How Airlines Can Reduce Loyalty Point Liability

Airline loyalty programs have long been a cornerstone of customer engagement and retention, rewarding frequent travelers with points or miles that can be redeemed for future travel. But behind the allure of earning free flights lies a growing financial challenge: loyalty point liability.

Loyalty point liability refers to the deferred revenue airlines record for unredeemed points or miles — promises of future travel that represent a future cost obligation. Across the global aviation industry, this liability is ballooning. Roughly 35 trillion points remain unredeemed, tying up billions of dollars in potential revenue and weighing heavily on airline balance sheets.

This creates a complex tension: balancing accounting liability, customer engagement, and revenue opportunity. While unredeemed points reduce immediate profitability, they also represent future loyalty and long-term value. The solution isn’t to restrict redemptions — it’s to turn loyalty from a liability into an engine for profitability through smarter redemption design.

What Is Loyalty Point Liability and Why It’s Growing

Why Point Liability is Growing

Airline loyalty liability continues to expand faster than passenger volume or revenue growth. The main reason? Points are being issued far faster than they’re redeemed.

The surge in co-branded credit cards has been one of the largest contributors. Every grocery run, hotel stay, or online purchase through a co-branded card earns miles, creating a future redemption obligation for the airline. Promotional campaigns, from double-points events to sign-up bonuses, accelerate this cycle.

However, redemption options haven’t kept pace. Many programs still confine redemptions to flight inventory, which is limited by route capacity, seasonality, and demand. As a result, members often struggle to use their points, creating a backlog of unspent miles and rising financial pressure.

Compounding the issue, accounting standards such as ASC 606 and IFRS 15 require airlines to treat unredeemed points as deferred revenue until those points are redeemed. This means that a company’s loyalty “success” can paradoxically make its balance sheet appear weaker in the short term — every issued point represents a future cost yet to be realized.

Why It Matters

Unchecked loyalty liability can create significant financial and reputational risk. Analysts and investors closely monitor these obligations because a growing balance can signal unfulfilled costs. When liabilities expand faster than redemption, airlines face pressure on credit ratings and reduced borrowing capacity. In some cases, investor confidence dips when deferred revenue outpaces recognized revenue, effectively treating unredeemed miles as debt.

Operationally, the problem is equally challenging. When redemption options are limited, members lose confidence in the value of their points, disengagement rises, and program participation drops. Industry studies suggest that nearly half of all airline loyalty members remain inactive or redeem only for basic flights. Each unredeemed mile isn’t just deferred revenue — it’s a missed opportunity for engagement, upsell, and brand reinforcement.

In short: managing loyalty liability isn’t just about balance-sheet optics. It’s a matter of financial health, customer experience, and long-term strategic agility. Understanding why it grows sets the stage for how to reverse it — by turning redemption into a catalyst for revenue.

The Devaluation Risk: When Points Lose Value Over Time

In addition to the burden of unredeemed points, airlines face another pressure: point devaluation. Over the past few years, carriers have quietly altered how many miles it takes to redeem for seats or benefits, eroding consumer trust and increasing the “liability risk margin.”

Why Devaluation Matters

• When an airline increases redemption costs (for example, from 25,000 to 30,000 miles for the same seat), the effective value of outstanding points declines. That shift reduces the real “debt” these points represent, but can harm consumer confidence and loyalty.

• Devaluation can fracture the psychological “exchange contract” with members. If travelers believe their miles will be worth less over time, they’re less motivated to earn and redeem.

• It creates pricing volatility in the liability model. When airlines devalue unexpectedly, forecasting becomes harder, and the redemption behavior becomes more erratic.

Balancing Liability and Loyalty in the Face of Devaluation

Devaluation is a tempting lever — it reduces future cost obligations — but it comes at a risk:

• Transparency is critical. Sudden, unexplained devaluation breeds distrust. Airlines that communicate changes (e.g., “miles required will increase next year”) fare better.

• Offset devaluation with value-adds. If you must devalue, cushion the change with new non-air redemption options, partner perks, or bonus point campaigns.

• Use predictive analytics. Monitor redemption elasticity (i.e., how members respond to incremental increases in price ) to fine-tune devaluation thresholds.

• Protect your brand. Devaluation should not be a default tactic; it must be used sparingly and strategically, as part of a broader liability-management framework.

Strategies to Reduce Loyalty Liability

From Liability to Opportunity: The Role of Dynamic Packaging

The fastest way to reduce loyalty point liability isn’t by limiting redemptions — it’s by encouraging them. Dynamic packaging gives airlines the flexibility to do just that.

By enabling members to combine flights, hotels, car rentals, activities, and insurance into one seamless booking, airlines can turn dormant miles into meaningful travel experiences while optimizing financial outcomes. Members gain more choice and immediacy, while airlines benefit from faster redemption velocity and improved margins.

Why Non-Air Redemptions Matter

Traditional seat-based redemptions often create bottlenecks. Limited availability and fluctuating inventory leave many members unable to redeem points when they want to — a major driver of growing loyalty liabilities.

Dynamic packaging removes those constraints by opening up non-air redemption pathways such as hotels, activities, or car rentals. These options typically cost less per redeemed point than air seats yet deliver higher perceived value for the member.

Integrated redemption experiences can deliver:

• +37% increase in member redemption activity

• –28% reduction in loyalty point liability

• 42% of non-air redeemers return within six months

These results demonstrate how expanding redemption pathways not only clears liabilities but also builds deeper, recurring engagement.

Financial and Operational Advantages

Beyond improving the member experience, dynamic packaging provides measurable business impact:

• Reduced balance-sheet liability: Every redeemed point lowers deferred revenue, improving liquidity and financial ratios.

• Increased ancillary revenue: Bundled travel experiences drive 3–5× higher cart values than flight-only bookings.

• Higher retention and loyalty: Members who redeem frequently — especially for personalized, meaningful experiences — are more likely to stay engaged and spend more.

• Reduced volatility: Diversifying redemption beyond flights cushions against fluctuations in fuel costs, route capacity, or seasonality.

• Operational efficiency: AI-driven packaging and partner integrations streamline fulfillment and improve redemption forecasting.

Together, these benefits transform loyalty management from an accounting burden into a strategic growth engine — one that deepens customer loyalty, stabilizes revenue, and enhances the overall traveler experience.

Reducing Liability by Unlocking Possibility

True airline point liability reduction isn’t about limiting member choice; it’s about creating more opportunities for meaningful redemption. When travelers can easily use their points across a wide range of experiences, loyalty becomes a living, dynamic relationship rather than a dormant obligation.

The airlines leading this shift are thinking beyond seats and status tiers. They’re aligning finance, technology, and customer experience teams to balance liability management with long-term brand value, ensuring that every mile earned has a clear path to fulfillment and delight.

Ultimately, reducing loyalty liability is as much about strategic design as it is about accounting. Whether through smarter redemption structures, diversified partnerships, or personalized engagement, the goal is the same: to turn loyalty from a financial constraint into a sustainable growth engine for both airlines and their members.

Want to see how leading airlines are modernizing loyalty for long-term profitability? Explore how Switchfly helps transform airline revenue streams and loyalty strategy.