How Loyalty Programs Work

How Loyalty Programs Work

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Do you have a punchcard for your local coffee shop? Participate in the rewards program at your nearby supermarket? Receive coupons via email?

Why?

For most of us, the answer is “to save money, of course.”

We offer our loyalty and consistent patronage to a business, and in exchange they reward us with better prices, discounts, special offers, and other things that make us feel like a valued customer. And when we feel valued, we’re incentivized to spend more with that company, continuing the cycle.

That’s the point of loyalty programs in general, and the airline industry is no different.

For the airlines, at least in the US, their ideal customer is the business traveler.

They know that companies are willing to spend more on tickets in order to have flexibility, but they’ve also learned that individual travelers can be encouraged to stay loyal to a single airline if they’re provided with the right incentives. They might even be willing to spend more on a ticket in order to fly with the airline they perceive to offer the best benefits.

So you see airlines offering “elite status perks” to people who fly tens or hundreds of thousands a mile each year, with the benefits increasing the more you fly. The business traveler feels rewarded when they get their free drink or complimentary upgrade, and the airline retains more of that person’s business travel (and maybe some of their personal travel as well).

Elite members can get upgrades to first and business class seats to reward them for their loyalty

Everyone wins.

With that premise as the foundation, airline loyalty programs have expanded dramatically over the years. It’s important to keep in mind that the frequent flyer programs themselves are profit centers for the airlines, independent of airline operations.

Why does that matter?

How Frequent Flyer / Credit Card Miles Work

Because airline loyalty programs are essentially their own businesses – and what they are selling, ultimately, is a promise. The idea being that in exchange for your business and actions now, you will receive “free” flights in future. This is brilliant, in that in many cases it costs them nothing.

Nowadays you can earn miles for almost anything, from spending money on a credit card, to joining a mileage dining program, to getting a hair loss consultation or car insurance quote, to taking out a mortgage. There’s not a single transaction I make where I don’t think about the potential implications for earning miles.

There are literally trillions of unredeemed airline miles, and while they ultimately become a liability on the airline accounts, the day-to-day cost is negligible. After all, around 85% of travelers redeem their miles for domestic economy tickets, which aren’t that expensive for the airline to begin with.

Furthermore, the economic realities in the United States, especially, have created a landscape where airlines and financial institutions have partnered in a way that can be obscenely lucrative for the savvy consumer.

The banks and credit card companies purchase billions of miles from the airlines, and offer those miles to their customers as a rebate on their purchases.

Some cards offer airline miles right away, others offer points in a currency that can be transferred to airline miles in future. We’ll get into all of those later, but the key takeaway is that the credit card companies are purchasing miles and points for a fraction of a cent.

This provides the airline with better cash flow, so they’re able to expand their route networks, or undertake fleet refurbishments, or even just engage in a costly media campaign. The bank profits as well, because they receive a fee from the merchant every time their credit card is swiped.

And you, as the consumer, receive a rebate on all your purchases – one that can be incredibly rewarding if you know the right tricks.

Amazing products like Lufthansa First Class can be booked with miles and points

This is an important concept, and one I can’t stress enough.

At present (and this will no doubt change over time), the most lucrative way to accrue airline miles is through specific, leveraged, spend on the right credit cards. By strategizing how you pay for your everyday purchases you can really maximize the rewards you’re earning, and the miles you’re accruing.

You don’t have to spend hundreds of thousands of dollars a year, or fly every week.

You’ll certainly accrue miles faster if you’re doing those things, but most families should be able to generate enough miles for one great trip per year just by maximizing the dollars they’re already spending.

Really.

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