'Credit card companies with wings'

Business Insider

08-05-2025

While it's ubiquitous, air travel remains one of the wildest technical achievements in human history. Beyond the scientific feat that goes into achieving takeoff, airlines must coordinate tens of thousands of bags, employees, and travelers to make sure everyone gets to where they're going. Despite the sheer effort involved, moving people through the sky from point A to point B isn't what makes the bottom line soar in the airline business these days. Instead, the major players rake in billions of dollars thanks to a feat of financial engineering: loyalty and credit card spending.
First developed in the 1980s, airline loyalty perks revolutionized the industry, creating a base of passionate customers eager to fly a specific carrier or use its credit card in exchange for things like free checked luggage, seat upgrades, early boarding, ever-popular airport lounge access, and "free" flights. A 2024 OAG analysis found that 82% of travelers worldwide were enrolled in at least one airline loyalty program. Delta SkyMiles is the world's largest, with over 120 million members. As of 2023, 31 million airline credit cards had been issued in the US, according to the trade association Airlines for America, and 57% of points were accumulated through cardholder spending.
The combination of people flying and swiping their credit cards has ballooned airline loyalty into a juggernaut and a primary source of airlines' income — so much so that carriers would struggle to profit without it. Federal airline filings show loyalty represents over $25 billion in yearly revenue. Among the Big Four in 2024, Southwest earned about $2.2 billion from its loyalty program, or about 8% of its total revenue, United $2.9 billion (5%), American $6.1 billion (11.3%), and Delta $7.4 billion (12%).
Airlines enjoy myriad benefits beyond a loyal customer base, a strong brand, and free marketing whenever someone swipes their card around town. Frequent flyer programs increase a carrier's valuation and generate consistent revenue streams. Played correctly, these programs can also be good for customers looking to optimize their points for vacations. But there are some risks to loyalty from a customer perspective. Carriers can, and will, adjust the value of their points on a whim, boosting their bottom lines at the expense of customers.
The business has morphed airlines into miniature central banks, printing points as currency and often profiting more from selling them than from actually flying airplanes, or as TJ Dunn, a points guru and editor in chief at the Prince of Travel, told me: "A lot of people call airlines credit card companies with wings."
American Airlines launched the first modern major airline loyalty program, AAdvantage, in 1981. United's MileagePlus and Delta Air Lines' SkyMiles programs followed that same year, while Southwest Airlines' Rapid Rewards program began in 1987. In the same decade, airlines decided to go beyond simply rewarding frequent flyers and began building what has become one of their biggest cash cows: co-branded credit cards. By partnering with banks, airlines can monetize these loyalty miles and points, creating a source of cash to supplement the basic flying business.
Airline points are, in essence, an IOU created out of thin air. Carriers turn around and sell these points and miles to banks in exchange for US dollars to fund their operations, like buying planes and paying pilots. Banks then distribute those to holders of the co-branded cards when they make everyday purchases — including on nonflying items and activities. Customers then redeem those IOUs for airline services. Put another way, you're turning the money you spent on groceries, gas, clothes, and that $500 VR headset you barely use into jet fuel for your next flight.
Banks like this agreement because it drives high spending and brand loyalty. Airlines love it because it generates repeat customers and a constant loop of revenue as people shop. The more a cardholder spends, the more points they earn, and the more a bank pays the airline. Consumers love it because it feels like they're getting free money when redeeming points. On paper, everyone wins.
Even if everyone comes off happy, the setup is an especially good deal for the airlines. A March report from the travel company Point.me said each airline point is generally valued at about 1 cent, in terms of how much value customers receive when they redeem them, but banks buy them for anywhere from 1.5 to 2.5 cents before any bulk discounts. The margins for selling points range from 39% to 53%. Airlines regularly lure new cardholders with enticing sign-on bonuses and other built-in perks, like travel credits and free checked luggage. Southwest and United partner with JPMorgan Chase, American works with Citibank, and Delta partners with American Express. Each airline has different tiers, and the annual fees — from which airlines receive a kickback — can range from $0 to $695 a year.
Having an airline credit card tends to make you a stickier customer.
There are some ways savvy travelers can gain the upper hand. Customers can book reward itineraries via airline websites, paying only taxes and fees, often at steep discounts compared with the cash cost of the same flight. For example, a one-way United business class flight from Los Angeles to Sydney on June 4 costs 100,000 points (plus $33). The average redemption value of United points is 1.3 cents per point, meaning the points needed to book the flight equal roughly $1,300 — but the ticket paid for outside the loyalty program costs $4,988.
"I've gotten so many good redemptions," said Dunn, who largely flies business class using points instead of paying the multithousand-dollar cash price. "One was a last-minute United Polaris from San Francisco to French Polynesia for 85,000 points. Another was American from Los Angeles to Sydney for 65,000 points."
Offering cheaper or almost free flights, upgraded seats, or complimentary checked luggage seems like a self-own by the airlines — why give money away? But all the special offers are offset by several factors. One, the cost to airlines of letting you redeem points is often far lower than the money they earned up front from selling those points to the banks, especially during off-peak times. So you may feel like you're getting a deal, but the bank already covered your redemption for that "free" seat. Two, spending to earn enough points or status for a flight or upgrade means the airline has already secured thousands of dollars' worth of your business many times over, whether you booked a flight with them instead of a competitor (whose standard cost may have been lower) or used its credit card.
"Having an airline credit card tends to make you a stickier customer," Savanthi Syth, a Raymond James analyst, told me.
Three, the complimentary or points-bought upgrades are typically business- or first-class seats that would go unoccupied anyway or be used for last-minute bumps on the day of travel.
