The airline industry in the United States has changed massively in recent years. Costs have skyrocketed, while consumer trends have evolved. Increasingly, we’re seeing a divide in the industry — some airlines are as profitable as ever, while others can no longer compete.
What’s causing this? Well, it’s because the profitable airlines aren’t actually making their money from selling tickets, but instead, they’re earning their profits from their loyalty programs. I’ve of course covered this many times as a concept, but @relibev flags a fascinating analysis of this…
In this post:
All US airlines would lose money without loyalty programs
Courtney Miller from Visual Approach Analytics has an excellent analysis of the state of US airline industry economics, and the extent to which profits are driven by loyalty programs rather than airline ticket sales.
He analyzed the 2024 operating profits of the five most profitable US airlines, and compared their reported operating profits to what their operating profits would have been without loyalty revenues:
- Delta had a 10.5% operating margin, but without loyalty revenue, would’ve had a -2.5% margin
- United had an 8.9% operating margin, but without loyalty revenue, would’ve had a -1.9% margin
- American had a 4.8% operating margin, but without loyalty revenue, would’ve had a -8.3% margin
- Alaska had a 4.9% operating margin, but without loyalty revenue, would’ve had a -11.4% margin
- Southwest had a 1.2% operating margin, but without loyalty revenue, would’ve had a -19.9% margin
So the actual core airline business is sort of operated as a loss leader, to allow the company to generate loyalty program revenue. It’s like Costco, where hot dogs are sold as a loss leader. The difference is that airline ticket sales make up a slightly higher percentage of revenue than hot dog sales do at Costco. 😉
Now, one might ask, how does this whole loyalty revenue thing at airlines actually work? In many ways, this is an accounting exercise:
- When you’re awarded points for your flight, that gets booked as air traffic liability on the balance sheet, and then when you redeem those points, the liability goes away, and the value of your points gets booked as passenger revenue
- When you spend money on a co-branded credit card, the money the credit card company gives the airline is split — roughly half goes onto the balance sheet as air traffic liability, and roughly the other half gets booked as marketing revenue; when the points are used, the air traffic liability gets booked as passenger revenue
- When you forget about your points (not necessarily they expire, but instead, the airline just assumes they won’t be used), the airline can release the liability in a breakage process, and removing the liability results in revenue
With that in mind, this study gets even more interesting when you look at the percentage of revenue that’s attributed to loyalty programs. At those same five airlines, what percent of revenue are from loyalty marketing and points redemptions?
- For Southwest, loyalty revenue makes up 21.1% of revenue
- For Alaska, loyalty revenue makes up 16.3% of revenue
- For American, loyalty revenue makes up 13.1% of revenue
- For United, loyalty revenue makes up 12.9% of revenue
- For Delta, loyalty revenue makes up 10.8% of revenue
I suppose that’s not too surprising — the less profitably an airline with a robust loyalty program operates, the higher the percentage of revenue that’s attributed to loyalty programs. Still, I don’t think most people would assume that Southwest has nearly twice as much loyalty revenue as Delta, as a percentage of revenue.
What should we make of this airline industry data?
I think there are a few conclusions we can draw here. First, to slightly downplay this data, I think it’s important to emphasize that loyalty programs have largely just become a new funnel for booking tickets, and generating revenue. Think of it as just another currency that airlines accept.
Southwest has a high percentage of passengers redeeming points for flights, though presumably if it weren’t for the loyalty program, the airline would have more people booking tickets in other ways (though I can’t imagine Southwest would be profitable without its loyalty program). While I do think points stimulate demand, people redeeming points for travel wouldn’t just totally stop traveling if it weren’t for these currencies.
Second, I think this just reflects the overall industry reality that we have to come to terms with — the US airline industry has transformed to the point that it can’t exist in its current form without loyalty revenue. You’d think that airlines would be unhappy about this, but for carriers like Delta and United, it’s good news. It allows them to squash competitors, who simply can’t compete in the same way.
For consumers, this is mostly good news. Our ticket prices are essentially being subsidized by credit card companies, and it’s why the average passenger revenue per available seat mile is typically lower than the average cost per available seat mile, while airlines can still make profits.
I’ve also made the point that this is why I’m actually broadly supportive of consolidation in the US airline industry. What’s good for consumers is to have as much capacity flying for airlines that can generate meaningful revenue from their loyalty programs. After all, that’s subsidizing our ticket costs.
How can smaller airlines without robust loyalty programs compete? Not only do they not have that revenue to rely on, but they need to generate a revenue premium on ticket prices over the “premium” airlines, which is… well, sort of impossible.
