Airlines are Just Banks Now

This is a follow-up to a discussion we had on the old Retirement Investing board. In a nutshell, the airlines business model isn’t to make money flying passengers around, the model is to make money on their frequent flyer programs.

Here’s how the system works now: Airlines create points out of nothing and sell them for real money to banks with co-branded credit cards. The banks award points to cardholders for spending, and both the banks and credit-card companies make money off the swipe fees from the use of the card. Cardholders can redeem points for flights, as well as other goods and services sold through the airlines’ proprietary e-commerce portals…

…Like the federal reserve, airlines issue currency—points—out of thin air. They also get to decide how much that currency is worth and what it can be spent on. This helps explain why the points system feels so opaque and, often, unfair. Online analysts try to offer estimates of points’ cash value, but airlines can reduce these values after the fact and change how points can be redeemed. Airlines even sell points at above their exchange-rate valuation, meaning that people are paying for something worth less than the money they’re buying it with, in part because it’s so hard to know what the real value is.

Soft paywall


More MBAs? How many plane crashes will that cause?

Put them on the planes…