Frequent-Flyer Programs: Hidden Economics Behind Airline Loyalty Programs

Frequent-flyer programs used to be simple: fly more, earn a free ticket.

But what started as a customer perk has become a financial juggernaut. Today, these programs generate billions in revenue, often out-earning the airlines themselves.

They’ve transformed how loyalty is defined, how behavior is monetized, and how outside partners (like banks) fund customer acquisition.

For startups and marketers, they represent something more: a roadmap for building sticky, high-margin businesses by aligning incentives, data, and psychology.

How Deregulation Sparked the Loyalty Industry

In the late 1970s, U.S. airline deregulation introduced intense competition. New low-cost carriers undercut legacy players like American Airlines, forcing them to innovate to retain customers.

Bob Crandall, then CEO of American, along with consultant Hal Brierley, created the first airline loyalty program in 1981: AAdvantage.

Inspired by grocery-store stamp books, it rewarded flyers with a free flight after 50,000 miles—just above the 40,000 miles the average customer flew annually. The message: consolidate your travel with us.

What made it transformative:

• Linked systems: American connected reservations with reward tracking—revolutionary at the time.

• Unique IDs: Customers got assigned numbers so American could track individual behavior across routes.

• Rapid growth: The airline projected 500,000 signups. It got 1 million in the first year.

Within months, every major airline launched a similar program. What started as a retention tactic became a full-blown loyalty arms race.

Progression Psychology (Goal Gradient Effect)

Frequent-flyer programs are built to tap into a basic human impulse: the desire to make progress.

Instead of flat rewards, they use tiered status ladders:

• American AAdvantage: From Gold (40,000 Loyalty Points) to Executive Platinum (200,000 Points)

• Delta SkyMiles: From Silver Medallion ($5,000 MQDs) to Diamond ($28,000 MQDs)

• United MileagePlus: From Premier Silver (5,000 PQP) to Premier 1K (28,000 PQP)

Each tier comes with upgrades, bonuses, early boarding, and lounge access. But what keeps users hooked is the visible sense of advancement—apps and emails that remind them they’re "just 8,000 points away" from the next tier.

Startup angle: SaaS platforms can use visible progress bars, usage streaks, or feature unlocks to create the same dynamic. Think:

• Dropbox's referral progress tracker

• Duolingo’s streaks and level-ups

• Notion nudging users to unlock more templates with higher usage

Loss Aversion and Status Decay

Once users earn elite status, they’ll fight to keep it. The idea of losing upgrades and lounge access feels worse than never having had them.

Frequent-flyer programs make sure you know:

• Status resets annually

• Miles expire after periods of inactivity (e.g., 24 months for AAdvantage)

This creates urgency. Even infrequent travelers are motivated to book flights or use a co-branded credit card just to retain their perks—or keep miles from expiring.

Startup playbook:

• Use soft expiration triggers: “Your saved designs will be deleted in 7 days unless you upgrade”

• Reinforce what users will lose, not just what they’ll gain

• Highlight expiring benefits in product UI or emails

Gamification and Personalized Quests

Frequent-flyer programs are more than passive point systems. They actively shape behavior with dynamic challenges and micro-incentives.

Tactics include:

• Targeted promotions: “Fly 3x JFK to LAX in the next 60 days and get 5,000 bonus miles.”

• Mileage auctions: Delta SkyMiles lets users bid for MasterChef experiences or VIP sports tickets.

• AI-driven offers: Platforms like Comarch help airlines tailor incentives based on routes, spend, and travel frequency.

These challenges turn loyalty into a game—and miles into a flexible, personal currency.

Startup angle:

• Use dynamic goals tied to user behavior (“Refer 2 people by Friday for a bonus”)

• Reward high-intent actions with personalized incentives (e.g., feature unlocks, account credit, custom swag)

How Airlines Turned Miles Into Money

What made these programs billion-dollar machines wasn’t flying. It was selling miles.

Airlines discovered they could sell their loyalty currency—miles—to credit card companies, who then used them to incentivize cardholders.

The American Express playbook:

• American Express buys SkyMiles from Delta at ~1.3 cents each

• Offers them as rewards to cardholders

• Delta gets immediate cash and recognizes revenue over time

2024 numbers:

• Delta–AmEx partnership: $7B+ in annual revenue

• American–Citi/Barclays: $5.2B

• United–Chase: Billions annually, bolstered by cards like the United QuestSM

This model works because credit cards earn interchange fees on every transaction. That revenue funds the mile purchase. Everyone wins.

Some airlines now make more money selling miles than flying passengers.