Bottom line
The US airline industry has evolved massively in recent years, both for better and worse. The reality is simple — US airlines rely on loyalty programs to make money. This is good for consumers, in a way, since our ticket prices are essentially subsidized by credit card companies. But it’s also bad, because it doesn’t allow the smaller players to compete.
It’s fascinating to see some concrete data on just how much loyalty program revenue impacts the bottom lines of these companies.
What do you make of this data on loyalty program revenue, and what it means for the long term direction of the industry?
@Ben,
If you are in favor of airline consolidation, you should not complaint about today's devalued and anti-consumer loyalty programs. On contrary, you wrote about the
"good old days" of airline and hotel loyalty programs two decades ago or so. Your views align with the direction where the wind blows. They are too simplistic.
It’s all financial engineering; the aviation and customer service are secondary. There’s a growing disconnect between the service they provide versus their incentives to actually make a profit—definitely not a good place for the customer! Thankfully, as a grown adult, I don’t waste time on silly status games via corporate hamster wheel of miles, points, stars, smiley-faces, etc.
You have covered this particular topic numerous times. However, we still cannot verify how the Big Three reported massive profits years before Covid but somehow they did not have sufficient cash reserves to sustain one month of operation after the world was shut down. Big businesses hire exceptional forensic accountants to cook the numbers and report fuzzy balance sheets without being challenged and exposed. Same way politicians draft annual federal and state budgets without accountability....
You have covered this particular topic numerous times. However, we still cannot verify how the Big Three reported massive profits years before Covid but somehow they did not have sufficient cash reserves to sustain one month of operation after the world was shut down. Big businesses hire exceptional forensic accountants to cook the numbers and report fuzzy balance sheets without being challenged and exposed. Same way politicians draft annual federal and state budgets without accountability. They are confident that when they face near bankruptcy, politicians will be able, willing and ready to open public treasury to bail them out. Politicians convince the public that big industries are "too big to fail" when in fact big businesses bribe and corrupt politicians to keep them in power to preserve and protect the interests of all participating co-conspirators. To those who are bewildered as to why big businesses want to " kill the goose that laid the golden eggs", well they lack comprehension of capitalism, or socialism. Everyone claims labor costs are the number one culprit affecting profits but nobody mentions the obscene executive compensation package: The executives' average salary is nearly 2900 times that of the employees' average salary. If you rationalize that the executive is the main engine propel his company's profits, then why no company clawed back its executive's compensation benefits five years before it hemorrhaged for cash infusion and bankrupted? We refuse to learn from foreign countries and adopt their more moderate & egalitarian approach because we are distinct and exceptional. To those who fantasize an impending economic downturn to put big businesses in their place, indulge yourself in below article to broaden your horizon. The fittest and strongest will survive the longest.
theintercept.com/2023/09/23/tim-gurner-speech-unemployment/
first,
the entire financial system froze up as communities were locked down. There was no expectation that the financial system could survive without huge injections of cash and that happened from governments around the world. Airlines got their share but trillions of dollars were pumped into economies. It became clear that much more money was deployed by governments than ultimately what was needed and the result was rampant inflation which disproportionately hit lower income...
first,
the entire financial system froze up as communities were locked down. There was no expectation that the financial system could survive without huge injections of cash and that happened from governments around the world. Airlines got their share but trillions of dollars were pumped into economies. It became clear that much more money was deployed by governments than ultimately what was needed and the result was rampant inflation which disproportionately hit lower income people. Parts of covid management from a government standpoint were not just errors on the US side.
second, as soon as the financial system started functioning again, Delta and Southwest were both able to pull down billions of dollars in lines of credit. It was American and United that could not access funding. So, the notion that the industry collectively could not function was incorrect.
and third, the reason for the huge financial drain was as much about the massive amounts of refunds that airlines had to give for travel that nobody would take as it was from operating costs that they would have had to shoulder without business.
and finally, there were failures throughout the global airline industry; it is precisely because there were not failures during covid and have not been failures since that the US industry is as fragile as it is.
The difference is that the line has moved in terms of who can survive based on operating results but balance sheet strength does not line up w/ operating results. UA still maintains enormous amounts of cash on hand even though they are making decent money - even if they have yet to pay their employees market wages - while WN still has a very strong balance sheet.
DL maintains very low cash on hand (which also makes it less attractive as a takeover target or by corporate raiders) but has access to large lines of credit.
If there were a black swan event now - and they do happen about every 10 years in the US airline industry - AA is the most vulnerable of the big 4 with a big chunk of the smaller carriers that probably could not make it.
We are in a war of attrition right now.
It doesn't take a bunch of forensic accounting to figure out how we got here - heavily because of US government cash infusions in the industry.
And the airlines spend billions of dollars every year buying back their own stock. Money that is needed when times get tough. If each airline wasn't a slave to the shareholders they would have weathered the storm better.
