Loyalty programs are huge moneymakers for airlines

Delta Air Lines is joining the “buy now, pay later” craze, a new wrinkle in a wave of airline marketing schemes designed to lock in customer loyalty ahead of what experts say could be the busiest travel season ever.

Why it matters: Loyalty programs are huge moneymakers for airlines, and this year’s pent-up travel demand gives them a rare opportunity, when habits are up for grabs, to boost their brands’ “stickiness” and diversify their revenue.

What’s happening: Delta’s new “buy now, pay later” option lets customers create a fixed monthly payment plan, with no interest, if they book their flight using Delta’s co-branded American Express credit card.

The payment option follows Alaska Airlines’ newly announced subscription service, which lets customers pay as little as $49 a month for six flights a year to certain West Coast destinations.

Both are examples of how airlines are looking to boost their alternative sources of revenue while tightening their grip on consumers’ wallets.

How it works: Airlines make money by selling frequent-flyer points to banks, which then award them to credit card holders as rewards for purchases such as at hotels and restaurants or for groceries.

Airlines are paid 1 to 1.5 cents per mile by the banks, plus a bonus when new customers sign up for their branded credit card.

Banks collect the annual fees but take most of their cut in the form of “swipe fees” when customers use the cards for purchases.

The more consumers spend, the more miles they earn for free vacations, upgrades and other perks, incentivizing them to use the airline’s credit card.

Today’s loyalty programs extend far beyond flying. Delta SkyMiles members, for example, now can get a free Instacart Express trial for up to 12 months and earn miles with every grocery delivery.

Aeroplan, Air Canada’s loyalty program, lets members earn points on Uber Eats and Uber Rides through a free six-month trial of Uber Pass.

American Airlines now even determines customers’ frequent-flyer status by how much they spend on everyday activities, not just how often they fly.

“The airlines realized there’s a lot more opportunity to make money from these programs than just engendering loyalty.”

The big picture: Loyalty programs — especially branded credit cards — have become increasingly lucrative to airlines.

Delta has said its long-term deal with American Express is expected to bring in as much as $7 billion in revenue annually by 2023.

Some analysts argue that frequent-flyer programs are the most profitable part of the airline business, but that’s difficult to confirm since few airlines break out details on their programs.

One exception to that rule is United Airlines, which valued its MileagePlus loyalty program at nearly $22 billion in 2020 when it pledged the program as collateral on a debt deal to help weather the pandemic.

MileagePlus had earnings of nearly $2 billion on sales of $5.3 billion in 2019, United said as part of its pitch to bond investors at the time.

Now United is exploring a potential sale of a minority stake in the program, according to Bloomberg.

Airlines are paid 1 to 1.5 cents per mile by the banks, plus a bonus when new customers sign up for their branded credit card.

B anks collect the annual fees but take most of their cut in the form of “swipe fees” when customers use the cards for purchases.

The more consumers spend, the more miles they earn for free vacations, upgrades and other perks, incentivizing them to use the airline’s credit card.

By David Slotnick, senior aviation business reporter at The Points Guy and Axios.