Here’s how major loyalty programs make hundreds of millions of dollars profit.

A small number of coalition loyalty programs around the world are highly profitable, with their annual billings in the billions and profits in the hundreds of millions. According to IdeaWorksCompany[1], in 2017, American Airlines generated $3.1 billion from AAdvantage program points sales, while Delta generated $3 billion, and United earned $2.3 billion.

Coalition loyalty programs are referred to as such because they build large networks of third-party partners (or ‘coalitions’) to provide points and miles (referred to as ‘points’ for the remainder of the article) to their members.

Coalition loyalty programs generate billings when a partner company pays for a member to earn points. For example, if an Emirates Skywards member hires a car from Sixt, they will earn 2,000 miles. Emirates will invoice Sixt for the cost of those miles. Sixt will view the cost as a marketing expense, because by offering Skywards miles, Sixt is more likely to attract Skywards members, plus Emirates may promote them to their member base, helping to boost sales.

Coalition loyalty programs generate revenue when the member redeems points, when points expire, and when interest is paid on deferred billings.[2]

To illustrate the coalition loyalty program monetisation model, consider this hypothetical example.

  1. A member of a coalition loyalty program spends $10,000 with a participating retailer (this may be a single transaction or multiple transactions). They swipe their membership card and earn 10,000 points at the rate of one point per dollar spent. The coalition loyalty program invoices the retailer for the cost of the points at a rate of 1.5 cents per point, costing the retailer $150.
  2. The $150 billings earned is transferred to a holding account. International accounting standards dictate the program operator must hold sufficient billings to cover the cost of the future points liability. In other words, the program operator must retain enough cash to cover the cost of the future reward.
  3. When the member chooses to redeem those points, the coalition loyalty program may assign a lower value than the 1.5c they earned for the points. In the example, the member redeems their points for a gift card, where the value per point is just 0.6c. Thus, the program operator earns 1.5c-0.6c = 0.9c per point.
  4. If the member does not have any further account activity, the points will eventually expire. In this instance, the program operator will earn the full 1.5c per point as revenue.

A large coalition loyalty program can sell hundreds of billions of points each year, making those fraction of a cent profits add up to substantial amounts.

The below table illustrates the calculations for the scenario detailed.

ActionEarn/Redeem/ExpireNet Points BalanceBillingsRevenue
Member spends $10,000Earn 10,000 points10,0001.5c x 10,000 points = $150 
Deferred billings earns interest   $150 x 3% p.a. = $4.50
Member redeems for a $50 gift cardRedeem 8,000 points10,000 – 8,000 = 2,000 8,000 x (1.5c-0.6c) = $72
Remaining points expireExpire 2,000 points2,000 – 2,000 = 0 2,000 x 1.5c = $30
Total  $150$4.50 + $72 + $30 = $106.50

Thus, for a transaction of $10,000, the program operator earns billings of $150. Of that billings amount, $106.50 revenue is earned.

Coalition loyalty program operators may price discriminate by offering volume discounts to third-party partners. Smaller retailers buying fewer points each year can expect to pay more per point than larger retailers buying more points. Some retailers may agree to provide multiple points for each dollar spent by the member, so they end up investing a larger percentage of the member’s spend on points.

Loyalty program operators may also negotiate with the third-party partner to commit to buying a minimum amount of points each year to ensure they are fully committed to promoting the partnership within their marketing channels. In return, loyalty program operators may agree to provide a minimum amount of marketing promotion for the third-party partner to their member base to help them grow their business. Loyalty program operators may also negotiate for the partner to commit to running a number of bonus points campaigns each year. In some instances, the bonus points can cost the third-party partner more than standard points in order to cover the campaign marketing costs of the loyalty program.

As detailed in the example, if the member does not redeem or transfer the points, they may expire (otherwise known as ‘breakage’ in the loyalty industry). This may be because the member has had no account activity for a specified period, meaning they have not earned or redeemed at least one point in the required time frame. For example, miles in the Air France/KLM Flying Blue program expire if members have no qualifying flight or credit card activity on their account within a 24 month period.[3] Alternatively, points may expire because a specified period of time has passed from when the points were earned. For example, Etihad Guest miles expire based on date earned, regardless of activity.[4] General Etihad Guest members have 2 years from the date of earning before miles start to expire. Silver members get 2.5 years, and Gold members get 3 years.

