<font face="Verdana, Arial, Helvetica, sans-serif" size="2">Originally posted by Sig:
What about Hilton, who gives you actual HHonors points for your miles? They aren't getting much of an intangible benefit out of that, so the airlines must be paying them?</font>
Almost certainly hotel programs like Hilton are NET buyers of airline miles : to accomodate the minority of customers who want to convert miles to points they are just transfering miles to other customers that want to convert points to miles.
Of course they still need permission from the Airlines to transfer these miles between accounts, but as long as the Airline is guaranteed that the Hotel will remain a NET buyer of miles, the Airline is making a profit given the typical liability of 0.1c/mile on their books. It is possible the Hotel has to pay some small fee to the Airline for each transfer of airline miles between accounts.