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…
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?
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