Commentary: How COVID Changed Airline Loyalty Programs

As the global travel market shut down in the middle of March 2020, so did consumer spending on air travel, while spending on other items was resilient, with many of those purchases made on airline co-branded credit cards.

Banks that sponsor airline credit cards buy points from the airlines, which are then given to their customers. As passenger revenue plummeted to historic lows for the airlines, the lone bright spot was the loyalty revenue.

In the initial stages of the COVID crisis, finding sources of liquidity became critical. Passenger levels declined 90%; financial losses were unprecedented. The airlines were on the verge of total collapse and needed to restructure debt. Historically, aircraft, gates, and other assets have been used as collateral for debt structures. But in 2020, for the first time in history, US carriers collateralized the future cash flows of their loyalty programs to raise billions in loans. Loyalty revenue played an integral part in stabilizing the industry during the peak of the crisis.

For the four largest US carriers—American Airlines, Delta Air Lines, Southwest Airlines and United Airlines—loyalty revenue accounted for 22% of their total revenue in the 2020 second quarter. The impressive growth of loyalty revenue can also be seen in the longer trends. Between 2019 and 2022, loyalty revenue grew 28%, compared with other airline revenue which grew a total of 5%. Today, loyalty revenue has returned to its previous level of 6% of total revenue.

In today’s environment, airline loyalty revenue has become a significant competitive advantage.

Offsetting Higher Costs

To maintain proper staffing levels, especially in the pilot ranks, airlines are negotiating new labor contracts that will increase costs dramatically. The loyalty revenue for the majors will soften the impact of the additional costs, much more so than for the ultra-LCCs and hybrid airlines that do not have that luxury. To be specific, the four majors each averaged $2.4 billion in loyalty revenue in 2022. JetBlue, by contrast, had $391 million in loyalty revenue.

The pandemic years swelled the ranks of airline loyalty plans and saw many people gaining status without even stepping onto an aircraft. A number of airlines reduced their program qualification requirements and extended members’ status. When passengers returned to the skies and the industry began the recovery process, frequent flyers realized things had changed. Getting that free upgrade to first class was not easy. The reality is the laws of supply and demand are impacting the ability to secure a free upgrade. Surging passenger demand, coupled with the constrained supply of seats, has resulted in exceedingly high load factors. There is also a new class of passengers, dubbed “premium leisure,” willing to pay for premium seats, further reducing the number of seats available for free upgrades.

If large numbers of high-status loyalty members continue to be unable to secure upgrades, there may be unintentional consequences that should be monitored. Nancy Harhut, author of the book, “Using Behavioral Science in Marketing,” talks about the power of a gift such as an upgrade. Harhut says that “the occasional gift or perk can help cement a relationship and motivate the kind of loyalty marketers seek.” In other words, an upgrade is a powerful tool to secure loyalty and when that reward is minimized, future passenger buying behaviors may change.

Loyalty programs are a big business and will continue to evolve. Not every passenger will be happy. Airlines are flush with data and can determine the value of each customer so they can recognize the most loyal. They will also need to carefully balance how they attract new customers to their loyalty programs while maintaining the quality of rewards to long-time frequent flyers.