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There's more to it than that: Loyalty systems do bring in a lot of profit for most airlines. SWA for example made 42% of it's 2017 EBIT on Loyalty. There is a

There's more to it than that: Loyalty systems do bring in a lot of profit for most airlines. SWA for example made 42% of it's 2017 EBIT on Loyalty. There is a certain scam in the fact that miles are a "kickback" for employees, but also keep in mind that third parties will pay vast amounts of money to participate in the miles ecosystem: Every co-branded credit card that is printed is 10-15 USD straight from the bank to the airline, without anybody having booked a flight yet..

arcticbull 6y ago
It's not $10-15 for any premium co-brand card. Back a few years ago the rough book value of a mile was 6/10th of a cent per point. Credit card sign-up bonuses are easily in the 25-100,000 point range, so every premium co-brand card pays $150-600 to the airline. Further, breakage is high in the airline loyalty space, something around 20-30% if I recall correctly.
- 112012123 6y ago
  The airlines have successfully squeezed banks a good deal more than that! At this point all the US-domestic carriers are charging their bank partners over 1 US cent per point. Source: Have negotiated these deals with airlines
  - arcticbull 6y ago
    These numbers are proprietary so it's really hard to find. Happy to have a better ball-park! Thanks!
  - thaumasiotes 6y ago
    > At this point all the US-domestic carriers are charging their bank partners over 1 US cent per point. I had the impression that the value of an airline mile to the consumer was 1 cent. That would make paying more than a cent nonsensical. Did airline miles suddenly become a lot more valuable?
    - dannyw 6y ago
      Yes, to banks. Banks pay airlines a premium for the opportunity to market and get customers through FF programs.
      - thaumasiotes 6y ago
        How can offering the customer 1 cent be worth more than 1 cent to the bank? They can just give you ordinary cash back.
        smm2000 6y ago
        Giving cash back creates wrong incentives and you sign up different audience than if you offer airline miles. Airline miles are in demand for people who travel often (affluent) in comparison to people who wants to get $150 after signing up for cc (poor). That said there are offers to get cash for signing up. Some time ago First Republic Bank was giving $300 for cc sign up for Google employees (aka rich people).
        thaumasiotes 6y ago
        Airline miles are cash back. They're just a larger hassle under a different name.
        rightbyte 6y ago
        I guess kickback is the proper term?
        arcticbull 6y ago
        Rebate is the term haha
        arcticbull 6y ago
        Points are different in a few ways. (1) They work because the bank and airline partners are able to offer you something of high perceived value (a vacation, even in business or first class) for very low marginal cost. (2) This means that (in my most recent redemption) the bank pays the airline $462 in rewards, that cost the airline $400 to deliver, and provides to you with $2500 in value. (3) Points are great because people don't consider them "cash" but instead something they don't mind parting with. More of a rebate. So the economics of it are that the bank collects $0.018 in interchange for every dollar spent on a card, converts that to a point that costs them $0.007 to deliver, which the airline services for $0.006 by disposing of inventory that would otherwise go unsold. The airline wins again because they've created a secondary market for unsold inventory that they can sell to leisure travelers without undercutting the amount they can sell the same inventory for to business travelers. It's a very nuanced and successful way of motivating people who have a choice to make the choice you want them to make. On the other hand, $0.01 in cash back costs the bank $0.01, and then if you redeem for travel the airline gets paid $0.01, and you get $0.01 in value.
- joncrane 6y ago
  What does breakage mean in this context?
  - arcticbull 6y ago
    The miles expire unused.
- namdnay 6y ago
  Sorry I wasn't clear. Indeed the banks buy miles from the loyalty system. But those will usually be spent later, so it's not a pure profit. Whereas there is also a flat fee paid immediately as a "printing right"
- PaulHoule 6y ago
  And better yet, should the airline be in trouble it will be able to void or devalue unspent points. It is like a debt you might be able to write off in the future so there's got to be a present value of that which is baked into the valuation.
MattGaiser 6y ago
Cost of customer acquisition in the financial space is enormous, so no surprise there.

arcticbull 6y ago

It's not $10-15 for any premium co-brand card. Back a few years ago the rough book value of a mile was 6/10th of a cent per point. Credit card sign-up bonuses are easily in the 25-100,000 point range, so every premium co-brand card pays $150-600 to the airline. Further, breakage is high in the airline loyalty space, something around 20-30% if I recall correctly.

112012123 6y ago
The airlines have successfully squeezed banks a good deal more than that! At this point all the US-domestic carriers are charging their bank partners over 1 US cent per point. Source: Have negotiated these deals with airlines
- arcticbull 6y ago
  These numbers are proprietary so it's really hard to find. Happy to have a better ball-park! Thanks!
- thaumasiotes 6y ago
  > At this point all the US-domestic carriers are charging their bank partners over 1 US cent per point. I had the impression that the value of an airline mile to the consumer was 1 cent. That would make paying more than a cent nonsensical. Did airline miles suddenly become a lot more valuable?
  - dannyw 6y ago
    Yes, to banks. Banks pay airlines a premium for the opportunity to market and get customers through FF programs.
    - thaumasiotes 6y ago
      How can offering the customer 1 cent be worth more than 1 cent to the bank? They can just give you ordinary cash back.
      - smm2000 6y ago
        Giving cash back creates wrong incentives and you sign up different audience than if you offer airline miles. Airline miles are in demand for people who travel often (affluent) in comparison to people who wants to get $150 after signing up for cc (poor). That said there are offers to get cash for signing up. Some time ago First Republic Bank was giving $300 for cc sign up for Google employees (aka rich people).
        thaumasiotes 6y ago
        Airline miles are cash back. They're just a larger hassle under a different name.
        rightbyte 6y ago
        I guess kickback is the proper term?
        arcticbull 6y ago
        Rebate is the term haha
      - arcticbull 6y ago
        Points are different in a few ways. (1) They work because the bank and airline partners are able to offer you something of high perceived value (a vacation, even in business or first class) for very low marginal cost. (2) This means that (in my most recent redemption) the bank pays the airline $462 in rewards, that cost the airline $400 to deliver, and provides to you with $2500 in value. (3) Points are great because people don't consider them "cash" but instead something they don't mind parting with. More of a rebate. So the economics of it are that the bank collects $0.018 in interchange for every dollar spent on a card, converts that to a point that costs them $0.007 to deliver, which the airline services for $0.006 by disposing of inventory that would otherwise go unsold. The airline wins again because they've created a secondary market for unsold inventory that they can sell to leisure travelers without undercutting the amount they can sell the same inventory for to business travelers. It's a very nuanced and successful way of motivating people who have a choice to make the choice you want them to make. On the other hand, $0.01 in cash back costs the bank $0.01, and then if you redeem for travel the airline gets paid $0.01, and you get $0.01 in value.
joncrane 6y ago
What does breakage mean in this context?
- arcticbull 6y ago
  The miles expire unused.
namdnay 6y ago
Sorry I wasn't clear. Indeed the banks buy miles from the loyalty system. But those will usually be spent later, so it's not a pure profit. Whereas there is also a flat fee paid immediately as a "printing right"
PaulHoule 6y ago
And better yet, should the airline be in trouble it will be able to void or devalue unspent points. It is like a debt you might be able to write off in the future so there's got to be a present value of that which is baked into the valuation.

MattGaiser 6y ago

Cost of customer acquisition in the financial space is enormous, so no surprise there.