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That Free Ticket? You Earned It!

In his Airline Biz blog for The Dallas Morning News, Terry Maxon analyzed [[American Airlines | American Airlines']] financial reports for 2008, and unearthed several salient facts regarding the carrier's frequent flyer program. (As he rightly quips about such accounting expeditions, "It's a dirty job, but someone has to do it.")

According to Maxon: "American Airlines issued 196 billion frequent flyer miles in 2008, about half through its partners like credit card companies and hotels. That mileage is equivalent to about 7.8 million times around the world, or just over 1,000 round-trips to the sun."

Like most other airlines, American doesn't break out the revenues and expenses related specifically to its mileage program, but we can extrapolate from the number of miles sold to get a ballpark estimate of the revenue generated through the sale of AAdvantage miles.

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While American sells miles directly to consumers, for about 2.5 cents per mile, the great majority of the miles are sold to partner companies—the credit card issuers, hotel chains, retailers, and so on that award their customers with AAdvantage miles.

The per-mile rates paid by American's business partners vary according to the number of miles purchased and other factors, and are kept confidential. But let's assume that the average price is in the neighborhood of 1.5 cents per mile. If American sold half of those 196 billion frequent flyer miles for 1.5 cents each, it would have grossed $1.47 billion in 2008. That's a tidy sum.

On the other side of the ledger, the costs of running a loyalty program are modest. Since most awards are capacity-controlled, very few revenue passengers are displaced. So the real cost of giving away a free ticket is just the $10 - $15 in direct costs for extra jet fuel, a bag of peanuts, and a soft drink.

Bottom line: The big mileage programs are very profitable. (The inside joke during the travel slump following 9/11 was that the airlines' only profitable operations were their mileage programs. So in effect, they were operating flights to support their marketing programs, rather than the reverse.)

The profitability of mileage programs has implications for consumers who participate in them.

In particular, it means that you are a customer of American even if you never set foot on an American flight. Because every time you earn an AAdvantage mile—whether it's by using an affiliated credit card or making a purchase from an AAdvantage mileage mall merchant or renting from [[Hertz]]—you're contributing to the airline's financial wellbeing.

If, for example, you earn 100,000 non-flight miles annually, you're adding around $1,500 to American's "Other" revenue. That's the equivalent of purchasing three or four domestic round-trip tickets. And selling you miles is significantly more profitable for American than flying you from point A to point B.

So next time you redeem your miles for an award ticket, from American or another major U.S. airline, remember this: You earned it.

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