2024 was a good year for U.S. network airlines, right?

RIGHT?

Well… not quite — not as airlines, anyway.

Picking up where we left off in October, we look at 2024 full-year earnings for the big network airlines in the United States; we look at how the airlines are making their money. More specifically, we are looking at how much of the year’s profits were made, not from running an airline but from building a currency in that airline’s name, otherwise known as frequent flyer miles.

No network airline made money moving people and things in 2024, including United Airlines and Delta Air Lines.

When we back out loyalty revenues (not cash, but we’ll get to that), all large airlines result in a negative operating profit margin.

What exactly are we counting as loyalty revenues in these numbers? Two things, actually.

Loyalty revenues are largely an exercise in accounting. To explain how miles are turned into revenues, allow us to walk through a few scenarios:

1. You buy a ticket and earn points

   In this scenario, your entire ticket revenue is counted as… well… ticket revenue. But you are also awarded a certain amount of miles. While the airline is as happy as Jerome Powell in 2020 printing this miles currency, it must also recognize a liability that it effectively owes you some travel. That gets booked as an air traffic liability on the balance sheet at whatever value the airline’s auditors are comfortable valuing the miles. When you book using miles (or transfer or buy something else with them), the liability goes away, and the value of your miles gets booked as revenue. No cash traded hands. Points were created from thin air J-Powell style, and revenue appeared when they went away. That revenue is simply booked as passenger revenue.

2. You spend money on a branded credit card

   In this scenario, credit card companies purchase miles from the airline and award them to the credit card holder. The money that comes in from the credit card company buying the points is split. Some of it (roughly half) goes onto the balance sheet as air traffic liability to reflect the travel the airline now owes the credit card holder. The other portion gets booked immediately as marketing revenues. When those points are used, the associated air traffic liability gets booked as passenger revenue, like in the first scenario.

3. You forget about the miles

   If you don’t use your miles after a certain period of time, the airline can assume you lost your account, entered the witness protection program, or are playing checkers with Elvis. In short, you’re not using them anymore. In that case, the airlines can release the liability in a breakage process. That doesn’t necessarily mean your miles go away; rather, the airline sees a very low probability that you’ll ever use them. Removing liabilities results in revenue. Yay for the airlines! (Sorry about whatever happened to you).

“Fun with accounting” segment now complete, you get the idea. Loyalty revenues come in two main ways: a portion when credit card companies buy the points and the rest when the passenger flies. We’re counting both.

There is a third piece of loyalty revenue often rolled into ancillary revenues that have to do with lounge revenues. Since they’re not often separated, we excluded them.

So, is this bad?

No, at least not in so much, as the miles are fairly valued. In fact, you could call this an intrinsic value to the airlines. We still hesitate to call it loyalty since it has more in common with a currency than any sense of loyalty to an airline, but it holds value for the airlines. It’s not like the sale-leaseback treadmill where the value added is simply borrowed from future higher lease rates. In the case of loyalty revenues, as the airline grows and is profitable, the loyalty revenues should also grow and add profitability.

However, it does showcase how airlines don’t really make money moving people anymore. They are loss-leaders to print currency and later book that as revenue. Sounds Ponzi-esque, but it’s not. Think more “Bitcoin” - or any currency, actually. It may be made up from, thin air, but its value is created by what you can get. In this case, travel, upgrades, lounge access… whatever you want.

Still, if you’re an airline without a strong loyalty program in 2025, you are at a serious disadvantage. As costs at the network airlines balloon to record levels, the credit card industry, not the airline industry, is paying those incremental costs.

Also, consider that the airlines must carry miles issued as a liability on the balance sheet for a reason. Consider them tiny little opportunity costs. Even though miles are (nearly) free to print, distribute, and redeem, they do represent a seat that can be booked with miles, removing it from inventory to be purchased with cold hard cash (or that same credit card that… wait for it… prints more miles.)

Put another way, without these passenger loyalty revenues, the airlines would have had more seats to sell, and subsequently would have brought more revenues. Probably at significantly discounted fares, but the point still holds — some tickets could be sold without miles redemptions.

Loss-leaders aren’t new. Costco has the hotdog, IKEA has the Swedish meatballs, printer manufacturers have the printers, and airlines have… well airlines. All loss-leaders to make money somewhere else.

Welcome to the future.

Pop quiz - which airlines have the highest percentage of revenue attributable to loyalty?

You can deduce the answers from the above numbers, but I’ll be willing to bet you’ll still get it wrong. I got it wrong.

Ready for the answer? You can find it here: answer.

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