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Why Airline Loyalty Programs Are Really Just FinTech Companies: World of DaaS interview with Author of The Diff, Byrne Hobart

August 5, 2021
Auren Hoffman

New podcast with Byrne Hobart, Author of The Diff. Our conversation is available everywhere (Apple Podcasts, Spotify, YouTube, etc.). Please subscribe, follow, and review.

Byrne Hobart is the author of The Diff, a substack newsletter covering inflection points in finance and technology. I'm a huge reader and fan myself. 

Last year, Byrne wrote an article about airline loyalty points, which I found really fascinating. Byrne explains how airline loyalty programs have saved the airline industry and drive the majority of their value.

Here are some highlights from my conversation with Byrne Hobart.

Airline loyalty programs are more valuable than the actual airline

Loyalty programs are mostly recession proof. If you look at how much money the loyalty programs make, and you look at what kind of valuation would traditionally be ascribed to a company that grows at X percent a year, is pretty recession resistant and has cash operating cash flow Y, you get to a valuation that is actually in excess of the market cap of the airline. 

The actual airlines are loss leaders to help the FinTech side, FKA loyalty programs

FinTech companies grow when they have preferential access to really valuable customers. Airlines take a hit on their services to help their loyalty programs grow. The entire business of actually flying people really fast from place to place and allowing humans to transcend our earthly bounce, that actually has negative value and destroys more than 100% of the equity capital you put into it.

Loyalty programs were the airlines’ lifeline during the pandemic

During the pandemic, there was a significant drop in travel. At that time, the airlines pointed to their loyalty programs to validate that they have a solid business that we know has these loyal customers, and we can borrow against it. This helped lower their interest rates and stay afloat.

Airlines are both monopolies and commoditized businesses

At one level, airlines are a network effects business that has these monopolistic characteristics. At another level, it is a totally commoditized business with brutal competition. It cycles back and forth through these states over time. It also cycles back and forth depending on location. It is more commoditized in a city with a lot of different airlines that service that city. In hubs with limited options, you’ll see more of a monopoly. So individual airlines are always trying to extend to parts of the map, where they can have a lot of pricing power. 

Signing up people for credit cards is really difficult, but also incredibly lucrative

Growing a financial services company is brutally difficult. The growth constraint is so dominated by customer acquisition costs. How do we know this? It's literally worth buying planes, flying people around the country, having a heavily unionized workforce and all these safety regulations... to cost effectively sign people up for credit cards.

Hope you enjoy this episode of World of DaaS — would really appreciate it if you subscribe and review Apple Podcasts, Spotify, YouTube, etc.).

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