Shares of Delta Air Lines, Inc. (NYSE: DAL) inches up in pre trading session on Tuesday as during the epidemic, U.S. airlines depended on loyalty programs for revenue, and industry officials and analysts said the programs’ revenues should stay up even if the economy enters a recession.
The programs, which were introduced more than 40 years ago to foster airline brand loyalty, are now a source of income for the airlines through the selling of miles to third-party partners, mostly banks that issue credit cards and award the miles to their own clients. Customers earn more miles and partners pay airlines more when they spend more money.
According to Evert de Boer, general partner at consultancy company On Point Loyalty, non-flight activities now make up more than half of all miles earned in significant loyalty programs, making airlines more robust to cyclical fluctuations in the economy.
According to research from consultant IdeaWorksCompany, the main five U.S. airlines, Delta Air Lines, American Airlines, United Airlines, Southwest Airlines, and Alaska Airlines, saw a sharp increase in the income earned by loyalty programs from roughly 12% in 2019 to 16% in 2021.
While fewer people travelling during the epidemic, airline reward credit cards were still used, said to Chris Buckner, vice president of JetBlue. If the demand for travel is reduced by a weakening economy, he and other CEOs anticipate that tendency to continue.
According to Jonathan Clarkson, vice president of Southwest Airlines, “Credit card spending isn’t going away.”
According to Reuters calculations, Delta made $5.7 billion in cash sales from American Express and other partners last year, which is equivalent to 14% of passenger revenue in 2022.
Similar to Citi and Barclays, American Airline earned $4.5 billion in cash from its partners, which represents 10% of passenger revenue.
Carriers are seeking new alliances in an effort to increase revenue from these initiatives.
United has collaborated with organizations including SimpliSafe, a seller of home security systems, and Norton, a maker of antivirus software. Alaska is giving clients 50,000 miles for obtaining mortgage loans for homes. JetBlue has partnered with baggage providers.
Among others, collaborations between Delta and the supermarket delivery service Instacart exist.
Moreover, loyalty programs for airlines are quite successful.
The return on invested capital from these projects for American, United, and Delta is more than 60%, according to a research by Frankie O’Connell, a professor of air transport management at the University of Surrey in UK. This is far greater than the 5% return on their whole company.
O’Connell described it as a “goldmine of recurring earnings for little or no work.”