Why Did The Big 3 US Airlines Secure Financing With Their Frequent Flyer Programs?

Everyone knows airlines around the world, including in the United States, faced a big revenue shortfall in 2020. Critical to any airline is the cash made from selling flight tickets. In 2020, most people stopped flying, and the cash from ticket sales coming into airlines dried up. But airlines continued to spend cash. With revenue from ticket sales disappearing, airlines had to look for alternative sources of cash.

The big 3 US airlines borrowed around $25 billion against their frequent flyer programs last year. Photo: Don Wilson/Sea-Tac Airport

Frequent flyer programs prove resilient to the travel downturn

In the United States, funding via the CARES Act helped keep airline workers in jobs. Airlines also secured cash via borrowing against assets like unencumbered aircraft and airport slots. But the airlines also ventured into new financial territory – raising cash against their frequent flyer programs.

It wasn’t a token amount of money either. United Airlines, Delta Air Lines, and American Airlines raised around US$25 billion against their frequent flyer programs in 2020.

Between them, these three programs have around 290 million members. While not all members are active, a good portion are. Those active members earn points in the air and on the ground. The airlines sell those points to partner businesses (the best-known examples are credit cards). Frequent flyer members accrue their points and spend them on free flights and cabin upgrades.

The model works because the revenue earned from selling points to credit card companies and the like exceeds the cost of flight redemptions and upgrades.

And most frequent flyer programs have proved relatively resilient to the downturn in travel. Last year, even if most frequent flyer members weren’t flying much (and consequently not spending points), many were still earning points on the ground. It makes frequent flyer programs an attractive asset. But until last year, they’d not been used to secure large-scale financing.

Frequent flyer programs have proved resilient to the travel downturn. Photo: Don Wilson / Sea-Tac Airport

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Why did the US airlines borrow against their frequent flyer programs?

United Airlines was one of the first airlines to borrow against its frequent flyer program. In June, United raised US$5 billion secured by its MileagePlus frequent flyer program. The airline wanted to shore up its liquidity as it bunkered down to ride out the travel downturn. At the time, a statement issued by United Airlines said;

“The additional liquidity will provide even more flexibility as the airline navigates the most disruptive financial crisis in the history of aviation.”

In September, Delta Air Lines raised US$9 billion against its SkyMiles frequent flyer program. Delta said it was also raising the money to bolster its liquidity levels. Last fall, the airline was burning cash at the rate of US$27 million a day.

United Airlines raised US$5 billion against its MileagePlus program. Photo: Vincenzo Pace / Simple Flying

Just weeks ago, American Airlines decided to raise several billion dollars by borrowing against its AAdvantage frequent flyer program. Among other uses, American Airlines plans to deploy the money to pay back government loans. American’s debt levels increased 23% last year to US$41 billion at the end of 2020.

Contemporary frequent flyer programs first took off in the early 1980s. At their core, they are a marketing tool to tie passengers to a particular airline. Along the way, they’ve become prized revenue-producing assets for airlines that, as it turns out, are travel downturn-proof. It makes them very valuable assets. As one financial commentator told The Financial Times;

“These frequent flyer programs are really the golden goose of the airlines.”