The Bank Attached to an Airline: How Loyalty Programs Became Carriers' Most Valuable Asset

Rajkumar Agarwal20 August 20267 min read0 viewsAirlines

In mid-2020, with fleets parked and passenger revenue near zero, America's largest airlines went looking for collateral. They did not pledge their aircraft first, or their gates, or their brands. United raised $6.8 billion against MileagePlus. Delta borrowed $9 billion against SkyMiles. American raised $10 billion against AAdvantage. The disclosures that accompanied those deals put numbers on something industry insiders had long suspected: the loyalty programs were appraised at valuations in the tens of billions of dollars — in several cases exceeding the entire market capitalization of the airlines that owned them.

The arithmetic produced an absurd-sounding conclusion that was nonetheless roughly true. Strip the frequent-flyer program out of a major US airline, and by the market's implied math the remaining business — the planes, the pilots, the network — was worth little or less than nothing. The airline had become, in the well-worn quip, a loyalty program with wings attached.

How did a marketing gimmick from 1981 become the economic core of a trillion-dollar industry? The answer runs through deregulation, credit cards, and one of the great unregulated currencies of the modern economy.

From punch card to printing press

The modern frequent-flyer program dates to May 1981, when American Airlines launched AAdvantage, quickly followed by United's Mileage Plus and Delta's program. In the newly deregulated US market, fares were converging and airlines needed a switching cost. Miles were it: a reward that accumulated with repeat business and evaporated if you defected to a rival.

For the first decade or so, the programs were what they appeared to be — a marketing expense. The transformation began when airlines realized they could sell miles to third parties. Hotels, car rental firms and phone companies bought miles to give to their own customers. But the partner that changed everything was the bank.

The co-branded credit card — spend on the card, earn miles on the airline — turned the loyalty program from a cost center into a manufacturing business. The airline manufactures a currency at negligible marginal cost, sells it wholesale to a bank at a healthy margin, and the bank retails it to cardholders as a rewards proposition funded largely by interchange fees on every swipe. The airline controls both the supply of the currency and, crucially, its redemption value.

The economics of selling money

The scale of this business is enormous and, since 2020, unusually visible. The financing prospectuses forced airlines to disclose what they had long kept vague. Delta has said in investor communications that its remuneration from American Express — its co-brand partner — reached roughly $7 billion in 2023, with a stated long-term ambition of about $10 billion annually. American's AAdvantage and United's MileagePlus each disclosed billions in annual cash sales of miles, the large majority to their bank partners rather than to travelers.

The margins are what make the model remarkable. When the pandemic-era bond documents laid out program economics, the loyalty units showed the kind of profitability associated with software companies, not transportation. The reason is structural: the cost of honoring a mile is a seat that would often otherwise fly empty, priced at the airline's discretion, redeemable under rules the airline can change at will.

That last point is the quiet engine of the whole system. Airline miles are a liability on the balance sheet, but a uniquely soft one. The issuer sets the exchange rate. Over the past decade, every major US program has shifted from fixed award charts to dynamic pricing, in which the mileage price of a seat floats with the cash fare. Devaluations arrive without notice. No regulator approves the exchange rate of a mile the way a central bank might defend a currency — a fact that has begun to attract attention from US lawmakers and the Department of Transportation, which in 2024 opened an inquiry into the four largest US programs' practices around devaluation and dynamic pricing.

Why the banks pay

None of this would work if banks did not find the miles worth buying, and here the co-brand card sits on one of the most reliable seams in consumer finance. Travel rewards are aspirational in a way cash back is not: a customer who would shrug at 2 percent back will reorganize their spending around a business-class redemption they may never actually book. Breakage — miles earned and never redeemed — pads the economics further.

For the banks, airline co-brands are among the most valuable card portfolios in existence, which is why the partnerships are fought over like broadcast rights. American Express's relationship with Delta is among the largest such deals in the industry. When American Airlines consolidated and renewed its card partnerships, and when United renegotiated with Chase, the announced terms ran to billions of dollars a year in expected value. The airline, in each negotiation, is selling access to the only rewards currency its most affluent customers care about.

The flywheel — and its distortions

At its best, the system is a flywheel that benefits everyone in it. The bank funds rewards that make the airline's product stickier; the airline fills premium cabins with engaged customers; the traveler extracts genuine value, sometimes spectacular value, from points.

But the flywheel distorts the underlying business in ways worth naming.

First, it changes what an airline optimizes for. Elite status and card spend, not just ticket purchases, drive the customer relationship. Airlines have repeatedly re-anchored status qualification toward dollars spent — including credit-card spend — rather than miles flown, because the program's real customer is increasingly the bank and the big spender, not the road warrior on cheap fares.

Second, it makes the airline's earnings quality dependent on consumer credit. A meaningful slice of major US carriers' profitability now correlates with card-spending volumes and the health of the co-brand partner's business. That was a stabilizer in 2020–21, when card spend recovered faster than travel. It could cut the other way in a consumer credit downturn.

Third, it creates a governance oddity: the program's largest liability holders — members sitting on trillions of accumulated miles across the industry — have no contractual protection against devaluation. The terms and conditions of every major program allow unilateral changes. The 2020 financings added a new twist: with programs pledged as collateral, airlines now have bondholders who benefit from the program being managed for cash generation, a set of incentives that does not obviously align with member generosity.

Wings attached to a bank

Is it literally true that the programs are worth more than the airlines? As a standalone claim it requires care. The pandemic-era comparisons were made when airline equity values were crushed; the programs cannot exist without the airline's seats, network and brand, so a clean separation is partly an accounting fiction. Attempts to spin loyalty programs off entirely — Air Canada's Aeroplan is the canonical case, sold off in 2005 and bought back in 2019 — ended with the airline concluding the program belonged inside the house after all.

But as a description of where the economic engine sits, the claim holds up. Passenger transportation is a brutally competitive, capital-intensive, cyclical business with thin margins. Manufacturing a private currency and selling it to banks is a high-margin, capital-light, recurring-revenue business. Every major network carrier now runs both, and the second increasingly subsidizes the first — which is why, when the industry faced an existential crisis, it was the miles, not the metal, that the lenders wanted.

For travelers, the practical lesson is unsentimental: miles are a depreciating private scrip issued by a party with every incentive to inflate it. Earn them cheaply, redeem them promptly, and never mistake a loyalty program for loyalty. For investors and regulators, the lesson is bigger. The most important product US airlines sell is no longer the seat. It is the point.

Sources

#loyalty programs#co-brand credit cards#frequent flyer#airline economics
Share:

Comments

Leave a comment

← All posts