Airlines cash in on rewards programs

/ Source: CNBC

When it comes to airline-mile rewards, it seems you can get them for almost anything nowadays: Shopping at the Gap, talking on the phone, you can even get miles for taking out a mortgage.

SO WHO’S WINNING besides the consumer? Look no further than the airlines themselves.

“If you take the total number of all U.S. airlines together its a business worth close to two billion dollars a year, ” said Ravindra Bhagwanani, founder and chief executive of Global Flight Management, a Offenbach, Germany-based company which provides a data base of frequent-flyer programs to corporations and individuals. Bhagwanani said that two billion dollars is made by selling individual miles to credit cards and other businesses for about one and a half cents each, then shouldering costs well below that when passengers redeem.

“If [a traveler] redeems what is the cost to the airline? And the cost of course is well below the 1.5 cents, and they have a very large margin in there and that’s why they make a very huge profit on that.”

And that profit may be getting bigger. The reason: Some frequent flyer programs aren’t going the distance that they used to.

“I think when you look at the airlines in general they’re really focused on costs, and as a result they’ve diluted the currency of their frequent flyer miles,” said Thomas Leritz, an airlines analyst at Banc of America Capital Management “Before it would be about 20,000 miles for a [free] domestic flight. Now it’s about 25,000 for a domestic flight.”

The largest frequent flyer program is run by American Airlines, with more than 45 million members worldwide. That member base could grow but experts say when it comes to business partners, here in America, the expansion is largely over.

“They’ve exploited a lot of the different ways to earn frequent flyer miles,” Leritz said. “For the airlines, it’s beneficial because the credit card companies are paying them for the miles, so I think they’ve gained a lot of customers that way and for the most part it has run its course.”

Experts say there are still chances for growth overseas — but for now it is the U.S. consumers who can earn miles even at the supermarket, thanks to an idea that has really taken off.