The economics of Priority Pass and will we see a flood of new Priority Pass lounges this year?
Priority Pass is a runaway success - in a way, it is a new credit card. Consumers can get an unlimited number of Priority Pass visits with many consumer credit cards all over the world.US banks are the most generous; I myself have three of these cards and have been enjoying many lounge visits at my favorite Priority Pass loungesand with extended family members at times.
Chase is rumored to announce a limitation of two guests per cardholder per visit (American Express does that with the membership that comes attached to their Platinum cards already).
Priority Pass is also adding a number of restaurants (the craze started in Miami) that allow cardholders to consumeup to $30 per guest. I was very happy with the Corona Beach restaurants and the $90 I received as a cardholder (with two guests).
Given how successful the program is, let's dive deeper into the economics of it.
The Economics of Priority Pass
1: $24 per guest per visit paid to the lounge.
Priority Pass pays about $24 per guest to a lounge. This number has been semi-public for some time.
2: $75-$125 a bank pays for a yearly membership per guest.
We do not know how much Chase pays to Priority Pass for the unlimited membership that comes attached with the Chase Sapphire Preferred.The word on the street says that Chase pays a fee of $75-$125 per year per member, irrespective of member visits.
3: What is the average number of visits per guest per year to Priority Pass lounges?
I could not find an official number but the rumor is about 5 per year per cardholder - on average.
4: Priority Pass, Lounge Key, and Lounge Club are all one big family.
Priority Pass, Lounge Key, and Lounge Club are all brands of the Collinson Group.
5: How old is Priority Pass?
Priority Pass is already 25 years old!
6: How many visitors does a lounge typically get?
The only Priority Pass lounge at Phoenix Airport recently revealed that it gets almost 8,000 visitors a month.
However, it is not clear how many visitors are coming through the Priority Pass program or are airlines' premium passengers. Let's assume for a moment that all the 8,000 visitors a month come via the Priority Pass program (it also helps marketing a lounge that it has such a nice app). It comes out to $192,000 billed to Priority Pass (quite a large check that hopefully does not bounce).
7: How much does it cost to run a lounge?
Of course, that depends heavily on what kind of lounge you are running.Let's assume you are open 16 hours a day and have three full-time staff (each for eight hours). For a whole month, you are looking at $15 * 8 hours * 6 shifts * 30 days = $21,600.
You will also need to rent a space that will cost you about $10 per square foot. Of course, it varies where you are and how nice that space is. Budget $25,000-$45,000 a month.
I'd budget another $30,000 for food (yes, you will get airline miles for buying it) per month. This can vary greatly on what kind of alcohol youprovide.
If you plan to provide hot food, you need to either buy (expensive) catering or get your own kitchen (easily $200k+ to get started).
8: When does a lounge break even?
Again, that depends on their business plan but generally, I'd expect anyone attracting more than 100 paying lounge guests per day to break even; below that it is rough, above that the sky is the limit.
Lounges can easily reach a net margin of 50% BUT relying on a single customer like Priority pass is a bad business strategy.
9: Where will all these lounges pop up?
Desirable space at most US airports is in short supply. When airports were built it was all about gates, restaurants and (maybe) coffee shops. Space for lounges was usually an afterthought.So there isn't a lot of space and if one opens up, it usually starts a bidding war that American Express Centurion lounges usually win (they don't need to make money, they burn it).
Outside of the US, there are far fewer cardholders (on average) but costs are also much lower (for rent, food, and labor).
Industry experts predict a big increase in lounges in China, Russia and Africa and more independent lounges in new airports that have new space available (often via new terminals) like Hong Kong, Dubai and Singapore.
10: Are airport restaurants the new lounges?
Priority Pass has been experimenting with airport restaurants in airports like Sydney, Australia for some time. Denver, Phoenix and Miami were next and now Miami has three airport restaurants accessible via Priority Pass (nothing stops you from visiting all of them).
11: Is it a fad?
Clearly, a $24 flat payout (without taking into account lounge quality) seems extravagant in many countries.
The verdict is also still out if restaurants will make money long-term from Priority Pass and if Priority Pass is willing to keep extending their product to even more restaurants.