Robert Silk
The long-anticipated demise of Spirit Airlines last month was driven by a variety of conspiring factors, among them management errors and the post-Covid evolution of consumer preferences toward higher-end flying experiences.
But Spirit's failure is also evidence that the large loyalty programs of the Big 3 U.S. airlines are overwhelming the competition.
Consider the following: Last year Delta reported $8.2 billion in remuneration from American Express for its co-branded credit cards out of total revenue of $63.4 billion. American reported approximately $6 billion in co-brand payments out of total revenue of $54.6 billion.
In contrast, ultralow-cost carrier Frontier reported $126 million in "other revenues," a line item that includes its co-branded card remuneration, compared to total operating revenue of $3.7 billion.
There are many reasons that the biggest U.S. carriers are way ahead of discount airlines in terms of co-branded credit card revenue, even when looked at as the portion of each airline's total revenue. Key ones are the reach of their global networks and their ability to offer flyers first- and business-class cabins, lounge access and many other perks that airlines like Frontier, and formerly Spirit, cannot.
This matters because co-branded credit card revenue is high-margin revenue. Airlines don't typically reveal just how high, but in a 2021 presentation to investors, American said it had enjoyed a profit margin of 53% in 2019 from its AAdvantage program.
As Delta, American and United have aggressively grown their loyalty revenue and co-branded credit card holders since the pandemic, they increasingly are able to use that income to, in effect, subsidize their own airfares, especially through the strategic deployment of basic-economy inventory on routes in which they compete with discount carriers.
That dynamic played a part in Spirit's downfall, just as it's playing a part in the struggles of fellow ULCC Frontier, as well as JetBlue, since the pandemic.
The outsize impact loyalty programs are having in helping the big U.S. carriers crush their discount competitors can also be seen by comparing the U.S. to Europe. There, ULCC Ryanair is the largest airline group, while EasyJet and Wizz are also stalwarts. All three were profitable last year. None even have traditional frequent flyer programs.
What's different? The loyalty programs of full-service European airline groups are much smaller than their U.S. counterparts. The largest on the continent, British Airways and Iberia parent IAG, brought in a pretax profit last year of $669 million. IAG's Avios program has a valuation of less than a third of Delta SkyMiles and approximately 40% of AAdvantage and United MileagePlus, according to the advisory firm On Point Loyalty.
Regulations are the reason. Airline credit card revenue comes mostly from purchases of frequent flyer points by the issuing bank. Those are the points consumers get when they acquire a card and make purchases. Banks pay for those generous point allocations with the help of point-of-sale swipe fees assessed to merchants. In the U.S., swipe fees average close to 2%, according to Wallet Hub. In Europe, they're capped at 0.3%. Banks there just can't afford to dole out as many points as their counterparts here in the States.
Various bills introduced in Congress in recent years have sought to limit swipe fees. Such efforts always face sharp opposition from airlines, and from the U.S. Travel Association, which says reward programs spur additional travel.
I hold three travel credit cards. So, I understand that perspective. But if preserving airline competition is important, it's time to start considering creative solutions.