Name: Why Airlines Can’t Survive Without Loyalty Programs | WSJ Case Study
Uploaded: 2026-02-18T22:57:54.000Z
Duration: 9 min 42 s
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Adverbs of degree

Fully booked flights, limited bag space, and

a kid kicking the window seat you paid an extra $100 for.

I have an extreme case of foc, fear of coach.

But that's the reality for the majority of people flying today.

A stark shift from the days where air travel included complimentary cocktails and an in flight piano performance.

To understand, we have to go back to a decision made decades ago.

When deregulation allowed airlines to set their own flights and routes.

What was meant to make the industry more competitive ultimately set off a race to increase profits and cement an airline's market share, leading to the world's first airline loyalty program.

It's hard to see how airlines could survive today without loyalty programs.

If we just started from scratch without it, I don't know.

Today, airlines make on average only about $13 in profit per passenger.

But 2020 revealed that the loyalty program can hold a higher value than the airline itself.

Here's the case study on how American Airlines created its own form of currency.

Changing the way the world flies and creating an entirely new business that has nothing to do with aviation.

This was back in an environment where airlines weren't full.

In the late 1970s, American Airlines was losing some of its grip on the market.

Deregulation had meant that there were lots of new airlines.

Suddenly, it's a little bit of a free for all.

Everybody was trying to figure out, how can we motivate people to fly more New smaller carriers began winning market share by offering lower prices.

And the competition forced the traditional carriers to rethink their business model.

They wanted to keep flying the same routes while maintaining prices, but not lose customers to competitors.

So our advertising agency said to us, why don't you guys see if you can come up with some kind of a prize?

The company brought together a small team to brainstorm Bob Crandall, he was the chief executive of American Airlines at the time.

And they brought in an outside consultant named Hal Brierly.

I definitely give Bob Crandall credit as the visionary who knew that incentives could drive behavior.

The team was inspired by price stamps, which could be collected at various stores and then exchanged for rewards like a watch or a new camera.

And American transitioned that idea to give customers miles, the first iteration of Advantage.

I think it did sound like a sort of simple idea at the time that if you give people some kind of prize, they might buy tickets.

In the early days, that simply meant a free flight.

American Airlines was betting that the business the program attracted would be greater than the cost to redeem the reward.

But to nail that, America needed to set the right benchmark.

The company knew that its average consumer flew about 40,000 miles a year.

Setting 50 meant concentrate your travel, fly on us more.

The team also implemented a specific one year time limit for the program and developed a way to track their customers.

They knew this was Tom Jones who flew from Miami to New York.

They didn't know if this was the same Tom Jones who flew to Paris last month.

Computerized reservation systems were still new and innovative and just getting off the ground.

To solve this, American linked its reward and reservation system and assigned customers a specific number.

Inspired by rental car company Avis, the goal was to know which customers were the most profitable.

Obviously, if I knew what you flew last year, I can design incentives that will reward you for incremental spend.

After more than a year of planning, American Airlines launched Advantage on May 1, 1981.

It seemed like the reaction was almost immediate.

And shortly after, twa, Continental, Northwest, Orient, Braniff and Texas International all followed.

And literally by September, every airline but one had a program.

But the secret weapon American had over its competitors at the time was just that time.

The other airlines had not done the planning necessary to keep track of the miles.

While they were figuring it out, we were signing up their customers.

American thought that we might have 500,000 people.

We signed up in the first year, a million people.

But the influx of competitors threw a wrench in American's lead.

When United launched its program without a one year time limit on the miles, I think a lot of the airlines thought it was a one year promotion.

And it might have been a one year promotion had United not made it open ended.

American quickly removed its limit as well.

And of course the consequence of that is that every frequent flyer wants to belong to every frequent flyer program, and

And that's totally destroyed the initial economics.

Without the time limit, the airlines found themselves once again one upping each other over and over and over again.

We need something that recognizes the top 2%.

This created a system to determine levels of incentive.

Like a complimentary first class upgrade, these upgrades were also a way to accustom flyers to the more expensive accommodations so that eventually they would buy that option on their own.

Now the Advantage program is hugely profitable because the value of the prize is proportional to the amount of business.

Miles became a sort of currency as frequent flyer programs began attracting attention and capital from outside the aviation industry, specifically from banks.

The Airlines began selling miles to these banks in exchange for cash.

The bank would then offer these miles to their cardholders as a reward.

But this move meant that passengers aren't an airline's only customer.

I mean, for the airline, that's great because it means they get revenue from all sorts of goods and services that you buy that are totally independent from travel or travel demand.

So the Advantage program has become a business in its own right, and a very profitable one.

But by awarding miles for spending, these programs were no longer just about frequent flyers.

How much did you spend on your ticket becomes more important than how far you're flying.

So you don't necessarily need to be a road warrior whose boss sends you out on business travel four days a week to have a shot at this.

You can get there by spending on your credit card.

Prompting the debate, have airlines become more like banks that just happen to fly?

I think the airlines disagree with that, and the flying is sort of the point.

But in terms of the role that the programs play in their finances, I mean, they have become really prominent and it's hard to ignore.

I mean, today, often in some quarters or some parts of the year, the actual airline operation doesn't make money.

You know, it costs more to fly passengers around than they pay the airline.

What can fill in the gaps is the loyalty program and the co branded credit card that gives airlines a little bit of revenue every time a customer swipes that credit card.

In 2023, American Airlines brought in $5.2 billion from its credit card and other partnerships and Delta 6.6 billion.

But the offerings promised in a loyalty program have become more competitive as the audience grows.

Now customers are paying for these accommodations.

By 2022, ancillary revenues like that made from seat upgrades and baggage fees accounted for about 15% of total airline revenue.

When I started, when you bought a ticket, everything came with it, whether you consumed it or not.

What we've been able to do over time is actually create more products that enable customers to pay for what they're going to consume.

And airlines are constantly recalibrating their programs to keep their economic edge.

Whether it's changing the benchmarks for a certain status or increasing the number of miles it costs for a flight, airlines have full control over how much a mile is worth and how much to charge for a flight.

So you are kind of at their mercy when you're participating in this program.

Some consumers have called these changes devaluations, drawing scrutiny in 2024, the Department of Transportation launched a probe into the four largest airline loyalty programs, describing the rewards programs as potentially unfair, deceptive or anti competitive.

A lot of people really seem to believe that airlines want to make it as hard as possible to use the miles.

And every airline executive I ever talked to has said that's not true.

I want them to find value when they use their miles.

But I do think there's a frustration when airline miles get devalued and then suddenly you can't buy the flight that you thought you'd be able to buy because your miles are worthless.

In response, an airline trade group said that loyalty programs are a way for airlines to compete for customers.