How Frequent Flyer Points Work

Alright, I admit that most people know that when you are a member of an airline frequent flyer program you gain points for the number of air miles flown, which is also determined by the type of fare that you’ve purchased, and that you can also acquire points from being a member of an associated rewards program, and that you can then, in theory at least, trade those points for free flights, upgrades, or other benefits.

That part of frequent flyer programmes is pretty much understood by most people who fly either regularly or rarely. Depending on the airline, your frequent flyer points can either be relatively easy to trade for flights of your choosing, or ridiculously difficult to trade for a flight that can be taken at a time that is actually suitable to the member.

The thing is that frequent flyer programs have a great deal of value to the airline, and it is the reasons behind that value that I will attempt to explain. You see, frequent flyer points were not designed to gain advantage for the program members, rather they are designed to be an asset for the airline, or frequent flyer promoter.

According to a survey conducted by IdeaWorks for Amadeus, a travel technology business, in 2011 ancillary income for the world’s airlines is worth $32.5 billion worldwide. Ancillary income is income that is generated from sources other than fares, and which includes fees, charges, food, beverages, etc. One of the most important of the ancillary charges is the income gained from frequent flyer programs which, in the United States alone, is estimated to be worth 50% of all ancillary income.

So you can determine that the income from frequent flyer programs is very large indeed.

In fact, in 2008 it was estimated that 20 trillion frequent flyer points were generated, with a value to the airlines of $400 billion in tradable airline tickets. That was the cash in value of the total number of points, but in actual fact most frequent flyer points are held by members of the various schemes, and are not traded but held until needed.

The first frequent flyer program was established only in 1979, and it has turned out to be so profitable for airlines that many started their own FF programs as an easy way to add value to their businesses.
Is it possible to get value out of your frequent flyer points? Well, according to Bain & Co., the value of 1 mile has decreased by 56% (USD 0.025 to 0.011) over a period of 8 years due to declining mileage redemption rates, increasing miles required for a flight reward and declining overall ticket prices on reward routes.

Additionally, these days most airlines have a limit on the time you can hold ff points, and they will expire if unused after a particular duration.

Airline frequent flyer programs earn billions by selling miles to program partners, but invest little to make redemption options attractive to program members. That’s right. Airlines not only make billions of their FF programs by encouraging passenger loyalty in order to accrue points, but they on sell participation rights to partner companies, such as banks and credit card companies who offer the incentive of frequent flyer points to their customers too.

So the airlines benefit not only from their own customers loyalty, but to their partners’ customers loyalty as well.

Of course, that is not to say that frequent flyer points are a waste of time. If you accrue enough points to actually use, then they do come in handy. On the other hand, most low cost airlines don’t bother with FF programs, and that equates to a real saving for the customer as low cost airline fares are generally kept lower than the fares of airlines with ff programs because although frequent flyer points may have some benefits, they also come at great cost to the loyal customer.

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