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Mile High Banks


The Setting

Back in 2020, something unusual happened. For the first time, the financials of major airlines in the US came under public scrutiny.

In 2020, with the covid shutdown in place, airlines were haemorrhaging money.

With not a single person booking flights, an apocalyptic future for air transport, and heavy fixed expenditures that come with maintaining an airline, the mile high alliances were dragged to the depths of financial hell.

Something had to be done to raise funds, but the problem was, none of their assets had enough value to put up as collateral, until they found one that did.


The Trump card

In 2020, what came to light were the FFPs, i.e., the Frequent Flier Programs.

Usually held as subsidiaries to the main airlines, the FFPs are loyalty programs, rewarding their customers for flying with them. These are membership programs that reward their members by awarding them with miles or points(for the sake of an easier understanding, we’ll refer to them as points going forward) that they can then spend on booking tickets or elsewhere, similar to banks that award points on credit cards(the airline points can also be availed via bank points!).

These airline programs are common news and have been around for ages, but what really was uncommon was their valuation. In 2020, (the loyalty programs have been bifurcated under subsidiary companies whose sole purpose is to run the loyalty programs, the valuations mentioned are of those subsidiaries) United’s mileage plus had a valuation of roughly 22 billion dollars, Delta’s skymiles roughly 26 billion dollars and American Airlines’ AAdvantage in the region of anywhere between 22 to 25 billion dollars.


All 3 of the companies are major power players when it comes to the US airspace having a combined market share of 48.7% as of 2022, but what makes it even more stupefied is the fact that the loyalty programs in all the 3 airline FFPs are more valuable than the airline itself.


So, how did these loyalty programs reach this point you wonder? Well, the answer is simple, and becoming more prevalent nowadays as large brands shift in the same direction, by creating an ecosystem where only the airline itself benefits.

The revolution was not really the loyalty program itself, but how airline companies used the points in these loyalty programs in an absolute downright genius manner. The airlines partnered up with various travel and other non travel companies to provide their points to members who used their other services. Partnering up with travel companies leads to a boost in business for both the parties involved. But why would a non travel company want to partner up? This point goes back to the development of the ecosystem, if a person has an AAdvantage membership and has been regularly collecting points on the membership, he is more likely to spend and purchase at those outlets which provide him with further points, so he could then go on to redeem them for seats or other services. The larger the loyalty program, the larger the potential market for an outlet store. And how did these travel and non travel companies get their hands on these loyalty points? Real life, Fed backed Dollars.


This money making machine got even more print power starting in 1986, when Continental Airlines partnered with Marine Midland Bank and offered a co-branded card, which allowed holders of the card to accumulate points every time they spent money on the card. This game changing partnership helped the airlines expand their ecosystem even further.




The $$$$$$$$$

So, how much do these loyalty programs really earn? Well, even with public financials, there are only unofficial estimates on the values of the points. According to the personal finance company, Nerdwallet, the estimates for some of the most popular programs are as follows:



This means that for every mile flown the price the partner companies have to pay to the airline program is as shown above. How the airlines really made money was through arbitraging the difference in the amount paid for flights via dollars and points. Here’s an example, As of Feb 7th, the price of a Delta flight from Boston to NYC is as follows:




While the cost of flying is only in $158 in Dollar terms, in points terms it comes out to be:

$(18000X0.015)+$11.20= $270+$11.20 or $281.20, a difference of $123.20 between the prices for the same miles travelled. The airlines have made a fortune through the large-scale selling of these points to various distributors all across the world.


Over time, any arbitrage opportunity or loopholes that existed in the system, have been clamped upon. This includes situations like,

  • Accumulation of miles by travelling longer routes:

    • Imagine taking a flight from Delhi to NYC, what would be cheaper, a direct flight or one with multiple layovers? Well, common sense would suggest the latter, as only the richer passengers would spend more on the convenience of a direct flight. As the points accumulation was in relation to the number of miles flown, people often took the longer and cheaper flight to gather points, making the airlines lose money in the form points which could have been potentially sold. So what did they do? Change the entire travel point distribution system of course. Now points are awarded as multiples of dollars spent on a flight rather than the number of miles.

  • Difference between rates on cash and points basis

    • A flight in the middle of December, that too, with the holidays just around the corner, would obviously be more expensive than a flight in the middle of August, but in earlier times however, there was not any difference between the number of points required for the tickets between the 2 dates. This was also changed and a dynamic pricing system was developed, which tied the pricing in terms of points to the pricing in terms of real time prices, closing any possible loopholes in that sector.

The tying up of these loopholes changed the system from one in which airlines may sometimes lose to one in which they literally cannot lose.


The Bank

All the pieces for the title are present, now to bring them together. What is the main function of a central bank? To print out a currency that only they have the right to print and control the quantity of. What do loyalty programs do? Distribute a virtual currency, that only they have the right over and control the quantity of. Through monetisation of the points, airlines have put a real price on their imaginary currency that they possess the sovereign rights to. What they have right now, is a possible unlimited source of revenue generation. The co-branded cards, and the ability to avail these points for things other than flights makes them insulated to any pandemic or global threat possible, because as long as there is spending in the economy, points will follow suit.



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