US airlines SPENT money buying back their stock in the 2010s. It wasn't allowed as long as government loan money was being handed out.
Several airlines have started buying back stock but it was AA that was the least profitable in the 2010s even as it bought back billons of dollars of stock and also engaged in one of the largest fleet purchasing campaigns. They simply were going through more cash than they could generate.
...US airlines SPENT money buying back their stock in the 2010s. It wasn't allowed as long as government loan money was being handed out.
Several airlines have started buying back stock but it was AA that was the least profitable in the 2010s even as it bought back billons of dollars of stock and also engaged in one of the largest fleet purchasing campaigns. They simply were going through more cash than they could generate.
If another covid happened, it is doubtful that the same amount of handouts to airlines could be justified
American would likely not survive.
UA could burn cash but probably survive.
WN might file for chapter 11 just to get costs down.
and for those that brag about the size of UA's order book don't realize that the level of financial commitments UA has are and will be a liability if there is a downturn. Airbus and Boeing are simply not going to push back hundreds of deliveries for an airline; they need to survive too.
UA has planned to take 140+ airplanes per year in several years. they maintain the cash they do because if there is a black swan event, they will have no choice but to keep taking massive amounts of new aircraft while other airlines can negotiate for most modest delivery schedules until times improve.
including AA, about 40% of US airline capacity is being flown by airlines that would not likely survive another black swan event.
Tim Dunn says, "It was American and United that could not access funding."
Completely incorrect. United was the first to raise $billions once Covid hit. In fact UA just paid back financing backed by Mileage Plus so that it is now completely unencumbered.
Tim Dunn says, "UA still maintains enormous amounts of cash on hand even though they are making decent money
DL maintains very low cash on hand (which also makes it less...
Tim Dunn says, "It was American and United that could not access funding."
Completely incorrect. United was the first to raise $billions once Covid hit. In fact UA just paid back financing backed by Mileage Plus so that it is now completely unencumbered.
Tim Dunn says, "UA still maintains enormous amounts of cash on hand even though they are making decent money
DL maintains very low cash on hand (which also makes it less attractive as a takeover target or by corporate raiders) but has access to large lines of credit."
UA and DL have very similar operating cash flows and net debt, and neither are under threat of corporate raiders. This isn't the 1980s. UA has stated the cash reserves are to take care of opportunities that present themselves.
WRT mergers there is an new sheriff in town.
I'm sorry but you are incorrect.
UA was the first to sell their loyalty program but DL and WN both pulled down billions in lines of credit as soon as the financial system was reopened.
UA simply did not have the lines of credit that DL and WN had.
See below about why UA has to keep so much cash on hand - it is because they have such a massive order book that,...
I'm sorry but you are incorrect.
UA was the first to sell their loyalty program but DL and WN both pulled down billions in lines of credit as soon as the financial system was reopened.
UA simply did not have the lines of credit that DL and WN had.
See below about why UA has to keep so much cash on hand - it is because they have such a massive order book that, if there is a downturn, they will be on the hook for those massive orders even if the economy no longer supports taking them.
and don't forget to read Ben's article about the FA contract rejection. In a service industry, UA is very close to being in exactly the same position AA was in a few years ago with a disengaged and hostile workforce.
All of UA's premium revenue strategies could vaporize in a heartbeat.
Sorry, UA raised more capital and did it earlier than any other airline in the US during Covid and all of the airlines took/needed the government bailouts.
Now UA's net debt is actually less than DAL and it is generating $10B in operating cash flow/year. The cash hoard is to take advantage of all kinds of opportunities that always present themselves in the airline industry including paying cash for airplanes when it is advantageous to do so.
rebel,
you seem to selectively want to interpret data the way you want.
UA simply did not drawn down cash before DL or WN.
And the reason why UA is generating so much more cash is because they are underpaying their employees.
See the topic about the FA contract where you are trying to argue that "this is just part of the process" and "UA won't have to spend money to get a contract...
rebel,
you seem to selectively want to interpret data the way you want.
UA simply did not drawn down cash before DL or WN.
And the reason why UA is generating so much more cash is because they are underpaying their employees.
See the topic about the FA contract where you are trying to argue that "this is just part of the process" and "UA won't have to spend money to get a contract approved"
UA's profit margins would not be on par with DL if UA was paying industry-comparable salaries and benefits - which not just DL is doing but so is AA and WN
Not going as far as Tim Dunn, but the /massive/ cash flow hit from both refunds and ceasing lots of operations was more than they really had on-hand reserves for. Delta, for example, had more in "customer advances" (that is, prepaid tickets) and similar than they did cash-on-hand at the start of 2020.
