What a coincidence, so have I! While I don’t know the answer, I will share my thought process. I’m sure someone that works in the alliances division of an airline somewhere will be laughing their rear off at my analysis, but I’ll provide it nonetheless.
I ask this question in the context of international premium awards. Can the airlines really be making money off of them, especially those airlines with massive mileage arrangements either with a co-branded credit card or a transfer partner (which is basically every airline nowadays)? Take Air Canada’s spun-off Aeroplan, for example. I converted 240,000 American Express Membership Rewards points to Aeroplan miles, which I used to book two crazy first class awards.
While I don’t know how much Membership Rewards compensates Aeroplan for the miles, I’m guessing it’s less than a cent a mile, probably closer to .75 cents per mile, so around $1,800-2,400 for 240,000 miles. For that we got two first class tickets to Europe and Asia on multiple world class airlines in some very comfortable suites. But of course that’s not the typical redemption. The airlines count on passengers using miles at the “standard” level with huge fuel surcharges for their own flights that would go out with empty seats otherwise, or sometimes even see transferred miles expire.
But this does raise the question, just how much are the airlines paying each other when it comes to partner awards? In other words, how much did Aeroplan have to pay United, Swiss, Turkish, and Thai Airways for my first class award ticket? I’m betting it’s way more than the amount Membership Rewards paid Aeroplan for those miles. I think it’s safe to say that the cost has something to do with the complexity of the ticket. In this case I would guess that Aeroplan had to pay somewhere in the ballpark of $2,500-3,000 per ticket. It’s a guess I’m pulling out of thin air, but it seems about right for a first class international award. The amount has to be enough for airlines to be encouraged to release first class award inventory, while not being so much that the airlines can’t afford to pay (minus United, of course). I’m guessing coach awards are substantially cheaper, probably around $400-500 per ticket to Asia.
Long story short, regardless of the angle from which I look at this, airlines must lose money on complex partner first class awards, even if they’re generating revenue from a transfer partner. Of course they’re totally cashing in on basically all other types of awards, which is what makes these programs such cash cows.