How airlines make huge profits by monetising frequent flyer programmes

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How airlines make huge profits by monetising frequent flyer programmes

How airlines make huge profits by monetising frequent flyer programmes
2021-03-22 11:23:00
Frequent Flyer programmes are a really pernicious way for airlines to get people, who already fly a great deal, to fly even more. They are also a nice money-earner for the airlines.  Some US airlines are probably dependent on them. Their mileage programmes are often worth many billions of dollars. Airline mileage programmes have 2 main sources of revenue: the airline itself and third parties. One of the key ways the schemes work in by partnerships with banks. However, airlines are generally tight-lipped about just how valuable these partnerships are. There is partly the cost of future travel, and airlines do not want customers  to fly with another airline. They also do not really want customers to redeem their points, unless they then earn some more.  The airlines make a lot of money selling point to other organisations and companies, including American Express. Airlines love it when you earn a credit card welcome bonus or otherwise earn miles through credit cards. In order to give you those miles, the bank needs to buy more miles from the airline. When it does, the airline receives an influx of cash—which is especially needed right now. Also, the airline is able to record at least some of that mileage sale as an immediate profit.  And there is more … .Tweet     How Airlines Make Billions From Monetizing Frequent Flyer Programs Jul 15, 2020, (Forbes) https://www.forbes.com/sites/advisor/2020/07/15/how-airlines-make-billions-from-monetizing-frequent-flyer-programs/?sh=44a2f4b814e9  with lots of graphics Airline miles are big business for airlines. Long gone are the days of frequent flyer programs being just a punch card to generate a little extra loyalty from flyers. Instead, airlines are now dependent on their mileage programs for survival. In efforts to raise cash to get through the pandemic, American Airlines and United Airlines are mortgaging their mileage programs. As part of this process, both airlines have disclosed valuations of their mileage programs—And the numbers are in the tens of billions of dollars. How are these mileage programs so valuable? Let’s take a look into how airline mileage programs make money. Mileage Program Valuations In the U.S., mileage programs are an integrated part of their respective airlines. As airlines don’t share many critical details about the programs, analysts can only estimate the value of the mileage programs. For years, stock analysts have estimated the valuation of major U.S. airline mileage programs to be in the tens of billions of dollars. Now, as airlines are having to mortgage their mileage programs, these estimates are being proven out. In a bid to get a Coronavirus Aid, Relief, and Economic Security (CARES) Act loan of $4.75 billion, American Airlines recently completed a third-party appraisal of the AAdvantage program. That appraisal placed the value of just the U.S. portion of the AAdvantage program at between $19.5 and $31.5 billion. The American Airlines Group—which includes the AAdvantage mileage program—is currently valued by the stock market at $5.9 billion ($11.58 per share with 508.11 million shares outstanding as of July 14, 2020). If you subtract the conservative valuation of $19.5 billion from the $5.6 billion market capitalization for the combined group, the implied value of the airline operations is a negative valuation of almost $14 billion. Indeed, American Airlines’ own filings show that the airline had been losing money from its passenger operations even before the coronavirus pandemic sent airline travel into a tailspin. However, by generating billions of dollars in loyalty revenue, the airline has been able to report billions per year in profit. The situation is similar for United Airlines’ MileagePlus program. United is currently valued by the stock market around $9.2 billion ($31.80 per share with 290.45 million shares outstanding as of July 14, 2020). Yet, in an investor filing in mid-June, United valued its MileagePlus program at $21.9 billion by using a 12X multiple of the program’s 2019 earnings. As with American Airlines, if you subtrac

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