Ever wonder what that free trip you’re on is costing the airline?
Wonder no more.
As of April 1, all airlines (and most publicly traded companies, for that matter) were required to submit their annual reports to the SEC. Of interest among these reams of facts and figures are the 10-K forms, which provide a comprehensive overview of the registrant’s business. Within, you’ll find the hard, cold numbers on the airlines’ frequent flyer programs.
The results, as they say, are in, and they’re pretty interesting.
US Airways, for example, filed for bankruptcy in September of 2002. Many expected to see a run on the mileage bank as a result, and it would appear that is exactly what happened. In 2001, Dividend Miles members redeemed 1.1 million awards. In 2002, that number jumped 18 percent, to 1.3 million. At the same time, though, the number of outstanding awards also jumped 2.8 percent, from 6.817 million in 2001 to 7.011 million in 2002. So, even though redemptions jumped, the number of miles earned jumped even more.
At United, the number of outstanding awards actually dropped, from 11 million to 10.5 million. This, while the number of awards redeemed stayed steady at 2 million in both years.
Delta incurred the highest “cost” — award seats accounted for nine percent of their total revenue passenger miles, up a full percentage point from 2001. They also have by far the largest unused award liability at 13.7 million. The closest runner-up is United, at 10.5 million.
Faced with tidy statistics like this, one might be tempted to draw sweeping, poorly-grounded generalizations.
We sure are.
So here goes: When you consider that the airlines list both the number of outstanding awards and the amount of money those awards represent, a little reverse engineering should tell you how much they think those awards cost.
How much is it? Try $17.46, on average.
Of course, that number varies significantly by airline. For US Airways, it’s a modest $12.84. For United, it soars to $24.10.
Here’s a little more overly-simplistic math.
If you’re ever tempted to think that frequent flyer programs cost the airlines money, consider this: An airline sells its miles to its partners, say, at 1.5 cents each. The standard award requires 25,000 miles. To honor the award, the airline incurs that $17.46 charge, but remember — it sold those 25,000 miles at 1.5 cents each, for a total of $375. Net profit: $357.54. Not a bad little take.
It should be stressed again that these calculations, while fun and somewhat enlightening, are hardly etched-in-stone accurate. That $17.46 does not take into account all the things you usually pay for on a revenue ticket — airport fees, crew, ground support, maintenance, etc. So perhaps it’s not fair to extrapolate too much.
Still, the point is abundantly clear that regardless of the relative health of other portions of a given airline, the frequent flyer program is and remains an enormously lucrative business.
