How do airlines make money or get some other kind of advantage when I book a flight using miles not earned from flying?

Question

Let's say I have a credit card¹ that awards me with miles for my expenses (each X dollars spent = Y miles earned).

When I use my card to buy products and services, the money goes to the places I spent my money on², and I get all the correspondent miles.

Then, I can use those miles in whatever airline loyalty program the card allows me to.

Assuming that I have enough miles to book a flight, all of them earned through credit card expenses (which means the airline got no money from me), how can this be profitable or advantageous for the airline?

The only benefit I see is that I'm not flying with their competitors, but I don't understand how the airline can make any money from this, or at least get some advantages other than preventing me from choosing a competitor.

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I can understand the advantage, from the airline point of view, when I get miles from flying with them. The airline already got my money on previous flights (in which I could've chosen their competitors, but I didn't), and as a benefit for my loyalty, I've got a "free" flight³.

But when I earn miles from another sources that have nothing to do with the airline (in the example above, credit card expenses), what's the benefit for them? Does the airline make money - or get any other kind of advantage - somehow in this case? Or is preventing me from choosing a competitor the only benefit?

Obviously I'm missing something, as I don't fully understand how loyalty programs really work, where do all those "miles"/points/whatever come from, etc. Hence my question.

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^{1: Credit cards usage is not the focus here, I'm just using it as an example. My question applies to any other mechanism of getting miles other than flying.}

^{2: I'm aware that credit card companies get their share, and there are also fees and taxes, but my point here is that no money - AFAICT - is going to the airline.}

^{3: I know it's not entirely free, there are other expenses such as government/aiport taxes, but AFAIK that money doesn't go the airline. Yes, there are also fuel surcharges, but I guess charging only this wouldn't be enough to be profitable.}

Answer 1

Airlines negotiate with a merchant (credit card, etc) a value per point. The merchant buys the miles for you from the airline. And of course the airline has priced its "free" tickets at a cost in miles that will be acceptable to them when converted back to cash.

The miles are booked as unearned income (they received cash, but it's not currently used for a ticket). Buying a ticket with miles converts these miles to their internal monetary value, and gets that cash transferred to income.

And the tickets aren't entirely free. You still need to pay taxes, surcharges, etc... usually with the same credit card (in the case of a credit card co). Again more miles for the airline.

So why would the credit card co or other merchant do that? Obviously to capture a market share, and lock you in (vs other, similar, merchants).

Answer 2

When I use my card to buy products and services, the money goes to the places I spent my money on

Not all of it. Some goes to the credit card company. If you're in the US it's about 3%, in Europe typically less.

The credit card company can pocket this money and make a profit. Or they can return some of it to you, hoping it would make you use their card more. They'd get less per dollar spent, but more overall. The simplest way to do this is to offer cash-back. Another way is to offer airline miles. As @dda wrote before me, the credit company will buy the miles from the airline. Thus the airlines makes money.

Answer 3

Co-Branded Credit Card Agreements and Selling Miles to Banks

The airlines either sell the miles to the banks that issue the credit cards or (in the case of co-branded credit cards,) they have an agreement to share a cut of the annual fees and card swipe fees on those cards with the airline.

This is actually an enormous business. The major U.S. airlines often actually make more profit from their credit card agreements than from their entire airline operations. For example, in the 3rd quarter of 2023, Delta made $1.7 billion USD from their agreement with American Express. This represented 11% of Delta's entire revenue for that quarter. To put this in perspective of the bottom line, their profit for the quarter was $1.1 billion.

To perhaps add yet more perspective to this, Delta's CEO stated in mid 2023 that around one percent of the entire U.S. gross domestic product flowed through Delta co-branded Amex cards. The U.S. GDP is roughly $28 trillion, meaning around 280 billion dollars flows through Delta co-branded Amex cards annually. That's a sum roughly equal to the GDP of Portugal (as of this writing in 2024.)

As other answers discuss, airlines often also have agreements to sell their miles to banks other than just the one(s) they have co-branded card agreements with. For example, Singapore Airlines, Virgin Atlantic, and Air France/KLM all sell their miles to all 4 major U.S. banks that issue travel-focused credit cards with transferrable points (Amex, Chase, Capital One, and Citi.) Airlines do make quite a bit from this, too, but, especially in the U.S., it's the co-branded card agreements where they make the real money. There have been quite a few quarters over the last several years (especially during the Covid pandemic) where the co-branded card agreements were the difference between a major airline losing money or turning a profit for the quarter.