Last week the largest shareholder of American Airlines publicly released a letter calling for the airline to spin off its frequent flyer program. Air Canada’s Aeroplan was spun off and is valud at about US$2.5 billion. The American program is ten times larger, but Aeroplan has a stronger relative position in its home market. Certainly, though, the AAdvantage program has to be worth nearly the $5 billion total market capitalization of the airline itself.
The Journal claims, though, that
- United in 2002 moved its 48 million-member Mileage Plus plan into a UAL subsidiary called United Loyalty Services LLC. Last year, the plan produced $600 million in revenue, though it isn’t a stand-alone company and doesn’t disclose its profitability or costs.
In fact, a look at United’s 10-Q filings reveals the profitability of its frequent flyer program. Bottom-line, it’s by far the most profitable part of the airline. (Similarly, selling frequent flyer miles to Bank of America is a key driver of revenue for Alaska Airlines.)
Our best guide to what happens under a spinoff is the Aeroplan program, which remains part of the Star Alliance and their miles can thus be used lucratively for international premium class awards on partner carriers. And an independent frequent flyer program should survive even if the associated airline does not, points are safer, redeeming five to ten million airline awards a year should allow the program to negotiate seats at a deep discount.
On the other hand, independent programs in the past haven’t offered much comfort, such as LatinPass (difficult to work with, forever changing rules) which became GlobalPass (offering very little of value).
My own sense is that spinoffs make sense for the airlines, it would be hard for them not to, but that the upside to consumers is limited at best — except for those who value their points in terms of non-airline redemptions as the separate companies are likely to offer more choices. Still, merchandise redemptions are generally poor values, topping out at a penny a mile at best, and folks interested in such awards are better off with cash back rewards than miles in any case.