United Air’s Potential Sale of Frequent-Flyer Stake May Spur a Gold Rush
United Air’s Potential Sale of Frequent-Flyer Stake May Spur a Gold Rush
(Bloomberg) -- As United Airlines Holdings Inc. considers selling part of its MileagePlus program, other carriers are likely to consider a similar move to open a significant -- if risky -- source of capital in uncertain times.
Frequent-flyer programs are among the most lucrative assets at major airlines, typically bringing in as much profit as passenger tickets.
But with travel junkies hungry for miles, carriers generally have resisted selling their loyalty plans, preferring to keep the stable cash flows and steady profits they offer. The few airlines that have offloaded the programs regretted the decisions almost immediately.
In-house loyalty plans have provided critical financial lifelines during periods of financial duress, allowing carriers to presell miles to raise cash and serve as collateral. United, American Airlines Group Inc. and Delta Air Lines Inc. all raised money in 2020 to survive the pandemic by issuing bonds backed by their programs.
The rationale against outright divestitures has been that these programs are innately tied to the underlying product -- air travel -- and separating them doesn’t make business sense.
United is shopping only a small stake, 15% or less, to potential investors, including private equity firms, Bloomberg News reported Wednesday, citing people familiar with the matter. The talks are in an early stage and it’s possible no deal will happen, the people said.
United declined to comment on the topic, as did representatives at American and Delta.
A potential sale may not be an “abrupt departure,” Gary Leff, a blogger and consultant on travel loyalty programs, said by email. United has been a pioneer in monetizing its loyalty plan, and such a move could unlock value while keeping stability for customers since the airline would retain a majority stake.
“They did more than anyone to become a ‘cash first’ program, tying elite status directly to ticket spend and selling debt backed by the program in a way that competitors copied,” he said.
United’s rivals will look closely at its strategy, said Alex Miller, founder and CEO of the UpgradedPoints travel blog.
“American and Delta will certainly consider a sale of their programs,” he said. “It’s an easy way to raise cash on the backs of their programs during a time when airlines are trying to recover from a global pandemic.”
U.S. airline loyalty programs date to May 1981 when American and United debuted new plans within days of each other. The programs have grown immensely in the years since, both in membership and in their financial importance to airline balance sheets.
Large banks such as JPMorgan Chase & Co., American Express Co. and Bank of America Corp. pay billions of dollars to buy miles they award customers who use co-branded credit cards that the banks and carriers issue. These cash flows offer airlines a financial hedge during recessions and other downturns that reduce travel and consumer spending.
A key reason for United’s potential sale is to enhance the program’s financial performance by using the new partner’s expertise to help better monetize data from the business, according to one person familiar with the company’s thinking. A sale would bolster the company’s balance sheet without the issuance of new debt or equity.
The Chicago-based company valued MileagePlus -- which has more than 100 million members -- at nearly $22 billion in 2020 when United tapped the program to backstop $6.8 billion in bonds and loans. In 2019, MileagePlus had earnings of nearly $2 billion on sales of $5.3 billion, the airline said as part of its pitch to bond investors.
Uncertain Value
Properly valuing carriers and their assets can be difficult amid the Covid-19 pandemic, with corporate and international travel still weak relative to 2019. Analysts are expecting a rebound for both over the next two years but the pandemic’s course remains uncertain. Since the beginning of 2020, just before the start of lockdowns, a Standard & Poor’s index of airline stocks has tumbled 33% as the broader S&P 500 has climbed 40%.
United is weighing a bet that has backfired for several airlines already. When a loyalty program moves to a new owner, the interests of the external company -- often centered on growth and profitability -- can clash with those of the carrier, which is weighing factors such as costs to keep frequent flyers happy.
Air Canada’s parent company spun off its Aeroplan program in two phases from 2005 to 2008, raising almost C$600 million (about $470 million). The airline declined to renew its contract with the plan’s operator in 2017 and ultimately repurchased the program.
“Air Canada and Aeroplan show what can happen with a complete spinoff, where interests of separate companies aren’t aligned and the airline can’t stay competitive in its loyalty offerings,” Leff said.
The programs need to remain tied to airlines’ revenue management to help maximize profits, said Savanthi Syth, an analyst at Raymond James & Associates. She pointed to Air Canada, along with Latam Airlines Group and Brazil’s Gol Linhas Aereas Inteligentes SA, which each sold some or all of their plans to raise cash, only to reverse course.
“Every program that has been sold or spun out, most of them are now back inside the airline or there are airlines that are desperately trying to bring them back in,” Syth said.
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