Startup playbook:

• Design loyalty currencies or engagement systems that third parties will fund

• Offer rewards that align with external partner incentives (like referral bonuses, white-labeled benefits, or third-party credit)

• Build B2B monetization into B2C engagement systems

When a Side Business Outgrows the Core

Airline loyalty programs aren’t just marketing—they’re line items on financial statements.

• In 2019, United’s MileagePlus program generated $1.8B in EBITDA, or 26% of total adjusted EBITDAR

• By 2023, SkyMiles was valued at $27B, more than JetBlue’s entire market cap

• During COVID, United and American used their loyalty programs as collateral for billions in loans

Programs like AAdvantage, SkyMiles, and MileagePlus aren’t cost centers. They’re full-scale digital businesses operating inside traditional airlines.

Startup insight: Your loyalty engine can become a product in its own right. Think of how:

• Amazon turns Prime into its own revenue stream

• Klarna monetizes user behavior via merchant-side data

• Discord monetizes power users via premium access, not advertising

The Shift from Miles Flown to Money Spent

Originally, miles earned were tied to miles flown. That changed.

Today, most airlines use revenue-based earning, meaning expensive tickets and credit card spend count more than cheap flights.

• American, Delta, and United all made this shift between 2014 and 2018

• This rewards frequent spenders over frequent travelers

• It aligns loyalty program economics with profitability

Startup angle:

• Rethink what earns “credit” inside your product

• Weight high-margin or high-retention behaviors more heavily

• Reward valuable users, not just active ones

Devaluation and Regulatory Risk

Loyalty programs don’t come without risk. Two major threats are on the rise.

Devaluation:

• Airlines can change how much a mile is worth—or how many it takes to book a flight

• Dynamic pricing makes it hard for users to plan redemptions

• Delta faced a major backlash in 2023 for raising Medallion thresholds and had to walk it back

Regulatory scrutiny:

• In 2024, the U.S. DOT launched an inquiry into four major loyalty programs

• Concerns included opaque pricing, redemption hurdles, and shifting rules

• Transparency has become a battleground issue

If miles feel like a scam, users churn. If the system feels unfair, regulators step in.

Startup caution:

• Don’t devalue earned credits, points, or loyalty tiers without clear communication

• Maintain redemption value clarity

• Design your program as if regulators are watching—because they might be

The Expanding Future of Loyalty

As airlines seek new ways to retain customers, they’re turning miles into a lifestyle currency.

• Delta and American now allow redemptions for Uber, DoorDash, gift cards, and more

• Miles can be earned via everyday purchases, not just flying

• The scope is expanding to include everything users do, not just travel

It’s not about the flight anymore. It’s about owning the customer relationship everywhere.

Frequent-flyer programs started as a patch to stop customer leakage. They became billion-dollar businesses by converting human psychology into repeatable, monetizable behavior.

The playbook is simple:

• Design systems that reward high-margin, repeatable actions

• Let someone else pay to keep your users loyal

• Turn engagement into a currency you control

When executed well, loyalty isn’t just a feature. It’s your financial model.

Top Tweets of the day

1/

Dubai is insane for doing things but they have a lot of money and $350 million per year feels cheap.

Sam Altman is crazy to deal with Dubai. I think they have a ban on homos and Sam made a deal with them. Kinda crazy.

One comment was extremely interesting:

"This creates a moat against open source models. When entire nations are locked into your ecosystem, every open source advocate who says 'just run llama' now sounds like they're telling people to reject free government services. Sam just turned ai competition from a technical arms race into a policy capture game."

2/

Lots of money in being a king in local markets. Such markets aren't sophisticated as the best players go where the big money is. And the big money is in USA.

3/

A (wo)man can do anything when there is no alternative. I'm a sucker for deadlines.

Rabbit Holes

1. How to Humanize ChatGPT Content by Edward Sturm

2. Putting Gemini 2.5 Pro through its paces by Simon Willison

3. An "oh fuck" moment in time by Geoffrey Huntley

What’d ya think of today’s newsletter? Hit ‘reply’ and let me know.

Do me a favor and share it in your company's Slack #marketing channel.

First time? Subscribe.

Follow me on X.

More Startup Spells 🪄

1. MrBeast's Neymar vs Ronaldo Challenge: How Recreating Viral Videos Gets 70M Views in 3 Days! (LINK)

2. Canva's 300% Price Hike: A Masterclass in Backtracking (LINK)

3. Hampton's AI Report (LINK)

4. How I accidentally generated 6 leads to a Cold Email Agency from Reddit (LINK)