The expiry of points is an important factor in the financial management of a coalition loyalty program’s profitability, with both push and pull factors. Higher expiry directly translates into higher immediate revenue,[5] however it represents members disengaging from the program, hence has a negative impact on the future profitability potential of the program. Due to this, some coalition loyalty programs engage actuaries to help manage their expiry strategies in order to maintain it within a specified percentage range.

This issue of points expiry has also attracted the attention of regulators, with some countries acting to outlaw the practice in the interests of consumer protection. This includes the Government of Ontario, Canada, which in 2018 banned the ability of loyalty programs to expire loyalty points altogether.[6]

Some loyalty program operators aim to maximise the profit they make on each point which is sold and redeemed. They may do this by adjusting the price and value of points. Depending on what reward a member redeems their points on, the value they receive for their points can vary. For example, points redeemed on a flight may deliver a value of 1 cent per point but if redeemed on a gift card (as per our example) they may deliver a value of 0.6 cents per point, while a toaster may give just 0.25 cents value per point. This pricing strategy is designed to both guide the member to redeem their loyalty currency on a reward which keeps the cash flow within the business, and take advantage of wholesale margins on third party products to boost profits. To further boost profits, some airline programs have also been observed to apply surcharges on reward flights which are not applied on flights paid for with cash.[7]

Other loyalty program operators take a more balanced approach; attempting to maintain as much value return as possible to members, with the outcome being lower program profits but (ideally) higher member engagement.

As illustrated, the coalition loyalty program operator also earns interest on deferred billings. When the points are sold to third-party partners, the loyalty program operator must defer enough to cover the cost of the future reward (or liability)[8]. A deferred holding of several billion dollars is not unusual for a large loyalty coalition program.

While our example showed the loyalty program operator deferring the full $150 earned from the third-party partner, a program operator may choose to only defer enough to cover the forecast cost of the future reward. For example, if the program operator earns $150, but they know the maximum value the member is going to receive from redeeming points is $80, they may defer $80 and bank the remaining $70 as revenue immediately.

Long live points!

Philip Shelper is a loyalty management consultant based in Sydney, who obsesses about everything to do with loyalty and member engagement. His company, Loyalty & Reward Co are Australia’s leading loyalty consulting agency.

Phil and his team regularly write highly-opinionated articles about loyalty, which they post on www.rewardco.com.au

Phil is an Advisory Board member of the Australian Loyalty Association.

Let’s connect!

LinkedIn: https://au.linkedin.com/in/philipshelper

Twitter: @phil_shelper


[1]      Silk, R., ‘Airlines’ credit cards in ‘arms race’ to profits,’ Travel Weekly, Feb 2019 https://www.travelweekly.com/Travel-News/Airline-News/Airlines-credit-cards-in-arms-race-to-profits, accessed 26th May 2020

[2]      Catchit Loyalty, “How Frequent Flyer Programs Make Money”, Youtube, 2016, https://www.youtube.com/watch?v=-i50YVaD-tk, accessed 13th May 2019.

[3]      Air France FAQ’s https://www.airfrance.us/US/en/common/faq/flying-blue/how-long-do-your-miles-stay-valid.htm accessed 25th May 2020

[4]      Etihad Guest Loyalty Program Review https://upgradedpoints.com/airline-loyalty-programs/etihad-guest-loyalty-program/,  Upgraded Points, accessed 25th May 2020

[5]      Feldman, David, ‘LOYALTY MYTHS: IS BREAKAGE GOOD?’ https://medium.com/@dfcatch/loyalty-myths-is-breakage-good-873950da26dc March 15th 2017, accessed 16th May 2019.

[6]      Chharbra, S., ‘Ontario’s reward points expiry ban is now in effect,’ https://mobilesyrup.com/2018/01/01/ontarios-reward-points-expiry-ban-now-effect/, ‘Mobile Syrup, Jan 2018, accessed 27th May 2020

[7]      Moffitt, Matt, “Lock in your Velocity redemptions before the end of the year to avoid new charges”, Point Hacks, 2018, https://www.pointhacks.com.au/reduce-surcharges-frequent-flyer-programs-guide/, accessed 13th May 2019.

[8]      Customer Loyalty Programmes, Compiled Interpretation, Interpretation 13, Australian Accounting Standards Board, ‘https://www.aasb.gov.au/admin/file/content105/c9/INT13_08-07_COMPjun10_01-11.pdf,’ 26th  November 2010.