Regarding airlines and the money that they make, the common assumption is that most of their profits come from the regular airfare tickets they sell. However, it's quite the opposite, and the airline loyalty programs bring in the cash. 

The Problem For Airlines

In 2023, the net profit across all airlines globally from airfare was around $9.8 billion according to the International Air Transport Association (IATA). The actual net profit margin, however, was only 1.2%, which is incredibly low if you compare it to a company such as Apple, which declared a $19.9 billion profit in just one quarter of 2023. 

Another global company, Starbucks, reported $23.83 billion for the financial year ending June 30, 2023, another significantly larger profit than global airlines combined. When everything is calculated down, the average profit-per-passenger is about $2.25, barely enough to buy a cup of coffee. 

So Where Does the Real Money Come From?

Ancillary revenue is things that come outside of the base airfare and can vary depending on what airline you fly and what the customer is willing to spend money on. You might pay for seat assignment, or check a bag to your destination. Maybe you want to buy a drink or snack onboard. All of these things are extra revenue generators for airlines, but the biggest ancillary gains from airlines come from their loyalty programs. These programs reward flyers in the form of points or miles, and the default way of gaining these is by flying on the airline itself. 

But we're talking about the extras here, so where does that come from? Well, the big ticket item in this category is airline credit cards. Whenever a customer purchases an airline credit card, their loyalty program is tied to the card. The result is that whenever a customer goes out and makes purchases on the card, they earn points or miles back into the airline loyalty program to which the card is associated. But to get those points, the credit card company has to purchase them from the airline. So the more the cardholder spends, the more the company must buy from the airline. 

With the overall goal of earning more points to earn status, the cardholder is inclined to keep using the card, so they can maintain that loyalty status they have been enjoying for many years. Not only that, but points are used as a way to gain free or reduced airfare flights, so the cycle promotes the customer's continuous spending to build up their points bank after they use them to buy a free flight. 

It's Not Just the Credit Card Though

Beyond airline credit cards, ancillary revenue is also generated through airline partnerships with hotel companies, rental car agencies, and retailers. The concept is the same though as credit cards. The customer spends the money, the agency buys the points from the airline, and the points then go to the customer. All of this adds up to the incredible gains that airline loyalty programs can provide. 

The 15 top-performing airlines disclosed a year-over-year frequent flyer program revenue gain of $8.3 billion for 2022.  American Airlines came out with the best profit from loyalty programs and made $5.8 billion in frequent flyer revenue in 2022, an average of $29.10 per passenger. And globally, Delta, Southwest, United, and Alaska follow America in the 2022 loyalty revenue rankings all leading by a wide margin over their global competitors.

Summary

In a world still recovering from the effects of the pandemic nearly 5 years ago now, the airline world must maintain its profitability while still providing the services it wants to keep customers loyal. Rather than raise airfare to a point where it does more harm than good, airlines turn to their ancillary revenue products and put heavy emphasis on their loyalty program. 

With more people striving to earn high amounts of points in the many ways possible, airlines get to take advantage of this buy-and-sell program to boost their revenue and turn a profit into something more than just selling flight tickets.