Who are an airline's best customers?

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Now that the three biggest US carriers (Delta, already followed by United, and soon to be followed by American) have moved to revenue-based mileage earning, at least on flights marketed or operated by them, we've heard a lot of rhetoric about how these programs will reward the airlines' "most valuable customers."

I think this is nonsense.

Delta markets hotel rooms and rental cars

You might think that Delta is a major US airline that operates with unmatched on-time consistency.

I think Delta's a corporate holding company with a subsidiary that happens to have a particular speciality in operating passenger aircraft. But in addition to operating passenger aircraft, which is a preposterously complex operation involving local, state and national contracts, a commodity trading desk, and is constantly prone to interference from the weather and other hazards, Delta also operates a hotel and car rental booking engine:

Delta doesn't have any specialization in operating hotels or car rental agencies. Indeed, Delta doesn't own any hotels or car rental agencies. Delta just collects a commission on hotels and rental cars booked through their website, then credits SkyMiles members with a seemingly random number of miles:

  • One mile per every $2 spent at delta.com for a completed hotel stay.

  • 1,250 miles per car rental for Diamond and Platinum Medallion members.

  • 1,000 miles per car rental for Gold and Silver Medallion members.

  • 500 miles per car rental for general members.

American licenses a shopping portal

You may be familiar with the AAdvantage eShopping Mall. It's one of those Rube Goldberg contraptions whereby Cartera Commerce, the portal's operator, receives a commission from merchants, then splits that commission with American Airlines, which then awards an arbitrary number of AAdvantage miles depending on their share of the commission.

The key point here is that American does not have any stake in Groupon, Bloomingdale's, Tumi or Dell.

American could not care less which online merchants participate in its Cartera-licensed portal, because the portal spins off cash regardless of the participating merchants.

An airline's best customers never set foot on a plane

Owning, operating, and maintaining passenger aircraft is expensive and extremely risky. If you're a corporate holding company, you'd naturally like to do as little of it as possible. Of course, somebody's got to operate passenger aircraft, and airlines are, as a matter of corporate organization, ideally suited to doing so.

But it's crazy to say that any airline passenger is among an airline's best customers. An airline's best customers are the ones who book hotels, rent cars, and do their online shopping through the airline's licensed shopping portal! Those customers generate what is indistinguishable from free cash, while even the customer booking a paid business class seat actually has to be conveyed, safely, from origin to destination!

Ok, large corporate travel coordinators are also great customers

If there's one exception to this rule, it's the travel coordinator for a medium or large corporation who gets to decide which airline should serve the company's business travel needs. If you can fill up two or three wide-body jets per year with your company's employees, you might be almost as profitable as the customer who buys a new laptop through the same airline's shopping portal.

But to be clear, that travel coordinator need never set foot on a plane to be the airline's best customer.

Airline tickets are a cost for you, not for the airlines

By focusing on the revenue the airlines get from their portal operations, you may think I'm missing the point: that the miles earned will eventually be redeemed for flights — and potentially expensive ones! That not right.

The airlines, against their better judgment, continue to operate high-fixed-cost, low-marginal-cost flights throughout the year. Giving away empty seats to their best customers — their shopping portal customers — is a no-brainer if it keeps that free cash coming in.

Shopping portals are profit engines

I always find extreme examples to be most illustrative. So let's say you decide to buy a 20,000-AAdvantage-mile one-way off-peak award (October 15 to May 15) to Europe exclusively by buying Proactiv+ through the AAdvantage eShopping Mall. You'll need to spend $1,000 on Proactiv+ to earn those 20,000 AAdvantge miles, for which we can assume American receives something like $200-$300.

You then get to redeem those 20,000 miles for:

  1. empty seats;
  2. during low season;
  3. on dates of American's choice.

And all American has to do is provide you with a couple cocktails and some flavorless fish.

Airlines shouldn't award miles for revenue flights at all

Since airline miles don't cost the airline companies anything, you might wonder why they're being so stingy in handing them out.

I have the opposite question: since operating passenger aircraft is by far the most expensive source of revenue for the airline holding companies, why do they reward people for buying passenger airline tickets at all?

After all, however small the cost of airline mile redemptions is (and it is very small), it's not zero, which means that rebate value could be used to reduce airfares and move your airlines' flights higher in the now-ubiquitous price-sorted booking engines.

Airline miles would make much more sense as a reward for directing your online purchases towards one airline's booking engine rather than another's, or for putting spend on one airline's co-branded credit cards rather than another's.

Rewarding people for booking flights on your full, gas-guzzling passenger aircraft seems like a serious strategic miscalculation.