members, for example, can use their miles to secure seats in a VIP box at London’s O2 Arena, while Qatar Airways allows customers to bid for UEFA Champions League tickets using points.
Airlines are also experimenting with subscription models. Carriers like Alaska Airlines, Saudia, and AirAsia now offer plans where customers pay a fixed fee for a set number of flights per year, blending loyalty and direct revenue generation.
Despite these innovations, experts warn that airlines must balance profitability with customer satisfaction. If miles become too difficult to redeem, customers may stop participating in these programs altogether. As Tom Peace, managing director of The Loyalty People consultancy, puts it: “Burn drives earn. If people can’t use their points, they won’t bother earning them.”
Ultimately, loyalty programs were designed to attract customers, not just make money. If airlines focus too much on monetization at the expense of customer experience, they risk alienating the very travelers they sought to retain. As Anthony Woodman, head of Virgin Atlantic’s loyalty business, cautions: “The biggest question is whether customers really want a relationship with the brand. If they don’t, the loyalty program can only go so far in bridging that gap.”