Also, nobody knew how long things were going to be shut down for, or how long airlines were going to be stuck...
Not going as far as Tim Dunn, but the /massive/ cash flow hit from both refunds and ceasing lots of operations was more than they really had on-hand reserves for. Delta, for example, had more in "customer advances" (that is, prepaid tickets) and similar than they did cash-on-hand at the start of 2020.
Also, nobody knew how long things were going to be shut down for, or how long airlines were going to be stuck blocking middle seats for - and don't forget, part of the reasons for those loans was that if those hadn't happened, a LOT of cities were going to lose service for a while. "Great Moments in Unintended Consequences" did a bit on that, and I made a comment pointing out that the skeletal service it propped up was something that everyone /knew/ was going to run pretty empty, but the alternative was a total loss of service, so empty seats were the lesser of the evils (and some airlines started running milk run-esque flights).
There were also some fixed/semi-fixed costs in the mix - leased properties, etc. Airlines have agreements to cover airport operating expenses, and a lot of that didn't decline in line with the (in April 2020 over 95%) decline in traffic.
I don't think all of the airlines were going to run out of cash in April, 2020 - but I think a lot of them were going to run low or run out over the summer. But it's also worth noting that (IIRC) e.g. Delta got a cash infusion from Amex buying a /ton/ of miles (I seem to recall it was in the tens of billions of RDMs). Also, this was (in some sense) government-induced because of all of the rules put out by the Federal Government, state governments, etc. Note - this is not to litigate the rightness of those rules, but they were often government-imposed (compare ridership in the fall of 2020 vs April/May) and there's a case that the government needed to step in as a result.
Don't forget that even into December 2020, ridership was like 40% of where it was in 2019. It was a BAD couple of years.
Ben says, "I’ve also made the point that this is why I’m actually broadly supportive of consolidation in the US airline industry. What’s good for consumers is to have as much capacity flying for airlines that can generate meaningful revenue from their loyalty programs. After all, that’s subsidizing our ticket costs."
It appears that this Administration might agree with you. DOT sure approved "Blue Sky" quickly.
https://www.reuters.com/business/jetblue-united-partnership-gets-go-ahead-us-transportation-department-2025-07-29/
Ben says, "I’ve also made the point that this is why I’m actually broadly supportive of consolidation in the US airline industry. What’s good for consumers is to have as much capacity flying for airlines that can generate meaningful revenue from their loyalty programs. After all, that’s subsidizing our ticket costs."
It appears that this Administration might agree with you. DOT sure approved "Blue Sky" quickly.
https://www.reuters.com/business/jetblue-united-partnership-gets-go-ahead-us-transportation-department-2025-07-29/
Blue Sky as it was approved by the DOT was never realistically something that would have been blocked.
It was considerably different from the NEA and is largely a joint-marketing program.
The JFK slot transaction will be approved on its own merits when it is formally proposed; the biggest issue is not that B6 could lease slots to UA but that UA agreed to give up space at a schedule coordinated (EWR) airport which does...
Blue Sky as it was approved by the DOT was never realistically something that would have been blocked.
It was considerably different from the NEA and is largely a joint-marketing program.
The JFK slot transaction will be approved on its own merits when it is formally proposed; the biggest issue is not that B6 could lease slots to UA but that UA agreed to give up space at a schedule coordinated (EWR) airport which does not have mechanisms to limit the ability of carriers to add service. The EWR part of the deal could be problematic to regulators.
B6 said BlueSky has worked so far and it is very likely because of the revenue that UA is providing to Paisly.
BlueSky is not about consolidation in the industry and what the DOT has approved doesn't give any indication of how they might rule on a true merger or major asset transfer.
This confirms that credit card companies rip off merchants with high fees and cardholders with high interest rates. That allows large payments to airlines.
The small merchant who cannot negotiate fees pays for all of your cash back or miles
Agreed. Credit card companies are not in the business to subsidize consumers. They do not swallow fraudulent transactions. Merchants do. They are in business to reap maximum profits the market can bear. It is ludicrous to read someone who claims banks own airlines !!!! Banks are the lifelines of airlines. They have their own CEOs.
No article on AA deval? You mentioned TATL is now 75k. Japan looks like 92k and South America maybe 95k? I don’t think any bloggers have written about this. Looks like the days of 57.5k are gone. This is pretty massive.
Can rarely find oneworld partner availability on major routes anymore in a premium cabin. Especially to/from the US.
This is nothing new but rarely is it spoken about except articles like this or that. When Amex Delta card got revamped that year Delta sold 2 billion in actual tickets but 6 billion in Amex redemptions. This year its 8 with a goal of 10 billion a year in the future.
