- Airlines are scrambling to raise cash amid the coronavirus crisis, mortgaging airplanes, parts, and other equipment to secure billions of dollars in loans.
- However, Delta, American, United, and other major airlines can also use their frequent-flyer programs to raise billions more.
- Through advance sales of frequent-flyer miles to the banks that issue their cobranded credit cards, airlines could raise the cash, while banks could get steep discounts on the miles they give to customers as rewards for spending.
- A new report suggests United is exploring the option, while a spokesperson for American told Business Insider that it wasn’t pursuing this “at this time.” A Delta spokesperson declined to comment.
- Visit Business Insider’s homepage for more stories.
As airlines continue to tighten their belts during the coronavirus crisis, a new report indicates that they’re prepared to try and find a lifeline from some of their most valuable assets: their frequent-flyer programs.
Airlines make money by selling frequent-flyer miles to their credit-card partners, which issue them to cardholders as spending rewards.
For example, American Express, which issues cobranded credit cards with Delta, purchases the airline’s miles, and issues them to customers as a reward for spending, typically at a rate of 1-2 miles per dollar spent on the relevant credit card.
According to The Wall Street Journal, both Delta Air Lines and United Airlines have approached their credit-card partners about purchasing large stocks of miles in advance (United’s cards are issued by JPMorgan Chase).
A spokesperson for American Airlines told Business Insider that it was not pursuing such a deal “at this time.” It was not clear whether Southwest, or JetBlue had approached their partners about a similar arrangement. American’s cards are issued by both Citi and Barclays, Southwest’s by JPMorgan Chase, and JetBlue’s by Barclays. There are no deals yet, according to The Journal, and it was not clear what stage the conversations were in.
The move has the potential to unlock significant amounts of money for cash-starved airlines that have seen demand drop to near-nil as calls for social distancing and various shutdowns make air travel unfeasible for the majority of people.
There’s also precedent for such a pre-sale, which helped airlines after both the terrorist attacks of September 11, 2001, and the 2008 global financial crisis.
The federal government authorized up to $29 billion in loans for the airline industry, and an additional $29 billion in payroll grants as part of the $2 trillion coronavirus bailout, but the funds are unlikely to carry the airlines for long, especially once the money is split between the various mainline and regional carriers.
Additionally, accepting funds under the bailout comes with certain strings attached. Those conditions, which include surrendering some equity to the US Treasury Department, incentivizes airlines to take as little of the bailout aid as possible.
Despite the hesitancy, airlines may not have much of a choice, as they continue to burn cash and draw credit from all available sources.
Delta, for instance, put up some of its planes as collateral for a $2.6 billion credit line from JPMorgan and other banks on March 20, The Wall Street Journal reported, immediately drawing down $2.3 billion. American secured a $1 billion loan from Citigroup and other banks, and United raised $2 billion in early March, followed by another $500 million, both secured by airplanes and parts.
United also secured an additional $250 million loan from Bank of America last week, according to SEC filings.
As the airlines continue seeking credit, they risk running out of collateral, or being forced to turn to lower-value items like ground equipment.
While pre-selling miles to their credit-card partners could unlock cash, it’s likely to serve as a close-to-last resort for airlines.
Selling miles is lucrative for the airlines — Delta earned $4 billion from mileage sales to American Express in 2019, and previously said it expected its revenue from the partnership to reach $7 billion by 2023 — and for any kind of advance, bulk sales deal, the airlines would likely have to sell them at a discount rate.
That would hurt potential future revenue for the airlines, which largely expect business to return in 2021 and 2022 — assuming they can secure enough funding to last until then.
“We view this as a very expensive source of liquidity and it would pain us to see airlines tap it as it carries an earnings burden, a negotiating leverage burden, and a valuation burden,” Stifel airline analyst Joseph DeNardi wrote in an April 1 research note. ” If airlines start seriously talking about mileage pre-sales, we’ll know things are particularly dire.”
Of course, it’s also in the banks’ interest to arrange a deal. The cash could help the airlines, which are responsible for leveraging their brands to drive customers to the card issuers. Delta’s credit cards account for 22% of AmEx balances worldwide, according to Stifel, and 8% of AmEx’s total global business.
“Delta Air Lines is now, effectively, too big to fail for AmEx.”
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