Airline loyalty: Why airlines are devaluing programs
Pressures on airlines to devalue programs
Airline loyalty programs are diverging sharply, with some carriers cutting back benefits in order to reduce costs, while others are investing in program enhancements to build long-term customer loyalty. Devaluation tactics such as increased redemption rates, restricted availability, and reduced elite perks are often implemented with little notice, eroding trust and disproportionately affecting non-elite members. These moves are financially motivated, treating loyalty programs as short-term liabilities despite their significant contribution to airline valuations and long-term revenue through customer retention and co-branded partnerships.
The ‘loyalty dividend’ represents the total package of benefits, services, and value that airlines return to customers in exchange for their continued patronage and data. It functions for airlines as both a customer relationship tool and a financial asset. It is also a promise to customers that builds long-term value when honoured or erodes trust when diminished.
Today’s airline industry faces unprecedented challenges beyond the pandemic’s initial impact. A looming global economic crisis, political uncertainty, geopolitical tensions disrupting route planning, active conflicts affecting global supply chains, escalating trade wars impacting operational costs, and persistent labour shortages have created a perfect storm for airline executives. This brings us to the central question: Is the airline industry bifurcating into two fundamentally distinct approaches? On one side, carriers pursuing short-term financial optimization through 'dividend devaluation', reducing the value returned to loyal customers. On the other, airlines focused on long-term competitive differentiation through 'dividend enhancement,' doubling down on loyalty rewards despite current pressures. The choices airlines make now may well determine their position in the post-crisis landscape.
Balancing short-term financial pressures with long-term customer value
Airline loyalty programs often face increased scrutiny when carriers experience financial turbulence. Cost-cutting measures might appear logical in boardrooms focused on quarterly earnings, but they frequently come at the expense of long-term customer relationships and lifetime value.
The immediate financial gains from program adjustments are undeniable. When loyalty programs increase redemption requirements or qualification thresholds, they effectively reduce contingent liability from their balance sheets. These changes can create immediate cost savings on benefits like lounge access and priority services.
Adding to these pressures is a growing global trend toward lower credit card interchange fees, a major funding source for airline loyalty programs via co-branded cards. Australia and New Zealand recently announced further reductions in interchange caps, continuing a multi-year tightening cycle. These changes reduce the per-transaction revenue airlines earn from credit card partners, shrinking one of the few levers available to maintain high reward value without direct operational cost. As more jurisdictions examine interchange regulation, airlines’ flexibility to preserve redemption value without cutting elsewhere will be increasingly constrained.
Another consequence of shrinking revenue from core loyalty funding sources is the need for airlines to expand their partner ecosystems to sustain perceived value. As co-branded credit card economics weaken due to lower interchange and tighter bank margins, carriers are increasingly turning to partner-driven points issuance. This means members earn more points from hotels, car rentals, retail, dining, fuel, and online shopping portals. While these networks are often branded as an airline’s own program, their structure increasingly resembles a modern coalition model: a wide range of partners funding points issuance in exchange for access to the airline’s engaged customer base. This coalition drift allows airlines to maintain attractive redemption opportunities without shouldering all the cost themselves, but it also creates dependencies on partner economics and commitment.
What makes these decisions particularly significant is that loyalty programs represent between 30 and 50 percent of major airlines' total valuation. During the pandemic, several major carriers used their loyalty programs as collateral for multi-billion-dollar loans, with financial disclosures revealing some programs were valued higher than the airlines' entire flight operations. American Airlines' AAdvantage program, for instance, was valued at 24 billion dollars in 2020 when used as collateral — roughly twice the airline's market capitalization at that time.
Market position factors
An airline's approach to loyalty is significantly influenced by its market positioning, competitive landscape, and business model. These factors create natural divides in how programs are structured and valued.
Full-service international carriers generally maintain more robust loyalty programs than budget carriers, reflecting fundamental differences in their business models and customer targeting. Legacy airlines like Singapore Airlines and British Airways invest heavily in premium cabins and service differentiation, making their loyalty programs essential tools for customer retention and premium segment acquisition.
These carriers use their programs to create aspirational rewards, such as first-class redemptions, that drive emotional loyalty beyond transaction-based relationships. In contrast, ultra-low-cost carriers like Ryanair and Spirit Airlines operate with thin margins that leave little room for generous loyalty benefits. Their programs typically focus on simple cashback or discount based models rather than the comprehensive elite status tiers and alliance wide benefits offered by full-service carriers.
Airlines operating in highly competitive markets, particularly in the Asia-Pacific region, consistently offer stronger loyalty benefits than those in less contested markets. The intense competition between carriers like Cathay Pacific, Singapore Airlines, ANA, and JAL has created some of the world's most generous loyalty offerings as these airlines fight for premium passenger share in a region with multiple strong hub airports in close proximity.
Hub dominance allows some airlines to reduce loyalty benefits with less competitive pressure or market consequences. Airlines with commanding positions at major hubs such as Delta in Atlanta or Lufthansa in Frankfurt, benefit from natural captive audience effects, where local passengers have limited viable alternatives for direct flights. This market power enables these carriers to implement more aggressive loyalty devaluations with less risk of losing market share.
These structural, economic, and competitive forces do not dictate a single path, but they do define the playing field.
Although these pressures are driving a broad devaluation trend, loyalty programs need to be managed with the ongoing aim of generating emotional as well as functional loyalty, and therefore the current environment does spell some longer term danger for carriers.
In the next article, we will examine the specific levers airlines use to reduce loyalty program value, the impacts these changes have on customers, and the regulatory scrutiny that is beginning to influence industry behaviour.
