How airlines make money with frequent flyer programs
One of the questions I am most often asked when I say that I travel with dots is the following: "The [...]
One of the questions I get asked most often when I say I travel with points is, "The airlines that fly with points, how do they make money?"
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This may be a million $ question and it is a very engaging topic indeed. This is precisely why we have chosen to answer the question that was also posed to us by some of our most attentive readers: How do frequent flyer programs monetize?
After all, it is normal to wonder, precisely because these programs "give away" free seats, merchandise, prizes of various kinds, and especially prize tickets! Of course, we used quotation marks precisely because loyalty programs always include benefits for the giver as well.
From the passenger's point of view, they might seem like a pampering, a nice way to get something in return, just from the favorite airline. In part it is, we cannot say that it is not a service created for the person, it is an exclusive service, designed by the best companies for the best customers!
But how did airlines monetize with frequent flyer programs?
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For many companies, these programs have been real lifelines in the dark time of Covid-19. An astute and apt way of personalizing a service.
Frequent flyer and membership users, after all, are the most demanding ones, who expect recognition, as if they can somehow buy "a small portion" of a pie. Frequent flyer programs offer this, a small portion of a cake, in exchange for loyalty.
The evolution of frequent flyer programs
Frequent flyer programs, until a few years ago, were exclusive to business travelers, that is, those who for their personal business and work, flew a lot. The latter accumulated miles very quickly and were the only ones who were able to grab free flights, exclusive gadgets and thus reap great benefits.
Frequent flyer programs over time have evolved! As of today, in fact, any of us who feel like experimenting can sign up by trivially clicking on the website of the airline of our choice.
Initially, frequent flyer cards were the one and only main product to be able to earn points and get rewards. Now, however, there are so many benefits and so many products that are associated with loyalty programs. Certainly, this is good for the traveler: for example, points can be earned by purchasing different kinds of products and in different stores, or by using some credit cards rather than others.
By now you can accumulate points by doing lots of actions. We wouldn't be surprised if it were possible to do this already in the Metaverse (if they haven't invented it yet, we at TFC could take care of it!). In 40 years of loyalty programs, travelers' habits have changed and airlines have adapted, providing more and more benefits and exclusive products.
Yet the question still occurs to us, effectively how much do airlines monetize by providing the average traveler with these benefits?
These premiums will still be paid from some wallet! However, we need to make some distinctions, there are 2 types of offers provided by airlines: points offered by the carrier for flying their own flights; points offered for purchasing or making transactions with loyalty program partners.
As for the first offer, it is the one that more or less all travelers are familiar with, the version that we might call "classic." Some companies, in fact, offer 1 point for every euro spent, but often this offer is not applicable to all fares purchased (see economy). Other companies offer 1 point for every mile flown, and so on.
The second offer, on the other hand, may be more advantageous for airlines. This is because. sell bundles of points to partners who in turn offer them as bonuses to customers. For example. American Express is a partner in Italy with 9 companies, but around the world they are practically all Amex customers, then there are hotel chains that make deals with individual carriers, car rental companies, and so on.
Partners obviously do this to grab new customers and to keep current ones. It is definitely a very profitable form for airlines to receive advertising at no cost and acquire new or loyal customers on their flights! Let's say this second offer is a great way to get a good win-win!
So this is exactly why airlines have been able to make partnerships even during the pandemic and stay afloat despite everything. For these in fact it's really super profitable for them to get new partnerships, because they basically mean cashing in money to sell points, points that not everyone will use to fly.
What benefits do frequent flyer programs generate for airlines?
- The points are effectively comparable to a currency. For airlines, therefore, points have a monetary value, precisely because through them, travelers can redeem, for example, a free ticket. Trivially, it is as if the companies earn double because they sell points to partnerships or customers that they will then use within their flights. Also, there are a lot of unused points, and this when you think about it, exceeds the physical monetary currency available!
- The company knows the habits of members. We live in the world of data, those who use the card leave a trail, and in this way carriers and partners of various programs can make ad hoc offers on users based on habits and make more money.
- Another of the advantages is the free advertising, in addition to the fact that program members often spend money to get more points and thus more benefits. A kind of vicious circle that we could still call win-to-win, however, because all the players get to benefit.
In conclusion
Many airlines have realized how referring their customers to frequent flyer programs is mutually beneficial. Carriers collect money for the points they sell to partners, partners attract customers with the ability to offer points, and travelers can accumulate points even without ever boarding a paid plane.
Therefore, it seems like a solution where everyone wins, but that is not the case. The companies are also betting that many users will fail to use their accumulated points and therefore will never redeem award flights. And that's where we at TFC come in: Telling you how not to let the points expire And how to accumulate enough to travel to the Maldives for free.
