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Air miles and frequent-flyer programmes drive enormous profits but risk becoming victims of their own success.

Matt Jones is no ordinary frequent flyer.

When the former chartered accountant flew from London to Cape Town this winter, he skipped the direct overnight flights linking the two cities.

Instead he set off on a voyage of five flights on four airlines, hopping from London to Oslo and then on to Zurich, Johannesburg and Windhoek, in Namibia. He finally reached his destination after more than four days of travelling.

His mission was to engineer a combination of routes to help reach “gold” frequent-flyer status with one of the Star Alliance group of airlines, unlocking access to 1,000 lounges and special treatment on more than 25 carriers including Lufthansa, Singapore Airlines and United Airlines.

The dedication shows how much loyalty programmes mean to some flyers. These include both “air miles” schemes, which allow customers to earn points and then redeem them on flights, and separate “status” programmes, which offer airlines’ best customers a few perks to ease the strains of modern-day air travel, from lounge access to chauffeur-driven cars.

Jones, who documents his travels on a popular YouTube channel, is part of a global community of frequent flyers who research how to earn air miles and top frequent-flyer status as efficiently as possible. “You have to enjoy the plane side of travel more than the actual destination,” he admits.

For airlines, loyalty schemes — and in particular air miles programmes — do more than drive repeat custom. They have grown into multibillion-dollar businesses that can be more profitable than the flights themselves.

By selling points or air miles to third parties, such as banks or credit card companies, airlines forged a hugely valuable source of revenue. The loyalty programmes of the big three US airlines alone were worth $73.8bn in 2023, according to calculations from On Point Loyalty, a consultancy.

But as many airlines report record demand for flights, there are signs a model built over the past 40 years is under strain.

Lounges are full as more people travel in premium cabins and burn points built up during the pandemic, while travellers have also learnt methods to earn points and status without doing too much flying.

Amid concerns that the balance of power has shifted too far towards the frequent flyer, some airlines including British Airways in the UK and Delta in the US have introduced changes to make it more difficult to reach their elite frequent-flyer tiers.

These have polarised customers. In London, enraged frequent flyers have written open letters to BA’s chief executive, threatened to move to its rivals and even drawn up plans to hold a “wake” for the old scheme in central London when the changes come into force in April.

At a moment when demand for flying is booming and frequent-flyer programmes are becoming increasingly valuable businesses, there are concerns they could become victims of their own success.

Industry observers warn that airlines risk losing sight of the fact that these programmes are designed to attract customers, rather than just make money. And doing so could damage the customer loyalty — and the lucrative revenue stream — that these airlines may need to fall back upon once the present flying supercycle is over.

“From a business perspective, it is definitely booming,” says Anthony Woodman, head of Virgin Atlantic’s loyalty business.

“But it’s also my job to never lose sight of our customers and our members . . . and any programme that loses sight of that fundamental thing will always be in trouble.”

The first major airline loyalty programmes emerged in the early 1980s, following the deregulation of the US industry.

Facing competition from lower-cost rivals, bosses at American Airlines realised they needed to find a way to incentivise passengers to keep flying with them, even if rivals were offering slightly cheaper seats.

They settled upon a fairly rudimentary early system: membership was by invitation only and customers were offered fixed rewards — from upgrades to a free first-class flight — depending on how many miles they had flown.

The plan was only to run it for a year, but American’s rivals followed suit within weeks, and the airline loyalty boom began.

Airlines soon joined forces with their partners so points could be used across alliances’ multiple carriers, expanding the scale of the loyalty programmes and turning them into global businesses.

But things really changed in 1987, when American Airlines partnered with Citibank to launch a co-branded credit card offering users air miles for every dollar spent. This scheme of selling frequent-flyer points to financial institutions transformed mileage programmes into complex but highly profitable businesses in their own right.

In theory at least, it seems like a near-perfect business model: airlines can create as many points as they like out of thin air, and then sell them on to banks and credit card companies. They can also sell miles to partner hotels, car rental companies or shops, in effect becoming the central banks of a lightly regulated financial ecosystem.

While airlines can enjoy instant revenue from selling air miles to banks and other third parties, the cost of customers redeeming their points through booking seats is deferred into the future, says John Grant, an executive at airline data company OAG.

Many never spend them at all. In 2018, the consultancy McKinsey estimated there were 30tn unredeemed air miles in passenger accounts, enough for almost every airline passenger in the world to take a free one-way flight.

These asset-light businesses are particularly attractive to airlines. The actual work of operating flights is capital intensive, exposed to economic downturns and has high fixed costs, some of which such as fuel are out of airlines’ control.

The reliance of airlines on their loyalty businesses became clear during the pandemic, when the four biggest US carriers put up their customer loyalty schemes as collateral to help them raise new debt.

At the time, the valuations put on the loyalty schemes far exceeded the market capitalisations of the ailing airlines, suggesting they were worth more than the flight operations.

Even at the height of the disruption in July 2020, American Express paid £750mn to extend its partnership with BA owner International Airlines Group, a significant part of which was to pre-purchase Avios frequent-flyer points.

IAG Loyalty, the home of Avios, reported an operating profit of €321mn in 2023, more than Aer Lingus, one of the group’s airlines, and up by 14 per cent from the previous year. Its operating margin in 2023 — 21 per cent — was more than double that of Aer Lingus or BA.

“It is a huge business, and very lucrative,” says Tom Peace, managing director of The Loyalty People, a consultancy.

Yet cracks have started to emerge in loyalty programmes since the end of the pandemic.

Some airline management teams have realised that too many passengers have elite status and hundreds of thousands of air miles to burn, after racking them up during lockdown, when flights were grounded and travel restricted.

Lounges have also filled up amid a boom in business and first-class travel, particularly from leisure travellers, who typically spend more time enjoying the perks of frequent-flyer status.

