Summary of the Core Content
This article discusses a counterintuitive phenomenon: the frequent flyer programs of North American airlines (such as Air Canada’s Aeroplan and Delta Air Lines’ MileagePlus) are actually more valuable than the airlines themselves. The reason is that these programs have long since evolved beyond being mere marketing tools for rewarding customers with additional flight miles. They have become “money-making machines” that generate revenue by selling miles to banks. Banks use these miles to retain high-value customers, while airlines earn stable cash and interest on the funds held in their accounts. Customers also feel they get a good deal, creating a win-win situation for all three parties. However, Chinese airlines struggle to adopt this model. Objectively, transaction fees for card payments are low, and mobile payment methods have replaced many traditional card-based transactions. Subjectively, airlines do not treat miles as a form of “credit currency” and lack a business model that supports their development as separate entities. The article offers suggestions for Chinese airlines to break this deadlock: recognize the value of miles (treating them as a liability), identify suitable use cases for miles, and operate these programs independently.
North American Frequent Flyer Programs: Money-Making Machines More Valuable than Airlines
You might think that an airline’s most valuable assets are its planes and flight routes, but in fact, their frequent flyer programs are the real cash cows. For example, Air Canada sold 25% of its Aeroplan program for C$2.5 billion, giving it a total valuation of C$10 billion—higher than the airline’s own market value of C$7 billion. In 2020, United Airlines used its frequent flyer program to secure a loan of C$6.8 billion, with the program valued at C$21.9 billion, more than twice the company’s market value at that time.
Why are these programs so valuable? Because their primary function has changed: they no longer focus on rewarding customers with miles but on selling those miles to banks. Delta Air Lines earns approximately $7 billion annually from American Express; American Express needs to provide miles to its cardholders, which it obtains by purchasing them from Delta. This revenue is in the form of cash, and it is less affected by factors such as oil prices, pandemics, or wars, providing a stable source of income.
The Win-Win “Mile Magic” for All Three Parties
This model works because all three parties benefit:
- Customers (e.g., lawyer Mike): By obtaining a Delta-American Express joint card, they can earn 150,000 miles on purchases worth $100,000 and potentially exchange them for a business class ticket worth $8,000.
- Banks (e.g., American Express): They charge an annual fee of $650 plus a $2,000 transaction fee, along with interest on any installment payments, earning a total of around $3,000. They only spend $1,500 to acquire the miles, resulting in a cost half lower than if they simply refunded the cash to customers. Additionally, by requiring customers to renew their cards, they ensure that the miles accumulated are reset.
- Airlines (e.g., Delta Air Lines): They receive cash immediately when miles are sold, and even if customers exchange them for tickets two or three years later, the money can earn interest during that period. Many miles may also expire or not be used, representing an extra profit for the airline.
The key lies in the airlines’ unique advantage: business class seats remain available even when they are not fully booked, and their actual cost is much lower than the listed price of $8,000. This price difference is crucial to the profitability of these programs.
Why Chinese Airlines Can’t Adopt This Model?
There are two main barriers:
1. Objective Constraints:
- Low transaction fees in China: Merchants charge only 0.45% when customers use credit cards, leaving little profit for banks to purchase miles.
- The rise of mobile payment: Chinese people prefer using QR codes for daily transactions, reducing the opportunities for airlines to generate revenue from card payments.
2. Subjective Management Issues:
- Lack of trust in the value of miles as a currency: Airlines often change the rules for mile redemption, such as suddenly raising prices or resetting expiration dates, which undermines customers’ confidence in these programs.
- Outdated management practices: Frequent flyer programs are often treated as mere departments within airlines, with evaluations focusing on the number of members rather than their revenue generation. As a result, these programs are not reflected in financial reports and are difficult to value in the capital market.
The Way Forward for Chinese Airlines
To make their frequent flyer programs valuable, they need to take the following steps:
1. Recognize the Value of Miles: Treat miles as a liability and manage them systematically. Establish stable redemption rules and ensure an adequate supply of seats to encourage customers to accumulate miles over the long term (e.g., 10 years).
2. Leverage China’s Offline Consumption Ecosystem: Since card payments are less common, Chinese airlines can leverage their extensive network of physical stores for customers to earn miles. They should also highlight the unique value of their miles, such as allowing them to purchase international business class tickets, which is unattainable with traditional loyalty points.
3. Operate Programs Independently: Establish dedicated teams and financial systems for frequent flyer programs, ensuring that their revenue and profits are clearly reflected in annual reports. Only then can they consider options like spinning off these programs as separate businesses or seeking financing.
It has taken North American airlines more than 20 years to develop programs valued at billions of dollars. Chinese airlines must first acknowledge that frequent flyer programs are not just marketing tools but profitable businesses. In short, what’s missing is a shift in mindset and a focus on developing these programs as legitimate business models.
In essence, this article highlights that an airline’s “soft assets” (such as frequent flyer programs) can be more valuable than its physical assets. However, this requires treating them as real businesses with dedicated management and strategic planning. What Chinese airlines lack is not just scale but a deeper understanding of the value of these programs and how to effectively monetize them.