George Kamel - How Airlines Really Make Their Money

Episode Date: May 10, 2024

💵 Sign up for EveryDollar today. Create a free budget!  Airlines have come up with a revenue source that’s almost as shady as the in-flight “snacks.” (Don’t drink the airplane coffee. Just trust me on this.) Let’s talk about how airlines really make their money and how to make sure they’re not ripping you off on your next trip.   Next Steps  📗 Order George Kamel’s new book, Breaking Free From Broke.  📺 Watch: 10 Travel Hacks I Use to Save Money Offers From Today's Sponsors  This episode is sponsored by Tello, a mobile service plan designed to save you money. Go to tello.com/George for $5 off your first month of Tello’s unlimited data plan.   🙌    🎙️ The Ramsey Show    🍸 Smart Money Happy Hour  💡 The Rachel Cruze Show  💸 The Ramsey Show Highlights  🧠 The Dr. John Delony Show  💼 The Ken Coleman Show  📈 The EntreLeadership Podcast     Ramsey Solutions Privacy Policy  Learn more about your ad choices. Visit megaphone.fm/adchoices

Do you know how airlines make their money? I'll give you a hint. It's not the flights. It's not even the baggage fees. And it's definitely not the overpriced headphones they sell you so you can watch Gile on your flight to Albuquerque with a layover in Atlanta. It's sad anymore. I've got to get out of here.

Airlines have figured out a way to basically create money out of thin air. And while that may just sound like clever flight-related hyperbole, it's actually pretty accurate. And it's why people are saying airlines are basically just banks now. So how are airlines getting away with this? and more importantly, how does it affect you? In today's video, you'll find out how airlines really make money and how to make sure they're not ripping you off in the process.

But before we take off, please take a moment to locate the like and subscribe buttons closest to you. In the unlikely event you enjoyed this video, there is a share button located beneath your screen. To activate it, simply smash and choose how you'd like to share. Please also take a moment to review the show notes located above the comment section in front of you. As a reminder, smoking is prohibited for the duration of this video,

and vaping is prohibited for the rest of your life. On behalf of the entire flight crew, welcome aboard. By the way, is there anyone on board who knows how to fly a plane? Okay, so how is it that airlines are virtually creating money from nothing? Well, the secret lies in their frequent flyer programs like Delta Sky Miles, Southwest Rapid Rewards, United Mileage Plus, and of course American Airlines, advantage. Or is it A advantage?

Ah, advantage! Whatever it's called, it turns out airlines make more money from these mileage programs, programs than they do from ticket sales. Because through these reward programs, airlines are basically creating their own currency in the form of points. And much like the Federal Reserve, airlines can issue this currency out of nothing whenever they want. The airlines get to decide how much these points are worth and what they can be spent on. And here's the crazy part.

They can change the value of their points at any time, and they're the only ones who can convert them to cash. And they sell these made-up points for actual money. And we all just go along with it like it's normal. That's kind of messed up. And that's why now airlines are more like financial institutions who happen to fly planes as a side hustle. In fact, Wall Street lenders valued the major airlines mileage programs more highly than the airlines themselves. And just to give you an idea of how much we're talking here, United's Mileage Plus program was valued at $22 billion.

Imagine what our Golden Boy Southwest is worth. Now you might be thinking, okay, George, that's great. But why should I care? Well, if you got a credit card with an airline logo on it, you should care a lot. I'll explain why, but first, take your phone out of airplane mode and listen to this. There's nothing worse than paying too much for your phone plan. Well, except getting the middle seat between two guys who both have their phones on speaker. That would be worse.

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Okay, back to your in-flight programming. Me, right here. If you've got a credit card with an airline logo on it, you might want to pay attention to this next part, because you could be getting ripped off. To understand how, let's break down how these airline rewards work. If you have one of these credit cards offered by an airline, you can collect points or miles based on how much you spend on your credit card

and how far or how often you fly. Or at least, that's how it used to be. More on that later. That's a tease. But the suspense is killing me. For most cards, every dollar you spend will earn you one mile or point. And the reason I use the finger quotes for the word mile is because we're not talking about actual distance here. They call them miles to make it sound like you're getting more than you actually are.

