The Transformation of Airlines into Financial Institutions

Core Concepts

Frequent-flier programs have evolved into financial systems, with airlines acting more like banks than transportation providers, due to deregulation and market strategies.

Abstract

Airlines' frequent-flier programs have shifted from rewarding miles flown to money spent, reflecting a broader trend in the industry. The transformation was fueled by deregulation in the late 1970s, leading to airlines becoming more focused on revenue generation through loyalty programs and credit card partnerships. This evolution has turned airlines into quasi-banks that issue points as currency, creating a complex system where consumers are incentivized to spend more for benefits.
The shift towards spending-based rewards rather than mileage accrual is driven by the need to manage outstanding points liabilities effectively. Despite potential customer dissatisfaction with devalued loyalty programs, limited competition among major carriers allows them to make changes without fear of losing customers. Deregulation promised lower prices and increased competition but instead led to consolidation, cost-cutting measures, and worsening service quality.
The failure of deregulation to deliver on its promises highlights the challenges unique to the airline industry, such as high capital costs and barriers to entry. The current state of airlines as financial entities raises concerns about consumer fairness and transparency in loyalty program valuations. Regulating the industry could potentially steer airlines back towards prioritizing passenger experience over financial gains.

Stats

Consumers charge nearly 1 percent of U.S. GDP to Delta’s American Express credit cards alone.
United’s MileagePlus program was valued at $22 billion while the company’s market cap was only $10.6 billion.
Airfare did get cheaper after deregulation but had already been falling before it at about the same rate.

Quotes

"From being a regulated oligopoly with real problems, airlines transitioned into an unregulated oligopoly that is much worse."
"Airlines now resemble financial institutions that sell points for real money and profit off credit card swipe fees."
"Deregulation allowed airlines to pursue profits in whatever way they could—including getting into the financial sector."

Key Insights Distilled From

Airlines Are Just Banks Now

by Ganesh Sitar... at www.theatlantic.com 09-21-2023

https://www.theatlantic.com/ideas/archive/2023/09/airlines-banks-mileage-programs/675374/

Deeper Inquiries

How can regulations be updated to prevent airlines from operating as financial institutions?

To prevent airlines from functioning primarily as financial institutions, regulations could be updated in several ways. One approach would be to impose stricter guidelines on the issuance and valuation of loyalty points by airlines. This could involve setting limits on the creation of points without corresponding liabilities, ensuring transparency in point valuations, and restricting the sale of points at inflated values. Additionally, regulatory bodies could mandate that a certain percentage of airline revenue must come from actual flight services rather than ancillary sources like credit card partnerships or e-commerce portals. By enforcing these measures, regulators can steer airlines back towards their core function of providing air travel services rather than acting as quasi-banks.

Is there a viable solution for improving air travel quality without compromising profitability?

One potential solution for enhancing air travel quality without sacrificing profitability is through a balanced approach that prioritizes customer satisfaction alongside financial performance. Airlines can invest in upgrading their fleet with more comfortable seating arrangements, improved amenities, and better onboard services to enhance the overall passenger experience. By focusing on operational efficiency and cost management strategies, such as optimizing route networks and fuel consumption, airlines can improve service quality while maintaining profitability. Moreover, implementing fair pricing practices and transparent fee structures can help build trust with customers and foster long-term loyalty. Ultimately, aligning business objectives with customer needs is key to achieving sustainable growth in the aviation industry.

What impact does airline deregulation have on consumer rights and protections?

Airline deregulation has had significant implications for consumer rights and protections within the aviation industry. With fewer regulatory constraints post-deregulation, airlines have been able to prioritize profit maximization over customer welfare leading to diminished service quality standards and reduced accountability towards passengers' rights. Consumers may face challenges such as limited recourse for flight delays or cancellations, opaque pricing structures with hidden fees, overcrowded flights due to capacity optimization strategies by carriers seeking higher load factors for profitability reasons.
Additionally,
the lack of competition resulting from consolidation among major carriers has further weakened consumers' bargaining power when it comes to choosing alternative options.
Overall,
airline deregulation has shifted the balance of power away from consumers towards corporations,
highlighting
the need for enhanced regulatory oversight
to safeguard passenger interests
and ensure a fair marketplace within the airline industry.