Written by: Akshika Jangid
In a world where industries have found a unique way to thrive on reward points such as some benefiting from carbon points, airlines have also mastered the art and science of rewards turning loyalty points into currency, partnership into profit and each traveler’s choice into a personalized offer.
Frequent flyer programs have transformed from simple loyalty schemes to billion-dollar financial engines that drive airline profits by selling miles, forging lucrative credit card partnerships, and cleverly managing redemption costs—sometimes making these programs more valuable than the airlines themselves. While full-service carriers earn massive revenue from miles and co-branded cards, low-cost airlines avoid these programs, focusing instead on simplicity and price-sensitive customers.
The very math behind creating, selling, and redeeming miles—built on cost efficiency, breakage rates, and dynamic pricing—underpins a complex rewards economy that incentivises both airlines and savvy travelers.
Now picture this, You are flying an economy class and you suddenly get upgraded to business class. Well at first, it feels like sheer luck, as if fortune just smiled on you. In reality, it isn’t luck at all—it’s the invisible reward of your loyalty, the many miles you’ve flown with that airline quietly working behind the scenes to give you this upgrade.
When it comes to customer experience, airlines know how to make you feel comfortable and make their brand. For them, customer experience drives revenue and that’s why the loyalty programs come into the picture.
How did it start?
The frequent flyer programs first took off in 1981, when American Airlines introduced AAdvantage. The idea was simple yet powerful—reward those who fly often with free tickets and exclusive perks. The concept spread like wildfire, and by the 1990s, frequent flyer programs weren’t just an innovation anymore—they had become an industry standard, reshaping the way we travel.
How does it work?
You might have heard of Air Miles. When you use your credit card, you’re not just spending—you’re earning miles. But here’s the catch: those miles aren’t a free gift from your bank. The bank purchases these miles from the airline at a markup price. So the more you travel and spend, the more bonus miles you get which gives you your offer and the airline also earns profit by selling these miles in bulk to finance companies.
This is where unit economics comes into play. For airlines, creating a mile costs less than half a cent, yet they can sell the same mile to banks and finance companies for 2–3 cents. That huge margin transforms loyalty programs into billion-dollar businesses. In truth, these miles aren’t directly tied to the cost of flying at all—they’ve become their own form of currency, one that financial partners are more than willing to buy.
Now you might have come across an Ad deal that says, if you buy the HSBC bank credit card, you will get certain points on your air ticket, that’s called co-branding and it’s a central pillar of frequent flyer programs. What makes it powerful is that it lets you collect miles not only when you fly, but on your everyday spending—from groceries to online shopping.
For airlines, these partnerships are a lucrative business. Every time you swipe your card, the merchant pays an interchange fee (usually 1–3%). On top of that, when a new customer signs up, banks often pay airlines a commission and let’s not forget the annual fees which co-branded cards typically charge, a portion of which flows directly into the pockets of the airlines as another revenue stream.
The impact is huge. For example: Air India SBI Platinum Credit Card charges an annual fee of ₹1,499 and offers 15 reward points for every ₹100 spent on Air India bookings, which can be redeemed for discount or free flights. This encourages frequent travel while adding a steady revenue stream for the bank and airline through both fees and interchange charges on daily spend. Recently, IndiGo partnered with Kotak Mahindra Bank that offers co-branded cards with annual fees between ₹1,500 and ₹3,000, providing travel vouchers and lounge access while generating revenues through fees and transaction commissions
So, what looks like a simple “sign up for a card and earn points” offer is, in reality, a multi-billion-dollar engine driving airlines’ financial health.
Beyond just a monetary incentive
Loyalty programs are one of the most common methods but it is also a very effective strategy for ensuring valuable customer experience. It is a great way to retain customers for the long term. These programs transform flying into a premium, personalized journey, offering members enticing benefits such as faster check-ins, extra baggage allowance, priority boarding, exclusive lounge access, and even eased visa-on-arrival processing. It’s like belonging to an elite sky club, where every flight feels special.
Moreover, these programs impact customer behavior as it provides airlines with valuable customer data by tracking members’ points and travel history. This data reveals insights into travelers’ preferences, spending habits, and buying personas, enabling airlines to personalize offers and communications for greater engagement and satisfaction. Just as achieving A-List status with Southwest Airlines by flying 25 times or earning 35,000 points unlocks perks like priority boarding and same-day flight changes, Indian airlines create achievable milestones that reward continued loyalty with special privileges to their customers.
Loyalty: The Billion-Dollar Industry
According to recent data, loyalty programs now generate a significant share of airline revenues worldwide. In the U.S. alone, loyalty divisions can contribute over 30% of an airline’s revenue—sometimes even exceeding its ticket sales. Indian loyalty programs are part of a booming $4.3 billion market projected to grow over fourfold to more than $17 billion by 2035.
However, with the rise of AI-powered personalization, gamification, and seamless digital integration, this trend is accelerating rapidly.
Airlines have faced unprecedented challenges during the pandemic, leading to over 400,000 job cuts globally in 2021 alone. With fewer human hands to handle daily queries and flight disruptions, the customer experience risked suffering in a highly dynamic industry where cancellations and changes are part of the norm.
AI-powered chatbots became a game changer in airline customer service. These digital assistants handle basic booking questions swiftly and efficiently, freeing human agents to focus on complex issues such as last-minute cancellations or personalized requests.
This seamless blend of technology and human touch allows airlines to remain responsive, offering customers real-time solutions while ensuring empathy where it matters most. Passengers appreciate having the choice to engage with an AI for quick answers or speak directly to a human when facing unique challenges.
What Lies Ahead
While the future of airline loyalty lies in leveraging AI and data analytics to create hyper-personalized experiences, turning every mile flown, every rupee spent, into tailored rewards and unique offers has become a need for survival for these companies. Airlines that view loyalty programs as strategic growth assets rather than mere marketing costs can unlock new revenue streams and build fiercely loyal customer bases in an increasingly competitive marketplace.
In the end, it’s not just about the miles—it’s about how efficiently we use math, data, and human psychology to win customers over competition.