10,000 flight miles doesn't get you 10,000 miles away from home. It gets you to Boise, if you're lucky. And while that was intended to be a joke, check out this recent comment that turned that joke into a reality. Free flight to Boise, I feel personally attacked. Just did that very thing. And you, my friend, you're part of the problem. Anyway, when you make a purchase, it takes about $1 to earn a mile. But when you try to redeem those miles, each one is only worth about one and a half cents,

depending on the kind of card you have. That'll get you about a foot down the runway. If you're doing the math at home, that means you'd have to spend $50,000 to earn $50,000 miles, which then gets you a free flight that would have cost about $750 out of pocket. My debit card, without an airline logo, could buy a whole lot of flights for $50,000. Oh, and don't forget to add on taxes and fees because your rewards don't cover those. Yeah, I know suddenly that free flight is starting to feel a whole lot less free. And trust me, they know what they're doing here.

In fact, I interviewed an ex-capital one manager for my narrative podcast called The Fine Print, and she told me that credit card companies create these reward programs in a way that incentivizes people to spend more than they planned, trapping them in a vicious cycle of debt. Gross. Gross. You disgust me. And if you miss a payment, they can just take away. your awards, like the others took away Walt in season one, episode 24 have lost. Well, I know it's an old reference, but it holds up.

Memorable scene. That was good television. We have to go back! And you might not realize this unless you really enjoy reading fine print, but they can just change the value of your miles and points at any time, making them worthless and requiring you to spend more for that same exact perk. Here's an example. A few months ago, Delta made a big change to its Sky Miles program, and the points chasers on social media were not happy about it.

One of the biggest changes Delta made was how customers achieved status, which is basically a classification that gets you certain perks when you fly. Until recently, status has been awarded based on a combination of miles traveled and dollar spent. But now, status will be granted based only on dollar spent. And this piece in the Atlantic said it best. Quote, in short, Sky Miles is no longer a frequent flyer program. It's a big spender program. And ever the night in shining armor, Delta also made earning status and perks a lot.

harder. Now, to earn their top-tier diamond medallion status, you'd have to spend $28,000 on Delta flights. That's like 75 flights to Miami. And I can't imagine you're going to fit those in the schedule in the next 10 years, no matter how big of a pit bull fan you are. And trust me, there's some people who are big pit bull fans who would be willing to commit crimes for the man. Mr. Ware, Mr. 3O fan, darling. The other way is to charge hundreds of thousands of dollars on your co-branded credit card. And depending on which card you'd have, you would need to spend either $280,000 or $560,000. That is insane. And on top of that, Delta also limited the number of visits cardholders can make to the Sky Club, which is their exclusive airport lounge system.

So basically, Delta moved the goalposts in the middle of the game. And they made it so much harder to earn status that David Slotnik, one of the reporters at the points guys said that he's going to, quote, stop chasing airline status. And that, quote, after years of being in the chase, that feels liberating. End quote. Beautifully said. Look, these companies intentionally use complex pricing structures, confusing point systems, and tiny fine print terms that all exist for their bottom line and their benefit, not yours. The former Capital One manager I spoke with told me that for someone to truly, quote, beat the system, they would have to almost make it a full-time job, which is kind of funny,

because you know what else can pay for flights and earn you some cash? An actual, you know, full-time job. If I had a mic right now, I drop it. And for a good chunk of the population, these rewards are going to waste. A recent survey found that 23% of people didn't redeem their rewards in the past 12 months. So, the bottom line here, don't fall for the trap. Credit card companies and airlines are not your friends. But they are experts in consumer behavior,

and they know exactly how to persuade you to spend more and get you into debt. And if you think you can beat them at their own game, they will happily let you think that. When you're the mouse on a giant laboratory maze, making it to the cheese seems like victory. But you're still a rodent stuck in someone else's science experiment. So don't even mess with these frequent flyer miles or any kind of airline rewards programs. I mean, why play a game designed to make you lose? The house always wins, especially when

they make up the rules and can change them midgame. So here's what to do instead, and here's what I do personally. Pay attention to airline sales, use travel apps, and do some research before you book your flights and hotels. And this way, you can find even better deals and pay cash without being beholden to a certain airline or points goal. And if you have the income to support all that credit card spending needed to get a certain status or earn enough points for a flight, then surely you have the income to save and pay cash for travel. And don't call me Shirley. And if you want to know some ways to save on flights and hotels without chasing the points,

check out this video for some travel hacks I use to save money. I'll also link it below in the description. Thanks for watching. We'll see you next time.