Licensing loyalty
Started as a way to keep passengers coming back again and again,
airline loyalty programs have grown into significant cash generators.
Airlines make money off
the programs by selling miles to other companies that want to offer
these miles as a marketing lure. Netflix Inc. (NFLX:
the programs by selling miles to other companies that want to offer
these miles as a marketing lure. Netflix Inc. (NFLX:
Netflix, Inc, for instance, advertises that new customers earn 1,500 miles for use in
Delta's SkyMiles program when they sign up for the video-rental
service. Netflix pays Delta for those miles; in return, Delta makes a
certain number of seats available for frequent-flier use.
Delta's SkyMiles program when they sign up for the video-rental
service. Netflix pays Delta for those miles; in return, Delta makes a
certain number of seats available for frequent-flier use.
The cash value of these
miles likely is 1 to 2 cents a mile, according to Henry Harteveldt,
Forrester Research airline analyst.
miles likely is 1 to 2 cents a mile, according to Henry Harteveldt,
Forrester Research airline analyst.
Particularly attractive
to investors are the high margins. One reason for these margins is that
some passengers never redeem their miles -- about 17% in Aeroplan's
case.
to investors are the high margins. One reason for these margins is that
some passengers never redeem their miles -- about 17% in Aeroplan's
case.
That means some of the
mileage sold to third parties are 100% profit. If a passenger does use
those miles to take a flight, the carrier makes a profit on the
difference between what it earned from selling the miles and the price
of a ticket for that seat -- if it were able to sell one.
mileage sold to third parties are 100% profit. If a passenger does use
those miles to take a flight, the carrier makes a profit on the
difference between what it earned from selling the miles and the price
of a ticket for that seat -- if it were able to sell one.
Aeroplan, for instance,
sells miles to Air Canada, credit card companies and retailers for
about 1.17 Canadian cents each a mile. When customers redeem them, that
costs Aeroplan around 89 Canadian cents a mile.
sells miles to Air Canada, credit card companies and retailers for
about 1.17 Canadian cents each a mile. When customers redeem them, that
costs Aeroplan around 89 Canadian cents a mile.
That cash generation
also makes the units attractive for their airline parents, which
increase cash flow as they sell miles to marketers. In general, most of
a carrier's frequent-flier miles go to third parties rather than as
rewards to customers.
also makes the units attractive for their airline parents, which
increase cash flow as they sell miles to marketers. In general, most of
a carrier's frequent-flier miles go to third parties rather than as
rewards to customers.
Plus, the programs
provide the carrier with an incentive program to make sure its most
loyal customers come back for more. Losing the ability to manage those
customer relationships is a big risk for carriers considering
separating their loyalty programs.
provide the carrier with an incentive program to make sure its most
loyal customers come back for more. Losing the ability to manage those
customer relationships is a big risk for carriers considering
separating their loyalty programs.
"The best customer for
American Airlines may not necessarily be the best customer for the
frequent-flier company," said Tom Horton, AMR's chief financial officer.
American Airlines may not necessarily be the best customer for the
frequent-flier company," said Tom Horton, AMR's chief financial officer.
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