Forty years ago this month – May 1, 1981, to be exact – American Airlines started the AAdvantage frequent flyer program. It was one of the first loyalty programs in the airline industry and is the oldest surviving airline frequent flyer program. In the last 40 years, things have changed greatly for the airline industry and its frequent flyer programs. Back in 1981, U.S. airlines had no clue that these programs would become their most valuable asset.
The original idea was to incentivize customers to fly the airline by rewarding them with miles based on the distance flown that could be accumulated and used for free flights in the future and also by bestowing various perks on the most frequent flyers such as free upgrades on a space-available basis. Airlines would benefit from repeat business and also for the assumption that customers would be willing to pay more for their tickets.
Airline mileage programs have two main sources of revenue: the airline itself and third parties such as banks that use airline miles to reward their customers for spending on the banks’ credit card. It is sales to third parties where frequent flyer programs make out like bandits. The rule of thumb is mileage programs sell miles to third parties for about two cents per mile but pays the airline only one cent per mile when the credit card holder redeems the miles for travel.
Without frequent flyer programs, U.S. airlines may have folded when Covid-19 brought almost all air travel to a halt in 2020. To secure government loans to cover losses, airlines pledged their frequent flyer programs as collateral for billions of dollars in loans.
Last year, the Financial Times valued the frequent flyer programs of Delta, American, and United at $26, $24 and $12 billion, respectively. At the same time, the market capitalization for those airlines was Delta $19 billion, American $6 billion, and United $10 billion. Without frequent flyer programs these airlines would be worthless according to that valuation and others.
I’m glad someone came up with the idea for frequent flyer programs. Over the years they have financed a lot of my travel and provided numerous international flights in business class and first class that I would not have paid for with money.