How Airline Companies Earn Revenue by Selling Goods for Frequent Flyer Miles
Frequent flyer miles are a form of currency that can be earned, transferred, and redeemed for various goods and services. Their value is often set by the airline, making them an intriguing form of currency with a defined worth. These miles can be acquired by flying with the airline, or through credit card issuers and other merchants who offer incentives for their customers. In the complex world of airline economics, understanding how airlines make money by selling goods for frequent flyer miles is crucial for both travelers and business owners.
Understanding Frequent Flyer Miles
Frequent flyer miles are a reward system designed to incentivize frequent flying. Airlines offer these miles as a way to retain loyal customers and encourage repeat business. However, the value and purpose of these miles extend far beyond the initial intent of the program. Airlines sell these points to merchants, who can use them to incentivize their own customers, effectively turning miles into a form of indirect revenue.
Why Airlines Sell Miles to Merchants
Airlines sell frequent flyer miles to merchants for several reasons. One of the primary motivations is to decrease their liability on their balance sheets. Miles are a liability because they are points that can be redeemed for goods and services. By selling these miles to merchants, airlines reduce their financial burden and free up capital. Additionally, airlines can earn revenue by charging merchants for the right to use their frequent flyer programs.
How Airlines Make Money
The process of selling frequent flyer miles to merchants for the purpose of reselling them or giving them away as incentives is not straightforward. It involves a complex interplay of pricing, market demand, and strategic marketing. Here’s how airlines benefit from this arrangement:
Selling Miles to Banks and Other Financial Institutions
While it may seem that airlines are losing money by selling miles to banks, the reality is that they might be earning more than the cost of the merchandise they sell to earn those miles. Banks and other financial institutions are often the primary buyers of miles, using them as an incentive for their customers to use their services. Airlines can charge these institutions a premium for the miles, effectively turning the miles into an indirect revenue stream.
Reselling Miles to Merchants
Airlines can also resell miles to various merchants, such as merchants who offer travel-related benefits or other products. These merchants can then sell or give away the miles as incentives to attract more customers. This arrangement allows airlines to earn a commission on each sale, further increasing their revenue.
Removing Miles from Circulation
A more strategic approach is to intentionally reduce the number of available miles by selling them. This can be done to manage the supply and demand of the currency. By removing miles from circulation, airlines can prevent potential consumers from using them on high-value flights, such as first-class or international routes. For example, if an airline sells 30,000 miles to a merchant to buy 10 cameras or carry-on bags, they effectively reduce the number of miles that could be used to redeem a first-class round trip between the US and Australia. This action can prevent the airline from losing thousands of dollars in revenue for a first-class ticket that they would otherwise sell.
Conclusion
Airlines use frequent flyer miles as a tool not only to retain customers but also to earn additional revenue. By selling miles to merchants and strategically managing their supply, airlines can maximize their financial benefit. Understanding this process can help both businesses and travelers make more informed decisions about how to best use and benefit from frequent flyer miles.