Are airlines worth less than their loyalty programs?

Paradoxically, airline loyalty programs played a key role in their survival at a time when almost nobody could fly. The reason? It’s a business so big that its estimated value is greater than that of the airlines that set it up.

In this article:

Loyalty programs: a major source of revenue for airlines

If you’re thinking that for an airline, a loyalty program is a burden and costs money, you’ll be surprised by the following.

So, yes, in a way, frequent flyer programs are a burden, because in accounting terms they represent a debt to passengers, and this debt can weigh heavily on an airline’s balance sheet. Or rather on the balance sheet of the loyalty program, since they are sometimes businesses independent of the airlines that operate them. As we shall see, this allows for a certain financial creativity.

Although Flying Blue is not currently a subsidiary of Air France-KLM…

– Miles&More is an independent business and a 100% subsidiary of Lufthansa.

– Skymiles is a subsidiary of Delta (located in the Cayman Islands…) since 2020 (and the date is not innocent) which delegates to Delta the operation of the loyalty program…but keeps the finances.

– MileagePlus is a subsidiary of United.

– Skywards is a subsidiary of Emirates

– Eurobonus is a subsidiary of SAS

– British Airways Executive Plus and Iberia Plus belong to Avios Group, an IAG subsidiary.

But a loyalty program is also a source of revenue! The miles you earn are valuable because they can be used to buy tickets, upgrades and much more. Miles and points are a currency that the program issues and that others buy to give to you. These “others” are the airline, even if this means taking money from the right pocket and putting it in the left, but also, and above all, financial organizations such as Visa, American Express etc.

When the holder of a payment card issued in partnership between such an organization and an airline (or “co-branded” credit card) makes his daily purchases with his card, he earns miles. When the organization in question wants to make a gift or promotional offer, it offers miles.

But these miles don’t just fall from the sky. The organization buys them from the loyalty program. If a customer spends €1,000 each month with their Amex Air France, Amex Delta or Citi AAdvantage at a rate of €1 = 1 mile, then Amex and Citi will buy €1,000 worth of miles each month from Flying Blue, Skymiles or AAdvantage. Over the “lifetime” of a customer, on the scale of a loyalty program, this represents colossal amounts of money.

For the first 9 months of 2020, for example, if we look at Skymiles’ revenues ($2.9 billion), $731 million came from passengers and $2.17 billion from “other sources”, the main source being American Express!

A financial crutch during the crisis

We’ve already explained this in the past, so we won’t dwell on it any further, but it’s the reason why loyalty programs have served as a crutch for airlines during the crisis.

While the airplanes were grounded, customers continued to spend with their cards, so the loyalty program generated cash. The airlines have been running promotions so that customers can buy discount miles to use after flights are back in operation. This enabled them to make a significant amount of money.

In the long run, this creates a substantial debt for them, which will have to be paid off either when passengers use their miles to travel, or by devaluing the frequent flyer program, but that’s another story.

But for the time being, loyalty programs have been a real lifeline for airlines.

And that’s what inspired them to go further…

The loyalty program, airline’s best collateral

Before going any further, let’s make one thing clear: there’s a huge gap between the way loyalty programs operate in Europe (and particularly in France) and on the other side of the Atlantic. The very way in which credit cards work means that this business is less profitable for loyalty programs and financial organizations, which means that they have less to offer the customer. customers are not attracted by co-branded credit cardsand therefore supply is low. A system that is far less lucrative for loyalty programs, less generous for customers, but which we also find far more protective of the consumer. You can’t have it both ways.

This is why Air France KLM has no vital interest today in making Flying Blue a subsidiary, even if from the point of view of a certain accounting orthodoxy this would seem healthier to us, but that’s another story.

Let’s get back to our airlines, whose loyalty programs make their living from a juicy business with financial institutions, mainly American but not exclusively.

The longer the crisis lasted, the more they had to cope with liquidity problems, especially as aid in the USA was not as massive and fast as in Europe. So they had to raise money on the markets.

It’s never easy to go out and borrow money when you’re in a disaster-stricken sector, in the middle of a crisis and with no visibility for the future. While some airlines were able to finance themselves on the markets during the crisis, this was not the case for all of them. Most airlines are valued at less than the value of their aircraft, even outside the crisis, and that’s saying something.

When you borrow money, in one way or another, you have to give guarantees that you’ll be able to pay it back. Given the state of their core business, the airlines had no assets that could constitute acceptable collateral for the markets.

None? Except their loyalty program!

Loyalty programs are worth more than airlines

Remember what we said above! Over the lifetime of a customer, the sums paid by Amex, Visa, Citi and others to loyalty programs are considerable. On the other hand, if we don’t know when the airline will resume operations, people will continue to use their credit cards, earning miles which the card issuers will then have to buy.

Consequently, the loyalty program and the billions of euros it is expected to generate in a quasi-mathematical way over future years are a much more credible asset than mortgaging aircraft! They have stable, predictable cash flows, with little exposure to market cycles, and generate high, stable EBITDA (earnings before tax). Just the opposite of an airline!

Airlines have used loyalty programs as collateral to raise money on the markets. Better still, in some cases it’s even the loyalty program that has issued securities on the markets!

AAdvantage, the American Airlines frequent flyer program, is valued at $24 billion, while American Airlines as an airline is valued at just $6.5 billion. Remember that American Airlines once lost money by flying planes, but ended up making money thanks solely to the business of its frequent flyer program! MileagePlus, United’s program, is valued at 22 billion compared with 10 billion for the airline.

According to experts, the loyalty programs of the 4 US majors would represent a cumulative value of $77 billion if they were independent businesses.

One airline even went to the end of the logic: Air Canada! The Canadian airline spun off its Aeroplan program in 2002 and gradually sold its shares. By 2008 Aeroplan had become a completely independent business from Air Canada. Finally, it recently bought the program back.

In short, it’s less risky for investors to lend to a loyalty program than to an airline.

The financialization of loyalty programs

Loyalty programs have thus become real vehicles for borrowing on the markets.

United raised $6.8 billion through MileagePlus (read also here). In the same period, Delta Airlines raised 9 billion and American Airlines 10 billion.

Now you know why Delta created Skymiles PI Ltd in the Cayman Islands in the rush in 2020!

By way of comparison, at the same time the Air France rescue plan was worth 7 billion euros.

Are we heading for a bubble and a crash?

This is a very creative use of the loyalty program, but it’s nothing to worry about. Perhaps the term “CDO” for “Collateral Debt Obligation” rings a bell? Remember the subprime crisis? Well, you get it.

So the question is whether the assets underpinning these debts are toxic or not. In other words, what is valued in a loyalty program are its future revenues, which the markets agree are highly predictable. So be it.

What if people gave up their co-branded credit cards?

What if Amex dropped one or more programs? It would be replaced by a competitor.

What if loyalty programs were banned for environmental reasons?

What if?

We assume that all this has been assessed and taken into account. We’ll see.

When loyalty programs will operate airlines

One day, the world could turn upside down. What if, in the future, loyalty programs owned one or more airlines? Financially, it makes sense.

Air Canada bought Aeroplan because the agreement guaranteeing Aeroplan preferential access to seats on Air Canada flights was expiring, and without it Aeroplan was not viable. But could it ever be the program that buys an airline?

We’ve seen more surprising things.

As a customer, you’re never a winner with loyalty programs. And as an investor?

Image : Plateresca/istockphoto

Bertrand Duperrin
Bertrand Duperrin
Compulsive traveler, present in the French #avgeek community since the late 2000s and passionate about (long) travel since his youth, Bertrand Duperrin co-founded Travel Guys with Olivier Delestre in March 2015.

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