How US Airlines Are Profiting from Your Frequent Flyer Miles

Screen Shot 2013-11-20 at 9.58.39 AMThink you’re the one benefiting from your frequent flyer miles? Think again, the sale of frequent flyer miles will account for 44 percent of total global revenue for airlines in 2013, according to a new study from IdeaWorks and Car Trawler.

Looking ahead to the end of the year, IdeaWorks projects that ancillary revenue will reach $42.6 billion worldwide. Ancillary revenue has grown 17.9 percent in the last year, boosted significantly by the growth of frequent flyer rewards programs.

In fact, $18.9 billion of that global revenue will come from the sale of frequent flyer miles as well as other commission-based revenue.

As a region, North American airlines benefit the most from frequent flyer miles. U.S. and Canadian airlines will earn $9.7 billion in revenue from frequent flyer miles in 2013. The Asian/Pacific region airlines come in second with only $3.9 billion.

 IdeaWorks noted, “The majority of ancillary revenue for US major airlines is generated by the sale of frequent flyer miles, mostly those linked to co-branded credit cards.”

empty seats American AirlinesFrequent-flyer programs matter most for the airlines — they are pure profit machines. How? The airlines literally print the “currency,”  i.e. the mileage — which they sell for about 1.4 cents a mile to hundreds of mileage partners–credit-card companies, grocery stores, florists, mortgage companies. In fact, the programs actually enjoy a market valuation higher than the airlines themselves.

Currently, there are at least 9.7 trillion unredeemed frequent flyer miles and with the airlines flying at such high load factors there is no incentive for them to redeem miles for tickets that would essentially displace revenue passengers.  As of the end of December 2012, United Continental expected 25 percent of its miles earned are expected to expire or go unredeemed. In 2012, customers of Southwest and AirTran redeemed approximately 4.5 million flight awards, accounting for approximately 9.0 percent of revenue passenger miles flown.

According to the IdeaWorks study, traditional airlines like Gulf Air and Singapore Airlines may earn the greatest ancillary revenue with $14.6 billion, but only 30 percent of their ancillary revenue came from the sale of frequent flyer miles. For major U.S airlines–like Alaska, American and U.S Airways–more than 65 percent of their ancillary revenue comes from frequent flyer miles, equaling $9.3 billion earned.

To put this in context globally, low-cost carriers like flydubai and WestJet made a total of $6.2 billion in ancillary fees with a modest 6 percent coming from frequent flyer miles and commission-based revenue.

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By Judith Retana for Peter