After 25 years, frequent flyer programs have become much more than simple marketing tools, according to a recent report by Reuters.
Instead, the programs have become big cash generators for an industry struggling on other fronts, as airlines raise hundreds of millions of dollars by selling mileage credits to banks, hotels, car rentals and phone companies.
Now some analysts are wondering if top U.S. airlines will follow Air Canada in taking the next logical step to profit from the loyalty programs, spinning off all or part of them into separate units.
Air Canada’s parent ACE Aviation Holdings raised C$250 million by selling a 12.5 percent stake in its Aeroplan business last July.
“The frequent flyer programs could very well be a major source of financial liquidity for the key carriers that have significant programs,” Julius Maldutis, president of consulting firm Aviation Dynamics, told Reuters.
American Airlines’ AAdvantage, which in 1981 became the first frequent flyer plan and is now the world’s largest, could be worth $5 billion based on the valuation Air Canada got for its frequent flyer unit Aeroplan, he said.
American has no immediate plans for a spinoff.
AMR Chief Executive Gerard Arpey in a recent conference call warned about deals in which “while you bring some money in the door at the front end, over the long run you end up paying out, in the form of whatever kind of relationship you have created.”
Still, Kurt Stache, president of AAdvantage Marketing Programs, told Reuters AMR did not rule it out in the future.
“We’re always looking at potential opportunities for the program,” he said. “The precedent has been set and it’s certainly something that could be done.”
United Airlines’ parent UAL which has another leading program, is “watching to see what kind of benefits are ultimately derived” from the spinoff by Air Canada, Ken Feldman, vice president of Loyalty and e-commerce, said in an interview with Reuters.
Whatever the airlines’ ultimate decision, they already make hundreds of millions off their frequent flyer programs by selling miles to partners from mortgage banks to restaurants who then distribute them to loyal clients.
American Express in December 2004 threw a lifeline to Delta Air Lines, agreeing to advance it $500 million, secured by miles American Express could then distribute to its SkyMiles cardholders.
The No. 3 U.S. carrier filed for bankruptcy in September but American Express is still one of its top lenders.
“We’re getting to a point where almost as many miles are earned through partnerships as through flying,” AMR’s Stache said. He declined to divulge American’s revenues from selling miles to Citigroup, its main partner.
The multiplying channels for mileage has also led to increased liabilities for airlines, who are trying to relieve the pressure to set aside more seats by offering other ways to spend miles such as magazine subscriptions and car rentals.
American estimated a liability from its AAdvantage program of $1.4 billion at the end of 2004, representing about a fifth of its total current liabilities, up from $1.2 billion, according to its most recent annual report filed with the Securities and Exchange Commission.
United Airlines in 2004 took a $47 million charge related to its Mileage Plus program, from which it estimated a liability of $840 million.
The programs still loom most importantly as a customer loyalty tool, though, with some “road warriors,” taking circuitous year-end trips (called “mileage runs”) just to keep the elite status that entitles them to first- and business-class upgrades.
Miles are one of the few remaining weapons in the arsenals of airlines like American, UAL, and Delta, as low-cost rivals offer improved service and schedules and better prices.
United’s program has helped stem defections to discounters Frontier Airlines and Southwest Airlines at its Denver International Airport hub, analysts told Reuters.