The fourth and final way that airlines end up winning the points game is perhaps the biggest and simplest: They're relying on people never using those points. The McKinsey consulting group estimated in 2018 that 30 trillion airline points went unused globally. That's billions of dollars' worth of unredeemed flights. Unredeemed points are listed as a liability on an airline's balance sheet to account for potential redemptions, but the ones that go unused are essentially "free money" because airlines keep the revenue from issuing the points without having to offer any actual reward in return. And the cost to keep unredeemed points in the system is virtually zero. A 2024 federal filing said Southwest had $4.8 billion worth of unused points on its balance sheet; Delta has about $9 billion.
Many people are so price-sensitive that they fly whichever airline has the lowest cost and never earn enough points from flying on a single carrier to redeem anything meaningful. Some people don't travel as much as they think they will when they sign up for a co-branded credit card — especially younger people like students. This same group may not have the cash funds to pay for a vacation beyond the points flight redemption. And even when people do end up using them, airlines can mitigate the hit by manipulating the number of seats available for redemptions and how many points they cost based on factors like demand and capacity. This type of price increase pushes frequent flyers away from using rewards to offset an expensive cash ticket.
Any good loyalty program comes with the risk of people milking too much out of it, at least from the airline's point of view. This has prompted carriers to periodically — and unexpectedly — change the level of points, spending, or eligibility required to earn status, freebies, and benefits. The goal is to maximize loyalty revenue, reduce flight redemptions, and elevate brand exclusivity by making people pay more for what was previously offered at lower rates. But it also runs the risk of running people off.
The latest example of this switcheroo is when United increased virtually all of its co-branded credit card annual fees in March by between $55 and $245. Delta similarly upped the yearly cost for its Amex cards in 2024. The buck didn't stop there, with both airlines also overhauling parts of their loyalty programs. Delta added limitations on its Sky Club lounge access and made earning status more costly by basing it on spending rather than miles flown. Delta said the changes addressed a need to manage overcrowding at airport lounges and how many people earn elite status.
Most consumers are using few to none of these benefits.
United's loyalty changes were tamer, such as upping the price for its lounge access, though they still frustrated members. Even the new credit card "perks" — which the company said would enhance their value by targeting different consumer travel styles — have some noticeable drawbacks. Sally French, a NerdWallet analyst, told me that United's new benefits have "coupon book energy to the max." Customers can use travel credits on things like hotels, ride-hailing services, rental cars, Instacart, and flights with the semiprivate charter company JSX. These may seem useful in theory, but the problem is that the $60 to $150 annual credit for Uber and Lyft is allotted at $5 to $18 a month, depending on the card. The same goes for Instacart. French said the up to $200 annual JSX credit may not put a huge dent in the company's pricier airfare, which starts at about $200 one way for short hops but can reach $1,000 or more on longer flights. And the up to $200 hotel credit? That has to be put toward bookings at Renowned Hotels and Resorts — it can't be used on your preferred brand, which might be Hyatt or Marriott. Given the limited value and scope, many customers are leaving these deals on the table — but the airline already cashed in on the sign-up with the bank.
"Most consumers are using few to none of these benefits," French told me.
Still, French said there are some, albeit few, positives to airline loyalty changes, like less crowded lounges and more membership exclusivity. And many cardholders will likely stay loyal despite the changes. Delta's president, Glen Hauenstein, said in the airline's January earnings call that about 1 million people signed up for its Amex card in 2024. In its full-year earnings call, United also said it saw 1 million new credit card acquisitions last year — though it's unclear how its 2025 changes will affect sign-ups.
Airlines are facing a grim outlook right now. Economic uncertainty and President Donald Trump's tariff war have sent airline stocks tumbling and threaten profit outlooks. Recession worries are testing travelers' willingness to fly, and a reduction in domestic government travel following federal layoffs hasn't helped. Still, loyalty may be a saving grace because, regardless of a recession, credit card spending and subsequent earnings aren't going away — a buffer that helped airlines' financials during the pandemic and could again if there's a downturn this year.
Delta's April earnings showed loyalty revenue increased by 7% year over year, including the $2 billion made from its Amex partnership. This was down from the 12% loyalty revenue increase the airline posted between the first quarters of 2023 and 2024 but still high enough to keep overall growth in the green. Similarly, United's earnings revealed a 9.4% increase in loyalty revenue year over year, a slide from the 15% bump in the first quarter of 2024 but still a strong number.
Even with the potential for regulatory and economic roadblocks, loyalty ecosystems are imperative to an airline's success.
American's 5% increase in loyalty revenue, driven by credit card swipes, was the lowest of the three mainline carriers. Southwest did not disclose its year-over-year loyalty performance. Neither airline reported a quarterly profit but said loyalty padded their bottom lines: "We had a record first-quarter spend in our co-branded credit card," Southwest's chief operating officer, Andrew Watterson, said during the airlines' earnings call.
The golden goose, however, is under threat. The Department of Transportation in September began investigating the programs at American, Delta, Southwest, and United to determine whether they were engaging in "unfair, deceptive, or anticompetitive practices." Then-Transportation Secretary Pete Buttigieg said the airlines' ability to devalue their points is hurting Americans and their families. It's unclear how the Trump administration will carry out the investigation.
Even with the potential for regulatory and economic roadblocks, loyalty ecosystems are imperative to an airline's success. As the people-moving business has gotten more cutthroat and margins have been squeezed, the major carriers are relying more than ever on revenue from nonticket sources. While bag and seat-selection fees draw customers' ire, loyalty points and credit card tie-ins almost feel like a game. That's pushing airlines away from their core flying business and making them into mini financial institutions. In Gen Z talk, it's giving less Wright brothers and more JPMorgan.