While odd basically they figured out a different path. Sorta like McDonalds Corporation makes over 80% of all revenue on charging franchise...
This is nothing new but rarely is it spoken about except articles like this or that. When Amex Delta card got revamped that year Delta sold 2 billion in actual tickets but 6 billion in Amex redemptions. This year its 8 with a goal of 10 billion a year in the future.
While odd basically they figured out a different path. Sorta like McDonalds Corporation makes over 80% of all revenue on charging franchise landowners rent. They make virtually nothing on the selling of a actual Hamburger.
Chase, Amex, Citi and Barclays own the airlines. Not even counting the millions of shares they own of each of these airlines, board seats they occupy and flying perks they receive for the corporate staff.
The banks are overseen by the Fed. The Fed would deem any of the big 3 airlines as too big to fail. Millions of jobs & flying routes lost.
It's a love triangle that can never be broken.
I'm not an accountant, but can someone explain to me why at least the actual redemption aspect of loyalty "revenue" is not anything more than just accounting and paper profit.
For instance, let's take the United example from the article. Yes, there was $3.3b in "revenue" from redeemed miles, but in the same time-frame United booked $3.6b in Miles Earned, which if I understand right is now a liability. So if I read it correctly,...
I'm not an accountant, but can someone explain to me why at least the actual redemption aspect of loyalty "revenue" is not anything more than just accounting and paper profit.
For instance, let's take the United example from the article. Yes, there was $3.3b in "revenue" from redeemed miles, but in the same time-frame United booked $3.6b in Miles Earned, which if I understand right is now a liability. So if I read it correctly, just the earning/redeeming aspect of mileage is a negative profit??
The separate revenue being booked on mileage redeemed through other sources (the $2.9b) or anything they get as a cut from Chase or whatever, seems a lot cleaner.
You're missing the 50% that's booked as marketing revenue. This is where the profits are.
I don't understand how the content of this post aligns with the other one where everyone seemed to be in agreement that the unbundling of premium fares would result in US airlines charging higher overall prices.
If they can't currently sell tickets at a price that covers their costs of operating flights now, will the changes magically give them sufficient pricing power to break even or, God forbid, start flying profitably?
I think SW huge loyalty program margins are also due to the fact that historically, the airline was a very appealing option for families who only fly a few times a year (primarily due to their open seating policy and 2 free checked bags). As a result, I know many of these relatively infrequent flyers (compared to most of the people reading this blog) would get the Southwest credit card. However, these people typically aren't...
I think SW huge loyalty program margins are also due to the fact that historically, the airline was a very appealing option for families who only fly a few times a year (primarily due to their open seating policy and 2 free checked bags). As a result, I know many of these relatively infrequent flyers (compared to most of the people reading this blog) would get the Southwest credit card. However, these people typically aren't as points and miles savvy (again, compared to the people reading those blog), so many people would use that card for a majority of their everyday spending. That bo doubt helps WN, especially given the amount of customers they had who participated in this behavior.
That's personally interesting to me because you wouldn't otherwise expect Southwest to command such a large loyalty program compared to the trends we see at other profitable US airlines. Southwest doesn't have first class, lounges, or many premium perks (even luggage was included so no extra perks there), which makes many of us apply for credit cards with airlines. They just appeal (-ed, maybe not anymore) to a different (large) market historically.
Southwest also has (or had - I haven't followed what they have done recently that closely) a clear value proposition for their points and cards:
- Consistent value for redeeming for domestic flights, with no issues surrounding availability. The points were as good as cash
- Consistent value associated with their companion pass, which seemed to be a good deal from what I have read on blogs like this
For those that fly a...
Southwest also has (or had - I haven't followed what they have done recently that closely) a clear value proposition for their points and cards:
- Consistent value for redeeming for domestic flights, with no issues surrounding availability. The points were as good as cash
- Consistent value associated with their companion pass, which seemed to be a good deal from what I have read on blogs like this
For those that fly a lot domestically and with a partner, there seemed to be huge value in the Southwest loyalty program. Historically, I have always disliked Southwest due to their high fares. But you can't deny the airline, and loyalty program, worked for a lot of people. We should remember that redeeming for first class on Etihad or whatever is not necessarily what everyone is looking for, or needs.
"I’ve also made the point that this is why I’m actually broadly supportive of consolidation in the US airline industry. What’s good for consumers is to have as much capacity flying for airlines that can generate meaningful revenue from their loyalty programs. After all, that’s subsidizing our ticket costs."
I truly don't get this, Ben. The only thing preventing airlines like United, Delta and American from raising ticket prices, and therefore improving their ex-loyalty margins,...
