The billion-dollar engine behind frequent flyer programs
It's a win-win-win.
You might think your miles are just freebies. In reality, they’re part of a multi-billion dollar machine where airlines and banks quietly mint money.
Frequent flyer programs started in the early 1980s to reward travelers who flew a lot. That’s why they’re called what they are.
American Airlines launched the first big program in 1981: AAdvantage. It let travelers collect miles based on distance flown, which they could trade for free flights, upgrades, or special perks.
Back then, it was simple: the more you flew, the more you earned. No credit cards, no dining rewards, no shopping portals. Just like grocery store loyalty: you shop more, earn more, and redeem those points later.
Here’s how that looked:
1. Mileage Accrual:
Susan flew the same route twice a month.
After 6 months, she racked up 12 round-trips = 19,200 miles.
By month 7, she crossed 20,000 miles, enough for a free flight.
2. Redemption:
She called the airline, asked for an award seat, and booked a free round-trip within the U.S.
No blackout dates yet. No dynamic pricing. Just simple availability.
3. No Credit Cards, No Partners:
Miles came only from flying.
No hotel points. No shopping rewards. Just pure travel loyalty.
But by the late ’80s, airlines realized they were sitting on gold. These programs weren’t just customer perks, they were financial engines.
The turning point? Banks started buying miles in bulk for their co-branded cards.
Example: American Airlines teamed up with Citibank in 1987 to launch the AAdvantage credit card.
Today, most miles come from spending on credit cards, not from flying.
So how does this airline-bank partnership actually work? What’s the win on both sides?
First, know this: airline economics are brutal. High fixed costs like aircraft leases mean money goes out whether planes fly or not. Profit margins from core flight operations are razor-thin, so airlines rely on extra revenue and frequent flyer programs are one of the strongest sources.
By selling miles to banks in advance (think of it like selling tickets before you know when they’ll fly), airlines get upfront cash. That money can go toward loan repayments, daily operations, or even be used as collateral to raise more funding. It’s recorded as deferred revenue.
And here’s the kicker, it buffers against demand swings or ticket price drops.
Let’s break it down using John, who spends $50,000 this month on his Amex–Delta credit card.
John earns 50,000 miles (1 mile per $1).
Amex pays $1,000 to Delta (2¢ per mile).
Delta books it as deferred revenue. No seat is filled yet, but the cash is in.
Delta adds 50,000 miles to its liabilities (it owes John a future flight).
Months later, John redeems 50,000 miles for a round-trip that costs $1,000 in cash.
Delta cancels the liability, recognizes the $1,000 as actual revenue.
The flight costs Delta around $150 to fulfill.
Delta may put John in a seat that would’ve gone empty anyway.
So it earns $850 ($1,000 from Amex minus $150 fulfillment cost).
John feels like he flew for free, gets emotionally attached to the miles, and keeps spending.
The flywheel turns.
Now let’s see what the bank makes:
John spends $50,000.
Amex earns 2.5% in swipe fees = $1,250 (paid by merchants).
John earns 50,000 miles.
Amex pays Delta $1,000 for those miles.
John also pays $500 in annual fees or interest.
So Amex earns $1,250 (interchange) + $400 (net from fees/interest).
Amex’s costs = $1,000 to Delta + $100 admin.
That’s $550 in net profit for Amex.
And there’s more: Amex got John onboard because of Delta’s perks. He likely spends more just to earn more miles and Amex earns more every time he swipes.
Here’s how the loop plays out:
Delta partners with Amex.
Amex buys miles from Delta.
Customers sign up for the card to earn miles.
Customers spend more to chase rewards (miles).
Amex earns more merchant fees.
Delta gets upfront cash.
Customers redeem miles and fly “for free.”
Both brands build loyalty and profit from customer behavior, not just travel.
Frequent flyer programs aren’t just nice little perks. They’re powerful financial flywheels that drive loyalty, boost revenue, and make you feel rewarded, while the real winners sit behind the curtain.