It turns out that airlines largely do not make their money from selling tickets. Instead, airlines are primarily in the business of selling credit card rewards.
Rewards programs are intangible assets, so the financial statements of major airlines do not generally give valuations for them. However, there are a couple public sources for how valuable these rewards programs are:
During COVID, many US major airlines applied for loans under the CARES Act. Some of them used their rewards programs as collateral for these loans, and both United and American publicly disclosed their reward programs’ appraised values for this purpose.
On Point Loyalty, a consultancy firm focused on loyalty programs, published appraisals of most airlines’ rewards programs in 2023 and in 2020. Their methodology is proprietary and it is unclear what data their numbers are based on, but the estimates agree with the CARES Act disclosures.
Major US airlines also trade publicly, so we can see what portion of the airlines’ valuation is due to their reward programs. Here’s a chart of the EOY 2023 market cap of the top six US airlines, their On Point reward program valuation, and the difference between those two amounts (figures in millions of USD):
It turns out that the rewards programs are, in many cases, worth more than the airline that owns them. The entire business of selling flight tickets is actually a loss leader for the airlines’ real business of selling miles.
It’s not just On Point’s valuations being wrong either, the United and American CARES Act filings tell the same story:
In fact, the only reason airlines can afford to operate the way they do is because American consumers subsidize the industry every time they make a credit card purchase. About 15% of US interchange (the fee that businesses pay in order to accept card payments) is ultimately paid to airlines in return for loyalty program benefits.
You pay for your flights with every purchase you make, not just when you buy the tickets.
This analysis is slightly incorrect, since if rewards programs are treated as assets, they contribute to net enterprise value, not to market cap. Market cap mostly subtracts loans outstanding from the total expected returns of the enterprise. American, for instance, has 37 billion dollars out in debt, and the market cap is the expected value above the expected payout to the loans.
So in this analysis, American is actually worth 47 billion-ish dollars. 37 billion of those are owned by the creditors, and 10 billion is owned by the shareholders. 22 billion of that worth is the rewards program, and the rest is the rest of the business.
If american’s rewards program disappeared, the creditors would take a haircut, but they would not get nothing.
You can do the same for all of these.
As an aside, every time I have seen someone saying this, they neglect to model debt. I think it might be systematically confusing.
This is correct and a big oversight on my part, thanks! I’ll update the post later today.
I am not understanding the mechanism here, could someone explain it please?
A consumer buys an air ticket. The airline makes a loss on this (or not much profit). That same consumer now has air miles on a frequent flyer card/account that they can use for perks. How does the airline make money subsequently? Does it require that the consumer used a credit card (instead of a debit card) to buy the ticket? Or does it require that the consumer uses the air miles in a specific way?
These are not clear to me. Perhaps from some combination of me (1) living in UK not USA, (2) using a debit card, not a credit card and (3) having only ever ‘used’ frequent flyer cards as a tiebreak where the airline has overbooked and needs to give someone a free upgrade, and as the cardholder I am first in that queue.
Onboard the flight and while ordering the ticket, the airline will try to sell you their branded credit card. If you take the deal and use the credit card, they give you a bunch of miles, and they get a cut of every purchase you make.
How would this work with European airlines or airlines from countries where there are much less credit card payments?
I’m curious about this as well, since as far as I’m aware, flights in the US tend to be more expensive than flights in, say, Europe.
Labor costs are much higher in the US, which I think plays into this. So it’s easier in Europe to not be reliant on the credit card model.
Is it plausible that the two different sources of valuation are actually one source? For example, could On Point valuations have formed the basis of the CARES Act filings, or vice versa, or both used data from a common source?
It also seems likely that any borrower has a strong incentive to talk up the value of their collateral, especially so if they get to choose who has access to the data used for valuations.
It would be nice to see an analysis of a median passenger, how much they pay in flights, how much they pay in foregone rewards from a non-airline card, etc. Or a revenue analysis—valuation is very subject to accounting trickery regarding debt management and liability assignment choices.
Claude says 75-80% of airline revenue is ticket sales, 8-10% add-on fees, and 10-12% credit card loyalty programs.
That seems plausible for gross revenue, not so much for net.
This is the problem with financial attribution. Net is highly susceptible to that accounting trickery (aka structure decisions) regarding how expenses are distributed. In truth, all of these are correlated in customer behavior—the credit card revenue comes because of operational/flight options. How much of the expense should be attributed to each (and how much of the debt service for the enterprise, which is significant for airlines) is a choice they make.
They are tied together enough that there IS NO objective truth of the matter for what the post is claiming. Revenue gives the closest approximation IMO, but really, it’s everything combined with everything else.
See also: Hollywood accounting.
Thanks for writing this up! I really liked this related podcast episode with Patrick McKenzie: https://open.spotify.com/episode/1QqFw5hlHKRrjRUTVLfKRV?si=ptVmFvXQRKaPwRNTg1Ollg
I think the biggest update for me was how the rewards programs are inseparable in some sense from the airlines. I think your language too of ordinary flight being a loss leader helps to describe it as well; the airlines couldn’t just have the valuable rewards program, because having the underlying less-profitable flights that make it possible!
These charts compare assets, but you talk about revenue, and I don’t think it follows.
The value of all future paying passengers is not an asset, it is not included in capitalization and it would be very difficult to present as a collateral. An existing reward program, on the other hand, has a much more tangible value.