"I’ve also made the point that this is why I’m actually broadly supportive of consolidation in the US airline industry. What’s good for consumers is to have as much capacity flying for airlines that can generate meaningful revenue from their loyalty programs. After all, that’s subsidizing our ticket costs."
I truly don't get this, Ben. The only thing preventing airlines like United, Delta and American from raising ticket prices, and therefore improving their ex-loyalty margins, is competition and lack of consolidation. Without the check of low cost airlines, including Spirit and JetBlue and others, you just make the strong stronger. I understand that low cost airlines have their own profitability issues, but they serve a critical need of keeping cash airfares in check. Without them, we all pay more.
well said.
and it is why the government will do all possible to not allow consolidation involving the big 4 including WN.
the lower tier of the industry is in shambles but JBLU demonstrated w/ its earnings (loss) report that it is slowly digging out of the hole that it largely dug for itself.
and there is another element in all of this and that is the notion among some in the big 4...
well said.
and it is why the government will do all possible to not allow consolidation involving the big 4 including WN.
the lower tier of the industry is in shambles but JBLU demonstrated w/ its earnings (loss) report that it is slowly digging out of the hole that it largely dug for itself.
and there is another element in all of this and that is the notion among some in the big 4 that there is even tacit cooperation to limit low cost carriers ability to grow and compete.
UA's execs including Scott Kirby have repeatedly talked about the industry as being composed of two groups - DL and UA in the "winning side" and the rest of the industry. It is clear from traffic reports that DL and UA are adding domestic capacity and doing so using their premium and international revenue strength to do so.
DL's addition of LAX-ORD and LAX-HKG is as much about DL execs making it clear that they want nothing to do with being lumped together with an airline that has repeatedly talked about eliminating failing low cost carriers - which UA execs have repeatedly done.
DL competes with everyone and it is certain that they have the market and financial strength to make life difficult for some carriers.
But they want to be very clear that they are not working together or even pursuing the same goals as any other airline.
Anthony, is paying more a bad thing?
For a few hundred dollars, and a lot of times less than that, people can fly across the country. In much less time and for much less money then if they drove their car to cover the same route.
What most passengers pay does not cover the significant overhead cost the airlines have. That results in an industry without much stability and the large number of airlines...
Anthony, is paying more a bad thing?
For a few hundred dollars, and a lot of times less than that, people can fly across the country. In much less time and for much less money then if they drove their car to cover the same route.
What most passengers pay does not cover the significant overhead cost the airlines have. That results in an industry without much stability and the large number of airlines that are currently incurring unsustainable financial losses.
So what is better? Have customers continue to pay (on average) fares that don’t cover airline costs, resulting in airlines going out of business, or having fares go up to cover the airline costs, to the point they can invest in their product and employees?
Mark - it is a fair (fare) question. I think it would be a net loss to consumers to have say JetBlue be swallowed up by United or American, and have Spirit go bankrupt and sold for parts to a number of airlines. You would price a lot of consumers who have benefited from affordable travel out. And remember, the airlines have already had to invest in their employees due to tight labor markets.
...Mark - it is a fair (fare) question. I think it would be a net loss to consumers to have say JetBlue be swallowed up by United or American, and have Spirit go bankrupt and sold for parts to a number of airlines. You would price a lot of consumers who have benefited from affordable travel out. And remember, the airlines have already had to invest in their employees due to tight labor markets.
With consolidation, you would also have route and service cuts (including a lot of smaller airports losing service altogether). This is why I just don't think large scale consolidation is going to be allowed happen. Better to have a bunch of airlines operating at essentially operating at zero margin then have prices increase across the board.
“I truly don’t get this Ben” Yes, it appears that you don’t. Every time a thoughtful, realistic analysis of the US airline business leads a commentator to opine more government approved consolidation may be necessary to avoid an even worse market outcome, someone like yourself, multiple someone’s actually, always pip up to say they’re not in favor of more consolidation because competition is grand and they really appreciate JetBlue, Spirit, Frontier being such good sports...
“I truly don’t get this Ben” Yes, it appears that you don’t. Every time a thoughtful, realistic analysis of the US airline business leads a commentator to opine more government approved consolidation may be necessary to avoid an even worse market outcome, someone like yourself, multiple someone’s actually, always pip up to say they’re not in favor of more consolidation because competition is grand and they really appreciate JetBlue, Spirit, Frontier being such good sports and holding the prices down for everyone. This is childish and short-sighted.
