IAG's loyalty program is a bank. Its best customers are other banks.

IAG, the parent of British Airways and Iberia, would like its loyalty program to be a billion-euro business, and last week Skift published the number that explains how it gets there. More than eighty percent of IAG Loyalty's revenue does not come from anyone on a plane. It comes from outside partners buying Avios in bulk, and roughly two-thirds of that comes from financial services: seventeen co-branded credit cards and twenty-three separate deals letting banks convert their own points into Avios. The flyers are almost incidental to the revenue. The customers are the banks.

Then the detail that should reframe the whole company. IAG makes about twice the margin selling an Avios to a bank as it does selling the same Avios to one of its own airlines. Read that twice. The most profitable buyer of the airline's currency is not the airline. It is Chase or Amex or a European card issuer, paying full retail for a mile that British Airways gets at a discount and then hands to a passenger as a reward for flying. The reward, the thing the program ostensibly exists to provide, is the lowest-margin line in the business.

So what is IAG Loyalty, actually. Strip the branding off it and you are looking at a currency mint. It issues a private money called the Avios, it sells that money wholesale to a couple dozen banks at a healthy markup, and it operates a very large and very expensive redemption network, the airlines, mostly so the currency has somewhere to be spent. The plane is not the product. The plane is the cost center that gives the money its credibility. An Avios is worth something because British Airways will fly you somewhere for it, the same way a banknote is worth something because the issuer stands behind it, and IAG has quietly figured out that the issuing is where the money is.

I have made this argument before from the regulator's side. A couple of years ago, when the DOT opened its probe into the big US carriers' loyalty programs, I argued that the frequent-flyer program had stopped being a marketing department and become a regulated financial product, even though no regulation had shipped. IAG's P&L is the same fact seen from the issuer's side of the desk. It tells you what kind of financial product: a near-central-bank that prints a currency, distributes it through commercial banks, and books most of its profit at the moment of issuance. Once you see the program as the mint and the airline as the captive customer, every strategic question about the business changes shape.

The old question for an airline executive was how to fill seats. The question for whoever runs IAG Loyalty is how to defend a currency monopoly, and it is a genuinely harder problem, because a currency issuer has exactly one asset and it is trust. The seventeen card partners are paying full price for Avios on the assumption that the Avios holds its value, which means the program's worst possible move is the one airlines reflexively reach for when margins tighten: quietly devalue. Devalue a mile and you are not annoying a frequent flyer anymore. You are debasing the product your highest-margin customers, the banks, bought in bulk on the promise that you would not. That is the difference between a marketing program, which can reprice rewards whenever it likes, and a currency business, which cannot debase its way out of a bad quarter without torching the franchise.

And there is a competitor in this story that the airline framing hides completely. If IAG Loyalty is a bank, its rivals are not Lufthansa or Air France. Its rivals are the card networks and the issuers themselves, who can see exactly the same margin IAG is enjoying and have every reason to want the points ledger on their own balance sheet rather than renting access to British Airways' currency. The whole points-and-miles economy runs on an arrangement where the airline owns the currency and the banks own the customer relationship. That arrangement is lucrative for IAG only as long as the banks decide it is easier to buy Avios than to mint their own travel currency. Visa and Mastercard already run the rails. The day a major issuer concludes it would rather control the redemption it is currently buying, IAG discovers that its monopoly was a courtesy.

Which is the operator's read underneath the billion-euro headline. IAG is not pursuing a richer loyalty program. It is formalizing a currency business that grew up by accident inside an airline, and the strategic exposure has migrated with it. The risk is no longer empty seats or a fuel spike. It is a regulator who decides a currency this large needs disclosure rules, or a card network that decides it would rather be the issuer than the distributor, or a devaluation that the airline treats as a routine repricing and the market treats as a sovereign default. Price IAG as an airline and you will misjudge all three. The most valuable thing in the building is not an aircraft. It is the right to print the money everyone else has agreed to honor, and that right is worth defending the way a central bank defends a currency, which is to say carefully, and not the way an airline defends a fare sale.

—TJ