“Loyalty programmes have become overcrowded in their mid-tier levels and airlines cannot afford those costs,” OAG’s Grant says.

Many airlines have responded by gradually tightening the rules governing their frequent-flyer programmes, focusing their reward programmes only on the customers who bring in the most revenue.

In the US, Delta Air Lines in 2023 announced changes to its SkyMiles programme to align rewards with how much customers spend, either with the airline or on a co-branded credit card, rather than how far they fly, as well as restrictions on how many times lower-spending credit card customers can access lounges.

In the UK, BA last month enraged some frequent flyers by announcing similar changes to its status programme.

From this April, the airline’s “Tier Points” will be awarded based on the cost of flights or package holiday bookings. At present, status is calculated on the class of travel and the length of trips, benefiting passengers willing to seek out cheaper and less popular long-haul routes in the pursuit of elite status.

Many flyers welcome the changes, in particular citing lounges groaning with passengers who had accumulated enough points to reach the top silver and gold tiers.

But others say BA has made the barriers to entry too high. The rules are complex, but reaching gold status could now mean spending around £20,000 a year on flights.

“BA is effectively washing its hands of the leisure market,” says Rob Burgess, editor of frequent-flyer website Head for Points. “Realistically, it will now be impossible to earn gold for small business travellers, economy travellers or self-funded leisure travellers.”

One former senior executive at the airline says that is partly the point — and that such changes are long overdue. It has become too easy to gain elite status without spending much money with the airline, they say, particularly with experts such as Jones offering guides on how to do it most efficiently.

BA said the changes had been nearly two years in the making and “based on extensive modelling of our customers’ behaviour” and other airlines’ programmes “to make sure we’re getting the balance right.”

“We’ll continue to monitor this while adapting to changing needs and habits,” it added.

Jones himself expects the new rules will push him out of the gold tier at BA. “It feels like one of my favourite hobbies will be taken away from me,” he says. “It has to work for the airlines, absolutely. But it also has to be realistic for the consumer.”

As loyalty businesses become increasingly powerful profit centres for airlines, there are warnings that some businesses are forgetting why they were thought up in the first place: to attract people to the airline.

“Companies have sometimes been tempted to view them first and foremost as revenue generators instead of tools to sway customers’ behaviour or to improve customers’ experiences,” analysts at McKinsey said in a 2023 report.

Many customers say it is increasingly difficult to redeem air miles, in part because aircraft are fuller than they used to be, so there are fewer spare seats to give away to frequent flyers.

One senior airline industry executive says there has always been a competitive tension within airlines between executives running the loyalty business, who want to try to offer good seats to keep customers, and revenue management teams, which are focused on offering seats that would be unsold anyway.

And as airlines become increasingly skilful at using technology to predict which seats will go unsold, travellers hoping for a seat on a popular route are increasingly left disappointed.

Peace says that this is counterproductive for loyalty schemes, as passengers are more likely to try to earn points if they feel they will be able to “burn” them. “Burn drives earn, it is not the other way round,” he says.

Airlines can also devalue points at will, sparking concern over consumer rights competition in the US in particular, where the industry is concentrated into four big carriers.

Under the Biden administration in September, the US Department of Transportation launched an investigation into rewards programmes at four airlines, including a focus on what it called “the devaluation of earned rewards, hidden or dynamic pricing, extra fees, and reduced competition and choice”.

That came months after Rohit Chopra, head of the Consumer Financial Protection Bureau, said his agency had found that credit card companies and airlines “have the power to quickly and dramatically devalue . . . points”.

“We have also observed that airlines sell points to consumers at inflated rates, while selling those same points to credit card issuers at a much lower price. This not only creates confusion about the true value of the points, but also raises questions about fairness,” he added.

Perhaps the biggest challenge facing airline loyalty programmes is growing evidence that passengers themselves are becoming less loyal.

McKinsey pointed to surveys it commissioned in 2021 and 2023 that revealed “a steep decline in the likelihood that a customer would recommend airline, hotel and cruise line loyalty programmes to a friend or colleague”.

It added that the trend is even more pronounced for younger travellers, with those under the age of 40 typically spending with a greater number of brands than older people, whose spending is more concentrated.

Peace says airlines have “cottoned on” to the need to find new ways to encourage more people into their loyalty programmes by finding new ways to spend their points.

“If you can’t use those points, you won’t bother earning them. You have to find valuable flexible ways for people to burn them,” he says.

Recognising the possibility of frustration, some airlines are willing to sacrifice revenue to upkeep loyalty schemes. BA, for example, says at least 14 seats across its cabins on every long-haul flight will be sold through its loyalty programme rather than on the open market. Since 2023, it has also operated Avios-only flights, in which every seat sold is through Avios air miles.

Airlines are also diversifying the ways in which members can spend their miles beyond flights, from experiences to products.

Loyalty programmes’ online shops sell everything from the newest iPhone — from 314,000 miles at Lufthansa’s Worldshop — to luxury handbags and wine shipments, for airport collection or home delivery.

Virgin loyalty scheme members can spend their points on seats in a VIP box at London’s O2 arena, while Qatar Airways, which uses the same Avios currency as BA, has introduced a new service which allows customers to use points to bid for events including Uefa Champions League matches.

Meanwhile, airlines such as Saudia, Alaska Airlines and AirAsia are offering subscription plans — allowing passengers a set number of trips a year for a regular fee — as a new way of driving and monetising customer loyalty.

But Woodman of Virgin Atlantic cautions that devotion to a brand is driven as much by a customer’s experience of flying as it is by perks.

“The biggest question is whether customers really want to have the underlying relationship with the brand or not,” he says. “If they don’t, the loyalty programme can only go so far in bridging that gap.”

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