Should transatlantic airlines split their loyalty programmes?

There are too many points sloshing around in America for European loyalty to do it’s core job of filling seats

Delayed. Cancelled. Devalued. Only one of those words strikes fear into the heart of frequent flyers.

Road warries roll with the punches when it comes to getting on a different plane than the one they had planned to. Especially since their shiny cards get them to the front of the queue when things are disrupted.

But they prize the miles and points that come part-and-parcel with the travel a great deal.

For regular work travellers, the chance to use points and take the family on holiday in fine style compensates for the time away from home. For those lucky enough to holiday often, or for self-funded status-chasers, the miles and points represent an important rebate on their air travel spend which influences their choice of airline when shopping for travel.

So when London-based Virgin Atlantic announced a few weeks that all their seats were going to be made available for points, the British mileage collection community groaned.

The reason was that the move signalled the introduction of dynamic pricing to seats paid for with Virgin Points. To see why, consider that airline mileage currency like Virgin Points is a form of cash for both the airline and travellers.

I explained how it all works in this article, summarised in the diagram below.

Airlines set up two companies. A Loyalty Co and an Airline Co. Loyalty Co produces miles and points, which it sells to airlines and third-parties. Airline Co buys these to give to it’s travellers. So do retailers, banks, insurers and others who want to use travel as a sales incentive.

Meanwhile, Airline Co sells seats to Loyalty Co when a passenger makes a redemption. Loyalty Co makes money when the value of points sold exceeds the price of seats purchased from Airline Co.

For Airline Co, they make money by selling seats to Loyalty Co and by monetising demand generated by a well-structured loyalty product.

The business is highly profitable. Spain-based IAG’s subsidiary Avios Group Limited, who are the loyalty arm of Virgin Atlantic competitor British Airways among others, generated £1.3bn revenue and £320m profit ($1.7bn and $415m respectively) in 2023.

But there may now be a problem, of which Virgin Atlantic’s move to dynamic pricing is the symptom. And that problem is the burgeoning credit card market in the United States.

A chap called Scott Mayerowitz who writes for The Points Guy, an American blog, claimed to have 22 credit cards in an article a few years back. Together these had annual fees in excess of $4k (£3k). Is this rational? He seemed to think so, and reading what he got in return it looks like the cards represent good value for money. If he actually used the benefits of course.

Marriott, Delta, JetBlue, Hyatt and Hilton were in Mr Mayerowitz’s wallet. So too were a variety of American Express products, which offer Membership Rewards points that can be converted on demand into a variety of airline mileage currencies.

To see the context, consider the following:

1. The American credit card market is less heavily regulated than the market in Europe, especially regarding the interchange fees that card operators can charge merchants

2. The American economy is booming. Since the year 2000 GDP per capita only fell in real terms twice, once in 2009 and once in 2020. Consumers and businesses have more money to spend than ever before, and much of it is spent on credit cards

3. It is common for small and medium sized businesses to pay suppliers with a points earning credit card, so both entrepreneurs and employees can earn enough points for business class flights by making boring purchases like paper and printer ink alongside their zazzy online ads – European business tends to go more with boring old bank transfer

4. The American financial sector is innovative and competitive, with new fintech and other financial products appearing regularly.

Put the four together and you have banks awash with cash hungry to capture market share of a large number of wealthy consumers, many of whom love to fly. A good chunk of this cash is given to airlines.

Much less cash goes through airline loyalty on the European side of the Atlantic. In economic theory terms, American consumers have much more earning power from airline miles than Europeans. Dynamic pricing gives them much more purchasing power too.

I am sure that if I was American I would also have 22 credit cards. Being British I actually have three. One of those does not even earn any points at all, although it does not have an annual fee either.

On the other hand, I do get out-sized benefits from my two airline cards (see article). These aspirational rewards keep airline loyalty attractive and push consumers into the funnel of buying up from Economy to Premium Economy, the Business Class and maybe even eventually First Class. Airlines would be unwise to throw away this part of the European business.

Now Virgin Atlantic’s annual revenue in 2022 was £2.9bn. IAG’s revenue in 2023 was €29.5bn ($31.6bn), of which their operating margin was €3.5bn.

I would estimate that over half of Virgin Atlantic’s revenue comes from the American side of the Atlantic, say somewhere between £1.5bn and £2bn because fares ex-USA tend to be a bit higher than ex-Europe.

IAG’s is probably a bit below half because they have extensive shorthaul networks, so say €10bn, leaving €19bn of which a few billion will be from Asia, Africa and India.

Remember that IAG’s Avios Group revenue in 2023 is £1.3bn and profit is £320m. Loyalty is a valuable revenue generator. But it is only producing 5% of the revenue of the group and 11% of it’s profits. The numbers for Virgin Atlantic could be similar.

So Virgin Atlantic is taking a big risk by devaluing it’s Flying Club loyalty programme to accommodate the economics of the American market. They are risking £1bn+ of flying revenue from Europe and the UK for a chance of an extra hundred million from America. If they are lucky. IAG would take a huge risk if they moved Avios to dynamic pricing too.

Moving to a model that rewards American credit card holders risks killing the goose of European travellers actually buying tickets with the carrier.

A better solution might be to split the programme into two – Flying Club and Flying Club America. That way Americans could get all the benefits of dynamic pricing by buying co-brand credit cards. Europeans meanwhile would enjoy the chance of an out-sized redemption and keep flying the airline, supporting overall revenue.

Brother Jonathan and his Yankee compatriots are a patriotic and pragmatic bunch. They might well accept their points being converted into America Miles, Eagle Miles or some such in return for the excellent availability that comes with dynamic pricing. Both American markets and European markets are big enough to make it worth the time for airlines to develop separate programmes.

In this context, separate programmes would mean moving American to dynamic pricing and easy-to-find rewards. It would also mean keeping Europe on the current model of aspirational yet achievable rewards.

There would need to be a few rules. For example:

1. America Miles cannot be converted into Miles

2. If you have an American credit card, your account is American.

It would be easy to make this work in practice. Airline selling platforms already allow different inventory classes based on the country of sale. America Miles holders would only be eligible to book based on point-of-sale America availability.

Airlines should not let special circumstances on the western side of the Atlantic kill their business on the east. We may have reached the stage where splitting loyalty programmes by geography is more lucrative than keeping them together as one.

oliver AT ransonpricing DOT com

oliver DOT ranson AT inkaviation DOT com