Frequent flier programs were initially intended to reward passengers for remaining loyal to one particular airline instead of hopping carriers for the lowest airfare. However, these programs have gradually shifted over decades into de facto financial institutions with airmiles becoming a self-regulated currency. The Atlantic published an article today that recounts the path airlines took to reach this point in the wake of Delta Air Lines’ transforming its SkyMiles program to focus solely on spending over flying.
These loyalty programs came into being after the federal government deregulated the airline industry in the late 1970s. Deregulation came with promises of increased competition between carriers and lower fares. In actuality, fares were already decreasing and airlines consolidated. Carriers became more concerned with how much customers were spending with them, not how far they were flying with them. They offered more premium fare classes and most importantly co-branded credit cards tied to frequent flier programs. Ganesh Sitaraman explains:
“Here’s how the system works now: Airlines create points out of nothing and sell them for real money to banks with co-branded credit cards. The banks award points to cardholders for spending, and both the banks and credit-card companies make money off the swipe fees from the use of the card. Cardholders can redeem points for flights, as well as other goods and services sold through the airlines’ proprietary e-commerce portals.”
Airlines created a highly sought currency that cost them nothing until customers redeemed them. The publication purports that almost one percent of America’s gross domestic produced is charged to Delta American Express cards. The carriers have complete control over this currency and can adjust its value at a moment’s notice for its own benefit.
You can read the Altantic’s entire breakdown of frequent flier programs here.