Yes it’s lovely that Spirit is continuing to sell tickets well below their break-even cost, but you seem to forget gravity is undefeated. What cannot go on will not go on indefinitely. Spirit, and to a lesser extent Frontier and JetBlue are losing money every quarter. These airlines are losing money consistently year after year and are being subsidized by investors and their employees. At some point the subsidizing parties will walk away then it’s game over. Without government intervention the biggest most profitable airlines (UA/DL) will gobble up the market share of the weak LCCs/ULCCs and it will be no different than a worst case scenario merger. That day is coming really soon for Spirit. They’ve already shrunk 24% post DOJ merger rejection and just announced a third round of pilot furloughs. Helluva way to boost competition eh? Spirit has cut a million of its seats from the market already. JetBlue is in slightly better shape, but without a merger to boost their scale/competitiveness they look like they will die a slow death being out-competed by Delta in JFK and BOS. They already folded out west. B6 only runs transcons to east coast cities (mostly hubs) out of LAX now. Shrinking to profitability is a fool’s errand in a market that demands get big or die. Delta continues to eat JetBlue’s market share in their two most important hubs, gaining pricing power for themselves while diminishing JetBlue’s pricing power while they relegate JetBlue to irrelevancy and guarantee it’s slow death. If things are allowed to take their course Delta will capture monopoly pricing power in both JFK and BOS in just a few short years. Absent the regulatory will to break up the Obama era big-4 giants, the industry will continue to consolidate with or without government approved mergers that seek to preserve competition and avoid monopoly arrangements. Letting the bigs continue to beat up the littles under the false pretense of “competition” only guarantees even worse outcomes if the market is allowed to take a Darwinist course.
The writing is on the wall. Pick a poison. Loss making tickets from financially distressed, shrinking airlines will not go on forever.
This whole process is contingent on credit card companies and the underlying issuing banks remaining solvent enough to pay the airlines. What happens if there is an economic downturn sufficiently large to endanger the ability of credit card companies to fulfil their end of the bargain?
Too big to fail went by the wayside in 2008.
If all the loyalty schemes suddenly disappear then what proportion of individuals who currently redeem points for...
This whole process is contingent on credit card companies and the underlying issuing banks remaining solvent enough to pay the airlines. What happens if there is an economic downturn sufficiently large to endanger the ability of credit card companies to fulfil their end of the bargain?
Too big to fail went by the wayside in 2008.
If all the loyalty schemes suddenly disappear then what proportion of individuals who currently redeem points for flights would pay cash for the flights? Would this revenue be less than equal to or greater than the current revenue from the credit card companies?
Sounds like something the big brains in the accounting department at the credit card companies and airlines are likely studying and modelling.
You'd think they'd treat their rewards programs with more care, given how vital they are.
I haven't redeemed SkyPesos in years, since they've completely annihilated the value proposition for them.
I cancelled my United card when United devalued their rewards program into the ground.
If rewards are driving profits, what sense does it make to constantly devalue and chase away rewards program members? Wouldn't it make more sense to adjust slightly upward revenue fares?
The value proposition of SkyPesos is clear (about 1.1 to 1.3 cents per mile) and has been enhanced since the pandemic through things like the Amex card discount and the ability to earn status through redeeming miles. You may not like the kind of value it offers (it's much more effective booking domestic flights, for example), but it offers clear value, similar to programs like Southwest.
Correction, this is good for consumers who fly business and first class.
You cannot convince there is not a better way then stuffing the rest of the people in economy like cattle or chickens.
This setup just ensures that no one can disrupt the existing market, but it can and has played out differently in different parts of the world or can and will in the future at the very least.
This data shows that the biggest US airlines have created enormous advantages that smaller airlines cannot duplicate - and they do benefit consumers so it is hard to argue that those advantages should be reduced.
Credit card and loyalty revenue is part of the business process and trying to exclude it makes as much sense as trying to calculate the profit margin of a grocery store by excluding the dairy section.
agree!
I hardly tweet but I thought you would find it interesting I appreciate the write up. I saw it on my feed. I honestly thought it would be higher for delta.
The caption for the spirit plane should say "impossible to compete" ?
"without loyalty revenue" isn't really a reasonable counterfactual here, since "without loyalty revenue" a lot of the loyalty revenue would just shift over to being cash fare revenue, and insofar as that didn't happen, the number of total flights flown (and with it associated opex) would be lower
Not surprising at all. Based on Ben’s past posts, one can already correctly assume that U.S. airlines basically depend on their loyalty programs with credit card companies to make money. This post just confirms it with statistics and research.
Ben - This article is quite misleading. I don’t doubt any of the numbers that you’ve listed. However, there’s no mention of credit cards anywhere in this article. The revenue from loyalty programs is all from the issuing banks such as Amex (Delta), Chase (United and SW), Citi (AA). May be worth doing a follow up article where you dig into the credit card programs, how much they pay the airlines and how they work....
