The Surprising History of Points and Miles
All the Hacks: Money, Points & Life Podcast Recap
Published:
Duration: 42 min
Summary
This episode explores the evolution and impact of the points and miles industry, which now surpasses the value of airlines themselves. Key insights include the historical development of credit cards and loyalty programs, as well as their modern economic significance.
What Happened
The points and miles industry has grown into a $140 billion machine, with airline loyalty programs now valued higher than the airlines themselves. This has transformed frequent flyer miles into a significant financial asset for airlines, such as Delta's SkyMiles, which is valued at $26 billion.
The first charge card, Diners Club, was introduced in 1950 with a $3 annual fee, and by 1953, it was accepted internationally. American Express, founded as a mail and freight business in 1850, later invented the traveler's check in 1891 and launched Membership Rewards in 1991, which revolutionized loyalty programs with transferable points.
The credit card industry saw a pivotal moment in 1958 when Bank of America distributed unsolicited credit cards in Fresno, leading to high delinquency rates and the development of critical consumer protection laws. Eventually, the Bank Americard program evolved into Visa, and the 1978 Supreme Court decision allowed banks to charge nationwide interest rates from their home states, prompting Citibank's move to South Dakota.
The Airline Deregulation Act of 1978 enabled frequent flyer programs like American's Advantage to launch in 1981, tracking actual miles flown. These programs have become crucial for airline profitability, with many airlines relying heavily on the revenue from co-branded credit card partnerships, such as American's with Citibank.
The episode highlights the shift to revenue-based earnings for miles starting with JetBlue in 2009 and later adopted by major airlines by 2016. This shift, along with dynamic pricing replacing fixed award charts, has led to fluctuating mile redemption costs based on demand.
Significant figures in the loyalty industry include David Phillips, who earned 1.25 million miles by purchasing pudding cups, and Stephen Belkin, author of 'Mileage Maniac', who amassed 40 million miles through creative strategies. These stories illustrate the lengths some have gone to exploit airline loyalty programs.
Amidst these developments, the U.S. credit card industry has thrived, with interchange fees remaining unregulated and averaging around 2%. In 2022, the six largest U.S. credit card issuers collected approximately $100 billion in interchange fees, highlighting the financial significance of the industry.
Despite the profitability of loyalty programs, the episode notes that 23% of cardholders did not redeem any rewards in the past year, and 3 to 4% of all rewards expire. This unused value contributes to the industry's profitability, as seen in the $6 billion gap between issued and redeemed rewards in 2022.
Key Insights
- The airline industry heavily relies on loyalty programs for profitability, with Delta's SkyMiles valued at $26 billion, surpassing the airline's market cap. Airlines profit from selling miles to banks at 1 to 2 cents each, generating significant revenue.
- Diners Club, the first charge card, started with a $3 annual fee in 1950, leading to a drop in membership but eventual profitability. By 1953, it was accepted internationally, marking the beginning of global credit card use.
- In 1958, Bank of America sent unsolicited credit cards to 60,000 Fresno residents, causing a 22% delinquency rate. This led to consumer protection laws like the Truth in Lending Act, shaping the modern credit card landscape.
- The shift from miles-based to revenue-based rewards began with JetBlue in 2009, followed by other major airlines by 2016. Dynamic pricing now adjusts mile redemption costs based on demand, affecting how travelers use their rewards.