Ravn Rethinks Airline Miles as Cryptocurrency

Aviation commentator Sam Denby, on his YouTube channel Wendover Productions, recently observed that American Airlines, Delta, and United are only profitable because of their loyalty programs. This fact came to light when airlines applied for COVID-19 relief loans. For instance, United offered its Mileage Plus program as collateral, which required a filing with the Securities and Exchange Commission (SEC) that valued the asset at $21.9 billion. However, United’s market capitalization (total value of all shares) was $10 billion. That means the value of Mileage Plus offsets the negative value of the rest of the airline.

Delta and American are similarly situated, for similar reasons: they lose money operating flights, but they make more money from owning their loyalty programs.

Denby points out that American lost 0.43 cents for every seat mile flown in 2018, yet the company turned a profit of $1.9 billion that year. The profit was entirely thanks to $4.2 billion in revenue from its loyalty program, mostly from co-branded credit cards and other partners paying a fee to buy miles. It’s as astonishing as it is confusing.

Ravn Alaska is slightly different, McKinney says. “For the next tier down, the smaller midsize airlines, the loyalty program really is a cost center for them,” he explains. “It’s a hit to the balance sheet and to cash flow because they’re basically just a discount program. They’re not able to capitalize on it like the big guys are.”

McKinney is thinking of ways to capitalize on it, though. “We are in talks with several other airlines around the world who are planning on making FlyCoin their royalty rewards program,” he says, which would make frequent flyer miles interchangeable for all participants. Ravn also partners with the Alaska Airlines mileage program, so passengers have the option to use either.

“If we can get other partners interested in it, we can transform it from where it’s a cost center for them to where it’s either cost neutral or maybe slightly positive for them using the cryptocurrency,” he says.

Ravn has also approached management at Ted Stevens Anchorage International Airport about merchants inside the terminal accepting FlyCoin. That would make the currency more liquid, tradeable for sandwiches or massages, not just future travel.

The ultimate liquidity is converting loyalty miles directly into cash, which is why McKinney is trying to issue them on cryptocurrency exchanges under the name FLY. “It’ll work just the same as it always did, except that it actually might grow in value for them,” McKinney says. “But if they want to take possession of it—put it on a hot wallet, a cold wallet, an exchange—they can do that too. Then it has limitless utility for them.”

When FlyCoin launched last summer, travelers received $20, or $0.02 per FLY. As an introductory promotion, that’s at the high end of cash value for mileage points. (The rewards tracker website The Points Guy put the average for US airlines at $0.013.) Months later, FLY was minted on the Ethereum blockchain. A fixed supply of 100 billion FLY will be disbursed quarterly through 2026, in batches of 5 billion at a time. The company pledges to put one-tenth of the value toward efforts to “decarbonize” air travel, phasing out fossil fuels. Another one-fifth of the FLY supply is reserved for post-launch partners to reward their users.

“Eventually, as [partners] need more cryptocurrency to give as their loyalty rewards, they will purchase it from us,” McKinney explains. “But at the same time, if they purchase one FlyCoin, they get two: one they give to their customer and one they keep on their balance sheet. That’s what keeps it cost neutral. And that’s assuming the value of FlyCoin never increases; once the value starts increasing, that’s where it becomes a profit center for them, a net positive.”

Ravn Alaska Is Not a Bank Now

However, the bank analogy is just that: an analogy. McKinney points out that Ravn and Northern Pacific’s parent company, FLOAT Alaska, remains a transport provider first, and even though FLOAT owns FlyCoin, it’s not a financial instrument.

“We’ve been very careful and we’ve really taken a hard look at all the SEC rules, so what we’re not doing is creating a security,” McKinney says. “This is definitely a utility token. It falls well within the four corners of those regulations. Eventually, once it’s traded—someone has earned it, and they might want to trade it—then you can buy it on the exchanges, but we won’t be selling it directly. It’s not like we’re selling something directly to someone who didn’t earn it any other way, either through one of our partners or flying on us.”

From an airline’s perspective, loyalty points are little different than, say, a discounted price that attracts customers into a store. “Not paying full price” isn’t the same as a material good, even though the difference from regular price has positive utility for the customer. Merchants have long relied on loss leaders (products sold with minimal profit margins or, in rare cases, below cost) to drive sales of more profitable items. Long-haul airlines may not have intended for transport to become a loss leader, but once their flights became unprofitable, they fortunately had loyalty programs as a hedge.

McKinney isn’t ready for Ravn or Northern Pacific to lose money on flights just yet. Rather, he’s pitching FlyCoin as an innovation with limitless possibilities. Over a century ago, when credit cards were new, people had to get used to the idea. Likewise, McKinney compares attitudes toward cryptocurrency to the gradual acceptance of online commerce twenty-five years ago.

“Anything that’s new can be scary to some people. As the internet came along, that was scary to some people,” he says. “It’s understandable that some people would be cautious and apprehensive about something as new as digital currency. We fully get that, but we also believe if they’re gonna get this for free anyway—because that’s the loyalty they’ve earned by flying on Northern Pacific or Ravn—then they will get some excitement out of it.”

Whether other vendors will accept FLY for transactions is still under discussion. Today, holders of the currency can only use it to pay for future flights on Ravn. The initial 210,805 FLY in circulation have an exchange rate of $1.06 as cryptocurrency—except, of course, they cannot be exchanged at the moment.

McKinney expects FLY to become tradeable by late spring or early summer, after overcoming regulatory hurdles. At that point, the Ravn family would no longer be the only entity that can convert the currency to cash. That would set FlyCoin apart from other airlines and their dependence on loyalty programs: as Denby says, “Airlines have nearly complete, unchecked control over a currency [which] they are the only entity that can convert it to cash. That is the key to their power.”

Ravn Alaska and, soon, Northern Pacific are competing in the game of moving people from place to place. McKinney has no incentive to lose at that game, but owning a cryptocurrency gives his team an extra edge. “Frequent flyer programs are genius financial instruments,” Denby concludes, “because it’s nearly impossible for airlines to lose.”