How Airlines Make Billions From Loyalty Programs

The airline industry is notorious for its volatility. To say the profit margins are razor-thin might even be an understatement, as they’re typically in the single digits across the board. Last year, it was reported that the four biggest U.S. airlines — American, Delta, Southwest, and United — made $200 billion in combined revenue, but when you break down the results, each of them actually lost money on their core business: transporting passengers. Which naturally raises an important question: How do airlines actually make money? There are several answers, but one of the most lucrative revenue streams may surprise you — it’s the money-printing loyalty program.

Not-So-Hidden Fees

But first, let’s talk fees — another important part of the equation. One of the most universal(ly frustrating) aspects of flying these days is seeing the initial price of your fare balloon by the time you’re actually paying for it. If you aren’t paying extra for a checked bag, you’re being charged for choosing a seat (remember when that was included?) or upgrading to a better boarding group so you don’t have to gate-check your carry-on.

There’s a good reason the airlines do this: As we’ve covered above, the base fare of a ticket doesn’t usually cover the cost of flying you from point A to point B, and — especially for low-cost carriers — the extra fees are how they actually make money. Just as it is at the gas station, fuel is expensive, as are airplanes themselves, labor costs, and airport landing fees.

How Frequent Flyer Programs Became So Valuable to Airlines

In 1979, Texas International Airlines (which later folded into Continental Airlines, which merged with United in 2010) started the first mileage-based frequent flyer program. Two years later, American Airlines began the first major frequent flyer program, AAdvantage, which is still around today. Since their humble beginnings, these loyalty programs have grown into core parts of the business strategies of every major airline. And they are only soaring higher and higher: Frequent flyer programs are estimated to have generated $32.2 billion in 2023, 19% more than the year before.

During the pandemic, loyalty programs became a lifeline for airlines. To secure crucial loans as travel demand plummeted, United used its MileagePlus program as collateral. On its own, the airline’s frequent flyer program was appraised at an eye-watering $21.9 billion. American’s AAdvantage program was appraised at a whopping $30 billion.

So, how do the economics work out so favorably for airlines? Though we traditionally think of these loyalty schemes as frequent flyer programs, one expert says they’ve become more like “big spender” programs.

“The airlines create points really out of nothing, and then they sell them for real money to banks that have co-branded credit cards,” Ganesh Sitaraman, author of the aptly named Why Flying Is Miserable, explained on NerdWallet’s Smart Travel podcast. 

For instance, in 2024, Delta made $7.4 billion by selling SkyMiles to American Express, which issues the carrier’s lineup of co-branded credit cards. It’s a lucrative partnership for banks, too, as more than 1 million new people signed up for the cards in 2024, driven by the promise of earning miles toward free flights.

Use Your Miles or Lose ’Em

As Sitaraman explained to NerdWallet, “The result is that airlines, in some ways, are kind of like banks or quasi-banks … Airlines issue currency, the points, and they get to decide how much that currency is worth and what it can be spent on.”

In other words, it’s not unlike the tickets kids receive for playing games at Chuck E. Cheese. The airlines decide how much everything is worth, formulating things in such a way that generates as much income for them (and their bank partners) as possible. 

How much bang for your buck you receive with these programs depends on the airline, as some are more rewarding than others. According to a NerdWallet analysis, most of them are in the range of about 1 cent per point. That means, if you’re looking at buying a $300 flight, it should cost around 30,000 points or miles.

In general, points and miles experts say that it’s better to spend your points regularly rather than hoard them. Airlines can (and often do) reduce how far your points will actually get you, meaning the thousands of points you’ve accrued might be more valuable today than they will be six months from now. And though all this information might make loyalty programs sound like a one-way street, they’re still highly beneficial to travelers — indeed, for many of us, the thrill of paying next to nothing for a flight when you have enough points to do so makes flying far from miserable.