We’ll get back to trains tomorrow!
In the mean time, I want to take a look at frequent flyer programs. When airlines were pressed to find ways of staying afloat during the worst of the pandemic last year, news emerged that airlines valued their frequent flyer programs highly. Very highly. In fact, they valued their frequent flyer programs more highly than the value of the entire airline.
Wendover Productions explains why. You can watch the full video here.
As is par for the course, Sam Denby does an admirable job distilling the concept.
His takeaway is:
We can think of modern airlines as two businesses in one: (1) an operator of flights (how we typically think of airlines), and (2) as a kind of bank issuing frequent flyer miles.
The programs started as simple loyalty programs—more marketing than anything else—but soon became massive profit centers in their own rights as airlines began selling their points to travel and credit card partners.
As air travel became commodified, the flight-operating part of the business became a loss leader.
So the business keeping airlines afloat: frequent flyer programs. Denby terms them “central banks for their own virtual currencies”—only better, because they can print as much as they want, sell the currency for whatever rate they set, and determine its redemption value at any given time.
So if you have ever wondered why air travel can feel like a caste system in the sky—with priority lanes, lounges, and 5 classes of tickets minimum—this is why. The use of highly visible incentives for customers to participate in frequent flyer programs is not just there to insult your dignity—it is an existential imperative for airlines.
The industry’s frequent flyer lesson is interesting all on its own, but it’s also an instructive tale for other consumer-facing industries that are rapidly heading towards commoditization. As greater autonomy allows for increasingly lower prices and greater competition, car services, food delivery, and all kinds of shopping are heading towards slim-to-zero-margin businesses. How will companies adjust? Variations on airline rewards programs may be one answer.
This is a freeform daily newsletter about the transportation industry: Planes, Trains, and Automobiles. I take shallow dives into topics that I think are interesting, including write ups of startups in the space, historical explorations, market analyses, company and personal profiles, interviews with industry players, and occasional personal essays.
Thanks for reading—and please let me know if you have any feedback or if there is anything you would like to see me cover.
Ride well,
DS