Article – Airlines are actually banks

Luiz Motta

Financial Markets

João Nuno Silva

Financial Markets

Teaser: Amidst the turbulence of the pandemic, airlines grappled with financial woes, resorting to eye-watering loans, and leveraging loyalty programs as collateral. But why did the value of these programs surpass that of the airlines themselves? Delve into the intricacies of loyalty economics and discover how budget airlines soar above traditional carriers by slashing costs and maximizing efficiency in the competitive skies of the aviation industry.

During the pandemic, airlines stood at a standstill, without any flights, loads of maintenance and other fixed costs to pay. Most of them resorted to bank loans to keep the business alive. United Airlines, for example, took an astonishing 5-billion-dollar loan (IR, United, s.d.), for which it had to put up collateral. However, at the time, United’s value was quite low, due to the company losing money on its operations. So, instead, the company chose to put a huge chunk of itself as collateral, specifically, its Loyalty Program.

Whenever a big business event happens, such as taking a multi-billion-dollar loan, companies are required by law to fill out an 8K form detailing the event. One line stood out to investors at the time: “Multiplying MPH (United mileage program) 2019 EBITDA (earnings before interest, taxes, depreciation, and amortization) by a factor of 12 equates to a MileagePlus valuation of approximately $21,9 billion.” (IR, United, s.d.)

Similar documents from Delta and American Airlines valued their programs at 26 and 30 billion dollars respectively. What made these numbers stand out from documents with thousands and thousands of lines? Well, if we look at the market cap of those companies at the time, we find something really interesting:

The market cap is the value of all company shares, in other words, how the market values a publicly traded company. So, the value of the airline’s loyalty programs is higher than the actual value of the airlines, meaning that, according to Wall Street, these airline companies are less than worthless. Rather, they are loss leaders and have negative values.

Note: the data is from 2020 because at that time the companies itself valued their loyalty programs to put up loan collateral; using this data cuts out any intermediaries and enables us to have more precise information on how much these companies are worth

On average, American Airlines at the time had a revenue per seat of per hour per mile flown and a cost per seat of 14,85 cents per hour per mile flown, resulting in a  0,40 cents loss per hour for every passenger. And, despite this, the company kept making profits. (IR American Airlines, s.d.)

Airports are filled with priority lanes and exclusive lounges precisely because airlines crafted a system so efficient that they are willing to lose money flying to boost their frequent flyer programs.

The system is no different than your classic loyalty punch card: the thought of winning a free meal, haircut, or flight for that matter, keeps bringing clients back, even making them pay a little bit extra than they would for an equivalent flight due to the thought of getting closer and closer to a free flight. But how can a program specifically created to give away free flights possibly make money for the company?  As time passed, these programs evolved into something bigger than just punch cards. In 1982, American Airlines partnered with Hertz to allow its members to win points when renting a car (IR American Airlines, s.d.). American Airlines would not want to give away free points for people spending money on another company, right? So, for the first time, the company put a real value on its imaginary point, the value is a close-guarded secret. However, the system : (Belli, 2022)

After that, American partnered with Citibank, offering a credit card that would give away points for its users (IR American Airlines, s.d.). Then, they expanded into partnerships with hotels, stores, and so on. When these programs were first set up, there were a lot of exploits people could use to rapidly increase their number of points accumulated specially on the one mile one point system, since at the time points were awarded by mile traveled instead of dollars spent on a flight. As such, people would oftentimes go on longer itineraries with lots of interconnected flights and relatively low costs for the inconvenience, gaining more points than what they were paying for.

To fix this exploit, they changed it into a dollar-to-point system and changed the redemption rates on specific dates, closing all loopholes in the system. Nevertheless, the power of consumers remains high, as airlines only manage to sell these points if the clients believe them to be worth something. At the end, it is a huge battle of managing the pros and cons of each loyalty program and finding the highest bidder.

