As banks compete to offer the most generous travel-related rewards for credit card customers, airlines are generating massive revenues from loyalty programs that likely account for a major proportion of their overall profits, according to a new analyst report.

Airlines don’t disclose much about their frequent flyer schemes, but Stifel’s Joseph DeNardi studied quarterly reports for seven U.S. airlines and learned all earned more in a key metric during the first six months of this year than a year ago, some significantly.

American Airlines earned most from its frequent flyer program in the first half of this year, DeNardi estimated, reporting roughly $1.15 billion in marketing revenue, an increase of 10 percent, year-over-year. What many airlines call “marketing revenue” from loyalty schemes is not quite profit, but it’s a close proxy: Airlines generally define it as the spread between what they earn for selling miles, and the trust cost for them of that mile.

While American reported the most marketing revenue for the year’s first half, other airlines showed larger year-over-year gains. None had a bigger increase than Hawaiian Airlines, which reported a 52 percent increase, though at just $34 million in marketing revenue, it was last among the airlines DeNardi studied. JetBlue also showed a major gain, raising its marketing revenue 23 percent year-over-year to $80 million. JetBlue started a new deal with Barclays in 2016, and the bank has heavily promoted co-branded cards.

It is no secret why the airlines are doing so much better. Each airline has long-term contracts with large banks in which banks buy miles and points to give to customers. While banks use rewards from other companies as well, airline points often attract more of the higher net worth customers banks value. In marketing speak, DeNardi said, airline customers are “stickier.”

Carriers have always benefited from frequent flyer programs but now have more leverage with banks than several years ago so they can exert higher prices. Banks sometimes pay as much as 1.5 to 2 centers per mile, DeNardi said in an interview.

Because of U.S. airline megers, he said, there are fewer airlines at the same time more banks want to break into travel-themed credit card business. In addition, he said, airlines are healthier financially than they were several years ago, allowing them negotiate more lucrative long-term contracts.

“As recently as 2011, the underlying airline business was bankrupt so they used these partnerships for financing,” he said. Some carriers, he added, would sell miles up front at a discount because they needed cash.

Valuing Loyalty Programs

On recent airline earnings calls, DeNardi has asked airline executives why they share so little information about the profitability of their programs.

He has said he suspects the loyalty business produces a major share of airline profits, though because carriers don’t break out much data, investors are not aware and can’t value companies properly.

Speaking July 26 on American’s second quarter earnings call, DeNardi shared some basic calculations with CEO Doug Parker. Without the frequent flyer program, DeNardi estimated, American’s full-year margin could be closer to 3 to 4 percent, rather than the 8 percent or so implied in American’s guidance.

“Do you think that if the two businesses were internally viewed separately and forced to stand on their own, that you would be able to manage the airline side to a better margin than what seems to be pretty low for the largest airline in the world?” DeNardi asked.

Parker said he disagreed with the premise, arguing the loyalty program should not be a stand-alone enterprise. “We think it’s hard to separate those businesses,” he said. “They’re so intricately related. The card is … another distribution channel. It’s a way in which people purchase tickets on American Airlines. If we separate that out of the airline, I don’t think those margins can be separated or should be.”

Nonetheless, DeNardi said he suspects some airline executives might be more open to selling part of their frequent flyer programs, perhaps to a private equity firm. He acknowledges spinning off the entire program, as Air Canada did in the early 2000s, does not make sense because an airline would lose control. But he argues an airline risks little from a partial sell-off.

“If Delta comes out tonight and says, ‘We are going to sell 25 percent of loyalty for $8 billion,’ nothing changes for Delta, other than they have provided to the market what that business is worth,” he said. “They don’t lose control of the program.”

An airline that sold part of its business might be more intriguing to investors, DeNardi said.

“All I want is for airlines to address the fact that the market is improperly valuing the loyalty program within the airline,” he said.

Here are DeNardi’s estimates of how much in “marketing” revenue seven major U.S. airlines booked in the first half of the year. 

Airline“Marketing” RevenueYear-Over-Year Increase
American Airlines$1.15 billion10 percent
United Airlines$962 million12 percent
Delta Air Lines$805 million12 percent
Southwest Airlines$563 million14 percent
Alaska Airlines$215 million3 percent
JetBlue Airways$80 million23 percent
Hawaiian Airlines$34 million53 percent

Note: DeNardi defines “marketing” revenue as the proceeds airlines receive from selling miles in excess of the value of the award travel.

Photo Credit: American Airlines generates a large proportion of its overall margin from sales of frequent flyer miles, according to one analyst. Pictured is an airline-branded credit card from Citibank. American Airlines