Frequent flyer rewards programs linked to credit cards are more than just perks for travelers. They're a lucrative part of an airline's business and they're likely to bring in even more cash to companies in the coming years, according to one analyst.
That's partly because airlines are trading miles for cash and don't immediately recognize the full cost of having those miles redeemed.
"Amex is the partner with Delta for their SkyMiles card and they get to issue cards that have a higher interest rate and higher annual fees for the same group of high-income and credit-worthy customers," said Andrew Davis, airlines analyst at T. Rowe Price on "Big Data Download."
Currently, Delta (DAL) receives more than $250 million from American Express (AXP) per year for rewards points given to cardholders and United Airlines, operated by United Continental Holdings (UAL), receives more than $200 million From Chase (JPM), according to T. Rowe Price estimates. And Southwest Airlines (LUV) is expected to report about $260 million in cash received for its rewards program in 2013, Davis said.
What’s more, airlines are starting to migrate to even better rewards models, Davis said. Redeeming points for hotel stays, rental cars and access to airport clubs that offer drinks, wireless access and other amenities, for instance, will be less costly for airlines than giving away a seat on a plane, Davis said. Airlines can buy those items at wholesale prices and they're redeemed at their retail value, Davis said.
Airlines are switching from rewarding travelers with points for dollars spent on flights as opposed to miles traveled as well, Davis noted. And travelers will eventually have to spend more points on flights that are most in demand, Davis added.
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But there will be pluses for travelers, according to Davis, who said he expects airlines to reduce the number of blackout dates that are off limits for travelers redeeming rewards. Already, airlines are offering deals to its rewards customers for peripheral items like in-flight wireless network access and other amenities, Davis said.
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