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Who pays for frequent flyer miles?

Ancillary revenueAirlines started nickel-and-diming their customers more than a decade ago. Their ancillary revenue has been growing ever since. IdeaWorksCompany’s definition of this kind of revenue is: “revenue beyond the sale of tickets that is generated by direct sales to passengers, or indirectly as a part of the travel experience.” An important role plays the co-branded credit card.

Ancillary revenue

IdeaWorksCompany discerns 5 categories of ancillary revenue:
1. A la carte features.
Frequent flyer cards2. Commission-based products.
3. Frequent flyer activities.
4. Miscellaneous sources such as advertising.
5. The a la carte components associated with a fare or product bundle.

Profit center

Obviously, ancillary revenue comprises more than just nickel-and-diming flyers. Table 1 below shows the 2018 revenue as included in IdeaWorksCompany’s recent report “2018 Top 10 Airline Ancillary Revenue Rankings.” Frequent flyer programs no longer aim at building or strengthening customer loyalty, although this was the original goal. Rather, those programs have evolved into profit centers.

The 4 biggest US carriers raise ¾ or more of their ancillary revenue through their frequent flyer programs. For Air Canada it is 39%, but that may increase soon. Recently, the carrier bought its frequent flyer program back from the program operator Aimia. In Europe frequent flyer programs seem considerably less profitable. Lufthansa raises 32% of its ancillary revenue through its frequent flyer program and Air France/KLM even less (21%).

The programs work like this. Every time the holder of a co-branded airline credit card makes a purchase, (s)he accrues miles. The bank issuer of the card pays for the miles that are then deposited to the frequent flyer account of the cardholder.

Co-branded credit card

Co-branded card Delta and American ExpressThus, carriers sell millions of frequent flyer miles to financial institutions, who use them as rewards for their customers. Airlines’ biggest customers are American Express, Barclays, Chase, and Citibank. This way they encourage their customers to pay by using the (co-branded) credit cards they issue.

Members of Delta Air Lines’ frequent flyer program spent $94.7 (€85,9) billion on their American Express SkyMiles card in 2018. It is a success story, for this is more than double the amount of $45.4 (€41.2) billion they spent in 2012.

High banking fees

Frequent flyer program members pay fairly high banking fees for their co-branded credit cards. Thus, the interesting thing is that frequent flyers pay themselves for the miles through those fees. Carriers and banks have developed smart ways to nickel-and dime their customers and keep them satisfied at the same time.

Related: “Does this credit card make sense?

Tags: frequent flyer programs, co-branded credit cards, ancillary revenue

 

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