How Do Frequent Flyer Programs and Alliances work?
 

I think it's pretty clear that we're all somewhat knowledgeable of the FFP program jazz. How do the actual business matters of this part of the industry work though? Something came to my mind when I was in the shower-

Scenario:
I book a ORD-PVG flight on AA using BA miles. In PVG, I use a JAL lounge. Which airline would pay which airline for the redemption part of the flight and the lounge?

Sorry if I sound confusing.

BAEC buys the ticket from AA, but no idea how the transaction is priced.

either way... someone's making money :)

At least in some cases, the operating carrier pays the lounge for premium cabin passengers while the home FF program pays for those passengers who get lounge access as a result of their FF status.

I see. Do they pay full fare for such privileges?

No, they don't. I am sure some points are more valuable than others based on a number of factors such as feul surcharges, miles used, value to the alliance, etc. Any net miles (Say 100 Avios are used per year while 125 AA miles are used = net of 25 AA spent) are paid at a certain rate. No body ever pays full price for lounge access. Im think it is not more than $10 per person for lounge access.

So in this scenario....
AA would pay for the JAL lounge access
BA would then pay for the mileage redeemer flying AA for the access to the lounge?

but lets just say AA miles are worth less than the BA points so would that in turn mean that AA$ is lost?

I'm more interested in knowing:

When I used 135,000 AA miles to book NYC to BKK First Class on CAthay Pacific, how much did AA pay CX for a seat that on the CX website sells for $26,000???!!! I imagine not very much - just something they all need to do in order to keep the profit from the mileage game alive. But it does intrigue me.

What I've heard from others I consider more knowledgable (although not from anyone who actually works for an airline) is that the airline which owns the miles pays the airline that owns the seat some marginal cost that pretty much just covers the food, drinks, baggage, and service. Think somewhere in the range of $50-100 for a first-class international ticket.

The seat itself is almost free. Remember, the point of a frequent flyer program is to take a wasted asset (unsold seats) and turn it into something valuable (a potential prize for loyal customers). Most airlines won't put seats into the award inventory unless they are already pretty sure it will go unsold. Since they assume it has no value, there's no reason for the partner to pay them for it either.

How do Alliances work?
 

.......

I believe, in part, they make money off code-sharing, revenue-sharing, as well as having exclusive control over certain routes as part of their contract. Keep in mind, for every traveler banking miles with UA, I'm sure there are other flying UA and banking miles with Lufthansa or whatever have you. In grand scheme of things, alliances are there to 'control' a global presence. The more parts of the world you're able to reach, the better chance people will fly with your airline to their final destination. Let's say to get to Doha from Newark, you will probably fly UA into Frankfurt, then Lufthansa into Doha (and I believe both airlines will get a share of the revenue)...everyone wins...sort of.

I'm sure there is MUCH more to this and this is just my $.02

The crediting airline pays the account airline for the miles so there is revenue.

Also many programs are requiring you fly a certain amount of flights with their own airline. United for example requires 3 flights per year.

In addition to code sharing and revenue sharing, carriers in the same alliance share FF benefits. For example, a UA 1K flying LH will likely get all the FF benefits he is used to, like priority check in, lounge access in the LH lounge, etc. If one never flys UA, why would he credit miles to the MP program? If he did, UA loses nothing. They never have to provide those benefits for someone who never flys UA. In addition, many programs give better benefits to their own FFs. For example BA gives only its own elites access to the Concorde room, not other oneworld elites (not *A, I know, but I am more familiar with OW being an AA flyer), and SQ releases very limited F award availability to its *A partners. Thus, I doubt airlines lose money in the way you describe. And also, you generally cannot achieve elite status on an airline without flying on it at all. For example, AA requires at least 4 segments on AA metal to achieve any sort of elite status.

Likely, both airlines get revenue from their code shares, and the global network the alliance creates generates more revenue for all airlines in the alliance.

Moderator action
 

AriLovesTraveling's question has been appended to a recent discussion of an overlapping topic.