The Economics of Free Flights

Do airlines make money from reward flights? Yes. And quite a lot.

It is possible to earn free travel from credit cards. I want to talk about how airlines make money offering free flights. You heard me right, airlines MAKE money off of the free flights you redeem miles for. Lets jump into that with some basics, and at the end of the video I have a stat that will definitely blow your mind.

First, a little ground rules explainer. The title of this video uses the word Economics deliberately. The world of points is its own economy, with the points and miles from each reward program being an independent currency. In this sense, a single point or mile is a lot like a penny; the smallest unit in a currency, except unlike pennies, points are actually useful! Points can often be redeemed for about one cent as well, but that is where things get weird. While the value of the US dollar is backed by the Government and generally stable, only changing in value with inflation, whereas points are managed by the private company that issues them and the value – entirely arbitrary. Airlines and hotels can change the value and rules for your points at any time – and it happens.

Thats it for the foundational stuff. Points are an economy, and the value is whatever the airlines decide. Got it? Cool. Now we can talk about how airlines make money when you redeem those sweet, sweet points.

You may be thinking the answer is the same as other retail loyalty programs. By rewarding you with points when you buy, the company is hoping the rewards you bank up influences consumer behavior to keep you shopping with them instead of the competition. This way business just bakes the price of those rewards into your purchase. Very simple and effective for retail, restaurants, and online stores. But other retail loyalty programs aren’t what I would consider an ‘economy’ or a ‘currency’, they’re an incentive for repeat business. When it comes to the travel industry, that reward model doesn’t fly.

And you know what? It makes sense that travel programs are different. Airlines especially are operating an entirely different business. While normal stores sell goods or services, airlines are selling geography.

Loyalty is only important to those who travel enough to earn elite status, and even status perks aren’t always enough to keep frequent fliers coming back to the same brand. Loyalty means nothing if an airline doesn’t fly to your destination. Even then, if a competing airline has a nonstop flight that saves hours or offers tickets at a much lower rate, most people are going to pick the best time or lowest price. Especially for the infrequent traveler, price is going to be the deciding factor. 

Most people don’t even fly enough to earn the miles needed for a free flight anyway. So it’s clear, airlines are not making money off points by incentivizing your loyalty.

How do airlines make money giving away free flights? The same way any company makes money, by figuring out what people want to buy, then selling it. Airlines know people want to fly, but don’t have the money to buy the whole family a ticket and jet off somewhere, so instead of selling tickets to individuals, with the help of a middle man, they can also sell the idea of free travel to consumers by selling points in bulk to banks and other partners.

This gives the airlines an alternate revenue stream and converts your dollars into points, which, much like gift cards, have rules and can expire. The airline is more than happy to let those points expire or make the program rules confusing enough that you never redeem those points because hey, they already made money selling those points. If they don’t get used, that’s just free money for them.

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Monti
Writing about aviation and points. Specifically interested in Australia and New England regional airports.
Articles: 39

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