Are Airlines companies really in the Business of Transportation!

Economics & logistics of the Airline industry have always intrigued me.

I was browsing through the revene sources of some major players & found that last year, the financials of airline frequent flyer programs were made public for the first time, and the results were surprising. During the early days of the COVID-19 pandemic, airlines were struggling financially and were in need of loans to keep the company afloat until travel picked up again.

United, for example, sought a $5 billion loan and had to offer collateral in case they were unable to pay it back. Instead of offering a large portion of the company as collateral, United decided to offer one of its subsidiaries, MileagePlus Holdings LLC (essentially their loyalty program), as collateral.

The value of United’s loyalty program was estimated to be $21.9 billion, according to the company’s calculations. Similar disclosures from Delta and American Airlines revealed that the value of their loyalty programs was $26 billion and $31.5 billion, respectively.

Let that sink in!

As these values are higher than the market caps for the respective companies. At the time, United’s market cap was $10 billion, Delta’s was $20 billion. This means that the value of the loyalty programs was higher than the value of the entire companies.

In fact, the airlines themselves have negative value, with the only source of value being their loyalty programs. This is because the airlines often lose money on the actual transportation services they provide, but make significant profits from the revenue generated by their loyalty programs, which include co-branded credit cards, lounges, and other perks.

The focus on these loyalty programs has led to the transformation of airlines into businesses that prioritize loyalty rewards over transportation services. Which might be necessary to surivive in the fierce competition we have today.