US airlines have to pay price of ‘loyalty’
The US Treasury Department is in talks with some airlines about accepting their loyalty programs as collateral against government loans to help them weather the coronavirus crisis. Other assets are also in play, including some international flight routes, planes, engines, airport gates, and spare parts.
American, Delta Air Lines, and United Airlines Holdings have the largest loyalty programs.
Applications are due today for the $25 billion loan program, the second round of US funds made available to airlines.
Airlines are among the industries hardest hit by the spread of the coronavirus and related government restrictions on travel. Passenger traffic in the US has dropped to 5 percent of what it was a year earlier, and carriers have slashed flying capacity by as much as 90 percent.
The Treasury already has doled out a separate $25 billion in cash assistance and loans to help airlines pay employees. American Airlines Group Inc. CEO Doug Parker said that his carrier would seek a $4.75 billion loan from the Treasury.
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. He estimated Southwest Airlines Co., Alaska Air Group Inc., and JetBlue Airways Corp.’s mileage plans as being worth $10.6 billion, $4.4 billion and $2.1 billion, respectively.
There is concern that if travel demand doesn’t rebound, airlines will have very few unencumbered assets left, and that would restrict the availability of collateral for later financing down the road.
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. The hotel chain agreed to pre-sell $1 billion worth of points tied to its loyalty program to raise cash. Bloomberg.com