Ben - This article is quite misleading. I don’t doubt any of the numbers that you’ve listed. However, there’s no mention of credit cards anywhere in this article. The revenue from loyalty programs is all from the issuing banks such as Amex (Delta), Chase (United and SW), Citi (AA). May be worth doing a follow up article where you dig into the credit card programs, how much they pay the airlines and how they work. Go digging thru the ‘Bits About Money’ blog. He did a whole breakdown at some point that would be a good jumping off point.
This spells really bad news for Spirit, Frontier, Breeze, Avelo and possibly JetBlue. Maybe consolidation into one large ULCC might work. She can't have an average fare and ancillaries per fare of $89 and have operating costs of $109 per fare and hope to stay in business.
Cost structure in the US have gone absolutely crazy, looks even worse when you see the likes of FR making billions every year flying people around Europe without a loyalty program and just selling cheap tickets
The airlines clearly generate the majority of their profits from loyalty, but I don't think the costs of loyalty are being fully accounted for in this analysis. Imagine a plane that is full of passengers that only purchased award tickets. The revenue from that flight is being broken out as loyalty revenue, so the operating revenue is $0. I believe the cost of the flight is still being categorized as an operating cost, which would...
The airlines clearly generate the majority of their profits from loyalty, but I don't think the costs of loyalty are being fully accounted for in this analysis. Imagine a plane that is full of passengers that only purchased award tickets. The revenue from that flight is being broken out as loyalty revenue, so the operating revenue is $0. I believe the cost of the flight is still being categorized as an operating cost, which would produce a -100% operating margin. But that's not really the case.
thanks for sharing, Ben.
Haven’t given this comment much thought but throwing it out there possibly for a discussion…
I wonder what would happen if the loyalty programs just went away. What percentage of trips “bought and sold” via a 3rd party (Amex chase) would still be taken but paid for by cash.
Airlines are just playing accounting tricks by recording ‘revenue’ when they sell points when one could argue it really should be recorded as unearned revenue, just...
Haven’t given this comment much thought but throwing it out there possibly for a discussion…
I wonder what would happen if the loyalty programs just went away. What percentage of trips “bought and sold” via a 3rd party (Amex chase) would still be taken but paid for by cash.
Airlines are just playing accounting tricks by recording ‘revenue’ when they sell points when one could argue it really should be recorded as unearned revenue, just like a gift card (maybe it is? I guess I don’t know for sure)
If everyone suddenly actually used all the points they have, suddenly the loyalty programs would become a massive liability on the balance sheet, if I properly understand how these transactions are recorded.
So if the loyalty programs didn’t exist, would all airlines actually lose money? Or would the accounting just change? Selling the points to cc companies is the easiest way to profitability, sure. But I’m not convinced they wouldn’t be profitable if the accounting trick went away and they went back to recording that revenue a different way (direct ticket sales)
I think that anyone who's got some free time can find the answer to this by studying markets where loyalty programmes are weak or nearly inexistent.
@SeanM is more than welcome to correct me if I am wrong, but I strongly suspect that the fact that there are only three airlines that belong to the global alliances in the whole of sub-Saharan Africa isn't just because the big players lack confidence in the financial...
I think that anyone who's got some free time can find the answer to this by studying markets where loyalty programmes are weak or nearly inexistent.
@SeanM is more than welcome to correct me if I am wrong, but I strongly suspect that the fact that there are only three airlines that belong to the global alliances in the whole of sub-Saharan Africa isn't just because the big players lack confidence in the financial stability, safety procedures, and IT systems of certain airlines in the region- I think it's also because there is a rather limited loyalty ecosystem to tap into.
good morning everyone!
Said another way is that without loyalty programs, airlines would have to raise airfares just to break even.
You think an "excellent analysis" involves subtracting revenue from profit to without even considering the cost of generating that revenue? That's violating a core aspect of financial analysis.
Hint: If you subtracted ticket revenue from their operating profit, you would end up with a similar conclusion - frequent flyer programs are massive loss-makers.
Why are the economics so different in Europe?
I understand that the credit card landscape is fundamentally different there so it’s not possible to run the same game, I get that, but why are airlines able to be more profitable simply on the basis of flying when their airfare is much lower? Is it simply that our labor costs are way higher?
@ James K. -- Higher labor costs are a major factor. But beyond that, the major European carriers have more pricing power due to their hubs (typically one or two global airlines per country), and their short haul flights are largely covering shorter distances, so the economics work better there as well. A London to Geneva flight doesn't typically cost 20% as much as a New York to Los Angeles flight, for example.
Credit card feeds are capped in Europe. There is less money flowing from banks to airlines.
Sorry I’m really confused with the grammar on your post Ben
@ Steven E -- Anything in particular that's confusing you? I'm running on little sleep, so you're probably right, just curious if there's something obvious I'm missing.