Airlines Are Just Banks Now

The global airline industry encountered never-before-seen obstacles as a result of the COVID-19 epidemic, which transformed its revenue plans, operating methods, and financial structure. Airlines were compelled to review their fundamental business models and find creative methods to adapt to survive, as international traffic stopped and profits virtually disappeared overnight. Airlines, formerly primarily involved in passenger transportation, have expanded their business strategies to include financial services, loyalty programs, and the monetization of passenger data. This change has completely remade the airline industry, changing both how passengers are served and how they see their long-term sustainability.

How Airlines Operate Like Banks

1. The Formation of Financial Models for Airlines

• From the Sale of Tickets to Additional Income: 

Typically, ticket sales and in-flight services have been the main sources of income for airlines. However, it has become more challenging for airlines to remain profitable from ticket sales alone due to the unstable nature of fuel prices, economic downturns, and growing competition. Airlines have therefore expanded their sources of income, placing a particular focus on additional income.

• Credit Card Partnerships: 

To offer co-branded credit cards, airlines have forged profitable relationships with banks. With these cards, users may earn miles for regular purchases. These agreements bring in a substantial amount of money via fees collected from the banks and cardholders. For instance, American Airlines’ financial strategy is based in large part on its partnerships with CitiBank and Barclays, which bring in billions of dollars each year for the airline.

2. The Use of Frequent Flyer Programs as Currency

• Loyalty programs for airlines: 

Several airlines now rely heavily on their loyalty programs, like United’s MileagePlus, American Airlines AAdvantage, and Delta’s SkyMiles. These programs, which were once created to reward loyal consumers, have developed into intricate ecosystems that work much like financial instruments. Airlines have the option to sell their miles to credit card issuers, who then sell them to consumers as benefits.

• Miles as Currency: 

Reward points are now accepted as currency. Consumers can use them to purchase non-travel-related goods as well as to book flights, upgrade seats, and gain access to lounges. These miles can sometimes be worth more than more conventional forms of payment, especially when airfare costs are high and there is a lot of demand.

• The Banks’ Role: 

Banks that work with airlines purchase miles in large quantities, giving the airlines up-front income. For example, it is believed that Delta Airlines made nearly $4 billion in 2022 from its partnership with American Express. This arrangement gives airlines a steady revenue stream separate from ticket sales while enabling banks to draw clients with enticing incentive programs.

3. The balance sheets of airlines:

• Evaluation of Frequent Flyer Programs: 

A lot of airlines have found that the value of their loyalty programs exceeds the value of their main flight operations. Some airlines, like United, valued their loyalty programs in the tens of billions of dollars and utilized them as collateral to obtain loans during the COVID-19 pandemic. The MileagePlus program of United was valued at approximately $21 billion, indicating the financial assets that had strategic worth.

• Loans and Collateral: 

Airlines have been able to obtain large loans due to the ability to utilize loyalty programs as collateral. This action demonstrates how airlines have taken on traits of financial organizations, handling assets and obligations in methods that are customarily linked to banks.

• De-risking Operations: 

Airlines can reduce some of the risks associated with their operations by concentrating on credit card partnerships and loyalty programs. Economic situations and pandemics can cause fluctuations in passenger numbers, although income from financial partners is generally steady. Airlines are now better equipped to withstand economic downturns as a result.

How Does it Impact Passengers?

• Inflated Costs: As airlines modify capacity to accommodate frequent fliers, the emphasis on obtaining value through loyalty programs has occasionally resulted in higher ticket prices, particularly during peak travel seasons.

• Complex Redemption Procedures: It can be challenging for users to optimize their benefits due to the transparent nature of the mile value and redemption process, which might include hidden fees and variable award flight costs.

• Dependency on Credit Scores: Not everyone can take advantage of these programs equally, as the finest reward cards are frequently only offered to people with excellent credit scores.

Conclusion

The role of airlines has expanded beyond simple passenger transportation from point A to point B. Airlines have discovered novel approaches to generating income and risk management by adopting a business strategy that strongly resembles a bank. Although this transformation has stabilized their income, particularly in uncertain economic times, it also modifies their connection with passengers. Credit cards and loyalty points will probably have as much of an impact on the future of air travel as ticket sales, as airlines continue to balance the boundary between financial services and transportation. 

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