Loyalty Programs – As a source of cash United Airlines CEO Scott Kirby spoke at the Bernstein Strategic Decisions Conference and spoke confidently about shedding costs and preparing for a rebound in air travel. He offered that bankruptcy isn’t a strategic option and that MileagePlus is going to be a great source of cash – whether by selling a ton of miles or borrowing against the program.
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Can break even with half of a recovery. Kirby believes United will break even again once “50% of demand returns.” One simple and rough way to track this would be to look at
when TSA starts screening over a million passengers a day again. That doesn’t mean load factors in the 40s, it means half the passengers will squeeze onto far fewer flights than before.
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Expect MileagePlus To Lever Up. Though they failed in a recent $2.2 billion debt raise, he argues they have plenty of assets left to raise capital against and that’s especially true of MileagePlus. He offered,
“more to come, anything is on the table for us, the reality is our loyalty program is not only incredibly valuable it’s one of the best pieces of collateral we have at united airlines...United is going to have a valuable loyalty program that spins off a steady stream of cash, there is significant capacity to raise capital against that. The form and structure to be announced…I’m confident we can find ways to do it.” Excerpts from a Bloomberg article:
American, Delta Air Lines Inc. and United Airlines Holdings Inc. have the largest loyalty programs. Airlines disclose very few financial details of their loyalty programs, including their primary source of revenue -- selling miles to banks that then use them to reward customer credit card use. Delta last year received total cash proceeds of $4.2 billion from such sales, including $4 billion from American Express, its card issuer, according to Joe DeNardi, a Stifel analyst.
DeNardi pegged the Delta, United and American loyalty program valuations at $21.6 billion, $19.5 billion and $12.5 billion respectively, according to an April 1 research note.
Airlines already have tapped banks for billions in new debt. They have parked thousands of aircraft, consolidated facilities, frozen hiring and delayed capital projects. At least 87,000 employees have taken leaves, early retirement or reduced work hours at the three largest carriers alone.
The value of airline loyalty programs has swelled as firms including American Express Co. and JPMorgan Chase & Co. agreed to credit-card deals that came with the promise of the lenders purchasing billions of dollars in miles each year.
Airlines have yet to execute deals similar to the one Hilton Worldwide Holdings Inc. reached with AmEx on Thursday. The hotel chain agreed to pre-sell $1 billion worth of points tied to its loyalty program to raise cash.
Dinardi has argued in recent years that U.S. airlines should spin off a minority of their loyalty program as a way of increasing the overall valuation of the airlines.