Mileage programs are big business

Frequent flyer programs are typically perceived by outside observers as costly undertakings. After all, those free award tickets aren’t really free.

What goes largely unknown or underappreciated is the amount of revenue the programs generate from the sale of frequent flyer miles to credit card companies, hotels, and hundreds of other program partners. Basically, every time a member of the AAdvantage program, for example, earns miles for staying at a Hilton hotel, Hilton is purchasing those miles from American.

A new study by industry consulting company IdeaWorks on ancillary revenue (revenue generated from non-ticket sales) provides some hard numbers.

While it is not the primary focus of the study, the sale of frequent flyer miles is a key source of ancillary revenues, particularly for the mainline U.S. airlines.

As the report notes, most airlines don’t report revenues or expenses associated specifically with their mileage programs. But frequent flyer revenue figures were available for two carriers, Alaska and United, providing a good sense of performance at both the small- and large-carrier ends of the spectrum.

In 2005, Alaska reported $180 million from the sale of frequent flyer miles to partners. IdeaWorks estimates that 70% of that was linked to the Mileage Plan credit card.

And United reported $800 million in Mileage Plus revenues for the same period.

These are significant amounts and should put an end to any lingering worries by travelers that the airlines have a final incentive to abandon their mileage programs. The reverse is the case.