Do Airlines Make More Money Selling Miles Than Seats?

This may sound crazy, but if you are a person who carries an airline branded credit card in your wallet, your daily visit to Starbucks or iTunes selections plays an important role in keeping the airline industry in the United States happy and fat.

For many carriers such as American Airlines or Delta Air Lines, the credit card programs are a golden goose. Studies show that every mile fetches anywhere from 1.5 cents to 2.5 cents to such airline companies. The big banks in the country amass these miles and then distribute them to the cardholders.

Users who pay an annual fee for these cards to get the miles are a sure bet for the banks. Most of these users will have more than average income and will usually spend more on the cards, leading to generation of merchant fees for the bank. These users also maintain high credit scores meaning that they will pay their bills on time and so they are not a risk to the banks as they experience only a few defaulters.

Airline miles program, formally known as loyalty programs, has developed into a high margin business that has grown much in value and size among the airline consolidations and the carriers are eager to increase the credit card rolls to see their loyal members spending more. Alaska Airlines, for instance, started to tie a small percent of their 19,000 employees’ performance pay to the growth of their credit card with the Bank of America.

Many of the investors failed to appreciate the importance of these programs to airline profitability among the stability consolidations, says Joseph DeNardi, who is a senior airline analyst with Stifel Financial Corp. in Baltimore. He has repeatedly explained that the investors do not have much insight into the billions of dollars that the large banks pay to have these affiliations. “Airlines are earning upwards of 50 percent of [income] from selling miles to a credit card company, which we believe is a great business to be in,” DeNardi wrote.

Beyond the cash, the carriers also get other benefits from the cards, as the deals remain unaffected and profitable in both good and bad times. “In a recession, that [bank] business will go down, but it should provide a very high cushion to the airline,” DeNardi said. “That’s the real benefit here: It speaks to downside protection for the industry better than anything else.”

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