Will airlines end frequent flyer programs to cut costs?

Dear Tim,

I’m curious to know if anyone at your site has heard the rumor that airlines will discontinue travel award programs to cut costs?

Nancy

Dear Nancy,

Have I heard the rumor? Yep.

Do I believe it? Nope.

This particular rumor rears its ugly head periodically, apparently in more or less direct response to troubled times in the airline industry. So it’s no wonder that it’s resurfacing now, during a particularly challenging period for travel purveyors. (As I write this, no fewer than five airlines have applied to the federal government for financial bailouts. And there’s every reason to expect that other airlines will do the same in the coming weeks.)

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While I would never say “never,” I will say that it’s highly unlikely that the airlines will shut down their frequent flyer programs anytime in the foreseeable future.

There are indeed substantial costs associated with operating mileage programs, as you suggest. But those outside the industry rarely appreciate the financial upside: The larger programs actually generate a profit for the airlines that own them. How? By selling miles to program partners.

For example, for every mile an AAdvantage member earns by charging a purchase to his or her Citibank AAdvantage MasterCard, Citibank pays American approximately one cent. A pittance. But multiply millions of cardholders by thousands of dollars in charges and those pennies quickly translate into enormous revenues for American. Factor in the sale of miles to partner airlines, hotels, rental car companies and other program participants and you have the makings of a significant side business.

The running joke, in fact, is that the return on investment from operating frequent flyer programs is higher (these days, far higher) than it is from operating the airlines themselves. At least for the larger airlines.

Smaller airlines’ programs do not have the scale necessary to generate enough revenue through the sale of miles to cover the programs’ costs. So they’re cost centers rather than profit centers. But don’t fret?competitive pressures will force them to maintain their frequent flyer programs anyway.

And lest we forget, frequency programs have proven themselves to be terrifically potent vehicles for gaining and retaining customers’ loyalty and business.

If you need something to worry about, try this: If commercial air travel doesn’t rebound soon, one or more of the weaker U.S. airlines could go bankrupt. What do you suppose will happen to the miles in that airline’s program? But that’s a question for another time…