Last week, Spirit Airlines (SAVE 1.30%) unveiled long-expected changes to its Free Spirit loyalty program and co-branded credit cards. The redesigned offerings -- set to launch in early 2021 -- are designed to increase customer engagement. If Spirit succeeds, rising cash flow from its loyalty and credit card programs could become an important driver of long-term earnings growth for Spirit Airlines. Let's take a look.

An outdated loyalty program

Spirit Airlines executives have been talking about the need to update the carrier's loyalty and credit card programs for about two years. During Spirit's Q3 2018 earnings call, chief commercial officer Matt Klein noted that the credit card was underperforming on a year-over-year basis despite the airline's growth (which should make a co-branded credit card more attractive).

This stands in stark contrast to larger U.S. airlines, which have profited from rapid growth in credit card revenue over the past decade. For example, Delta Air Lines reported that revenue from its partnership with American Express reached $4.1 billion last year, up from $1.2 billion in 2009.

Klein noted that Spirit's loyalty program and credit card offerings were developed when the airline was a lot smaller and had a different business model. They don't work as well for the company and its customers now. He made similar comments on Spirit's next earnings call (in February 2019), calling the current loyalty and credit card programs "dated" and "not reflective of the ULCC [ultra-low cost carrier] model." At the time, Klein said Spirit would implement changes to the loyalty program later in the year.

Spirit rethinks loyalty

It took a year longer than management had previously promised, but Spirit Airlines finally lifted the curtain on its new loyalty and credit card programs last week. The new Free Spirit program goes into effect on Jan. 21, 2021.

A yellow Spirit Airlines jet parked at an airport gate

Image source: Spirit Airlines.

One of the most important (and customer-friendly) changes is that points won't expire unless you go more than a year without earning or redeeming points. By contrast, miles expire after 90 days of inactivity under the current program. There are various ways to earn miles other than flying (such as shopping through an online portal, signing up for marketing emails, or using the co-branded credit card), but the rapid expiration of Free Spirit miles made them useless to many occasional customers.

The new Free Spirit program also awards points based on spending rather than miles flown. Spirit will award double miles for its ancillary offerings like seats and bags. It will also have elite loyalty tiers for the first time, which can be reached by spending enough money with Spirit Airlines or on the co-branded credit card. Silver members earn points at a higher rate and get perks like free early boarding and expedited security, free seat selection up to 24 hours before departure, and free same-day standby. Gold members earn points at an even higher rate and get additional perks including a free carry-on bag and free checked bag with every flight, free seat selection at the time of booking, a one-time free flight change, and a free inflight beverage and snack.

In conjunction with rolling out the new loyalty program, Spirit Airlines is updating its credit card offerings. Key changes include early boarding, the ability to earn elite status based on spending, and a $100 annual companion voucher for eligible cardholders. Cardholders will also be able to pool their points with up to eight friends and family members to earn free flights faster. (Silver and Gold elites will be allowed to serve as "pilots" for points pools, too.)

Why it matters

The updates to Spirit Airlines' loyalty and credit card programs should encourage customers to become more loyal and make the credit card more attractive. Most notably, the ability to make progress toward elite status (which unlocks valuable perks and discounts) by spending money on the credit card will likely drive growth in sign-ups and usage over time.

The stakes are high. In conjunction with a debt offering, Spirit revealed in late August that it received $49.4 million of cash from its co-branded credit card agreements last year. It expects to more than double that figure to over $100 million by 2024, thanks to the program enhancements revealed last week, along with improved terms from credit card partner Bank of America.

Over the long term, the upside from having better loyalty and credit card programs is even bigger. A more engaging loyalty program should drive more repeat business. Frequent customers get more value out of having elite status, making them more likely to sign up for and use the credit card to help them get there. This drives growth in high-margin recurring revenue. Thus, the upcoming loyalty program and credit card changes will be critical as Spirit tries to recover from the pandemic and grow its earnings to new highs.