So, in conclusion, why is the value of the loyalty programs so much higher than the value of the airlines themselves? Well, it’s because the airlines essentially act as central banks for their currencies, controlling their supply. They have even more power than central banks, as they can freely control the availability of goods to spend on.  On top of that, due to the lack of government regulation, these private for-profit companies can create more of their currency for the sole purpose of selling it, having completely unchecked control over a currency in which they are the only ones capable of converting into to real money.

However, there is an exception to this case: budget airlines.

Budget airlines are the most successful airlines in Europe. Most of them do not even have loyalty programs, however, the likes of Ryanair and EasyJet are setting record-breaking profits year after year and, with the way that they work, it’s pretty obvious why: they take everything expensive about flying and reduce costs to the maximum.

Starting with the most obvious component of any airline business: the airplanes themselves. As post-9/11 traveling stalled and most airlines were fighting to survive, Ryanair put on an order for 151 “Boeing 737s” at a very low price (IR Ryanair, s.d.). This is a big part of a budget airlines’ strategy: buying a lot of planes for low prices, allowing them to get a big bulk discount at the right time. The same thing happened during the COVID-19 pandemic. It seems weird that budget airlines would buy new planes, however, the newest planes are the most efficient in terms of fuel consumption.

(Company’s Investor Relations, s.d.) Another very classic strategy performed by budget airlines is always operating the same type of plane. Ryanair operates mostly 737’s and A320’s (IR Ryanair, s.d.), while Easy Jet operates the A320 plane family (EasyJet IR, s.d.), meaning that pilots, mechanics, ground staff, flight attendants, and other employees are all interchangeable and are only trained in one or two types of aircraft. This practice saves enormous amounts of time and money.

Seats inside the plane don’t recline, because that would take up more space and require more maintenance. Flight attendants employed by budget airlines are often in the very beginning of their careers, meaning they have little training and are responsible for more than one single function at a time. For example, when the plane is on the ground some of them might go to the gate to check tickets, while others clean the airplane. By doing this, the airlines eliminate the need for several positions they would have to pay for.

Another policy is that food and drinks on the plane are not free, which cuts down the weight of the plane and airport relatable fees, because there is basically no catering service on a big scale. Some airlines like Ryanair even sell lottery tickets inside the planes to further dilute those fees. You will also never see Ryanair fly to London Heathrow or Paris Charles de Gaulle, since those airports are expensive. There is only a set number of flights that can go there per day, so supply and demand dictate crazy high landing fees, so Ryanair lands at peripheral airports such as Lutton and Beauvais. Most of these airports are an hour or so away from big cities and operate budget airlines only, giving said airlines insane bargaining power over the airports themselves.

Take an airport like Stansted (picture below), located one hour away from London, for example. As you can see in the image, around 85% of planes parked are either from Ryanair or EasyJet, both budget airlines.

Because of that, they have a huge influence on landing and take-off fees. If the airport does not comply with their demands, they just leave, and the airport would cease to exist. Some of their flights do go to big, major airports, but always at the most off-peak hours possible.

The great thing about these budget airlines is that they have a lot of available destinations, avoiding the need to connect in big airports like most long-haul airlines. Most budget airlines do not even allow connections, since would need to pay twice for ground crew, creating more complex ticketing systems which would force them to pay fees to the client if there was a delay on the first flight. They also cut down on salespeople, to the point where it is almost impossible to buy an in-person Easy Jet or Ryanair ticket. They won’t even bother using jetways as they are expensive, choosing instead to simply use a normal step and have passengers take a bus to the plane, or better, walk to it. If done right, this business model is crazily efficient. (Airsight, s.d.)


In contrast to traditional airlines, whose value is plummeting, budget airlines are thriving due to their sharp focus on cost reduction. While traditional airlines bleed money on every flight to bolster their loyalty programs, budget airlines prioritize efficiency and maximize profits by employing a series of cost-cutting strategies.

By meticulously eliminating unnecessary expenses, budget airlines have carved out a profitable niche in the airline industry, offering a no-frills alternative for price-conscious travelers.


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