Airline loyalty programs are their most valuable collateral

Major airlines are really two separate businesses that operate under one brand. The first business is pretty straightforward: consumers want to travel, and airlines sell plane tickets to meet that need. The economics of this business, however, are tough. Air travel is a commoditized service with little room for differentiation, especially on domestic flights, so it’s tough for airlines to flex their pricing power, and airlines have to account for variable demand, fluctuating fuel costs, and high pilot wages too.

The second business is much different: airlines also sell rewards points to banks for real money, often earning 1 to 1.5 cents per mile sold. The banks then reward credit-card users with these points as incentives for high spending. While rewards flights do compete for the same seats

This business has much better margins for airlines than their flight businesses. While airline points do compete with customer dollars for flight seats, the points cost nothing for airlines to generate, and the airlines get paid by the banks regardless of whether or not the customers use the miles for flights.

These rewards programs are quite valuable: last September, The Wall Street Journal reported than almost 1% of the entire US GDP was spent on Delta’s American Express cards, and during the pandemic, four airlines: American, United, Spirit, and Delta, pledged their loyalty programs as collateral to help them raise new debt. At the time, the airlines’ rewards programs were appraised at higher valuations than the airline’s market capitalizations: in 2020, United’s MileagePlus was valued at close to $22 billion according to bond documents, while the airline’s total equity value was $10.6 billion.

Earlier this week, Bloomberg reported that JetBlue wants to tap bond markets to refinance its debt, and it might pledge its loyalty program as collateral too:

JetBlue Airways Corp. has held talks with lenders for a potential $2.75 billion debt offering that would be backed by its loyalty program, making it the latest carrier to undertake such a deal.

The company is working with banks including Barclays Plc and Goldman Sachs Group Inc. on the transaction, which would be a mix of bonds and leveraged loans to refinance debt, according to people with knowledge of the matter who asked not to be identified as the details are private. Conversations are preliminary and details of the financing may change, they added.

For context, JetBlue’s market capitalization is ~$2 billion, but as of June 30 2024, it owed $5.4 billion in outstanding debt, with around $500 million maturing in 2024 and 2025, and an additional $1.1 billion in 2026. The company is looking to quickly refinance its 2026 debt, which includes a $750 million convertible note.

I understand that airlines’ rewards programs are valuable (and, frankly, higher margin businesses than the airlines themselves), but I was curious about what would happen if an airline were to go under. For example, if JetBlue raised $2.75 billion, with its loyalty program as collateral, and it went bankrupt, would that loyalty program still be worth anything? Its value is totally dependent on the airline itself: banks pay the airline for points so they can reward customers with flights. No airline means no flights, so wouldn’t the rewards program/collateral be worthless if an airline went bust? Not necessarily!

Historically, when major carriers have gone into bankruptcy and reorganization, they continued to honor frequent-flyer miles. This makes sense: bankruptcy doesn’t necessarily mean the airline stops operations; it just means that creditors take over, and the equity value is likely marked to zero. Regardless of the airline’s ownership structure, as long as operations continue, its loyalty program is still a valuable asset for banks.

Even in instances where large carriers have ceased operations, their frequent flyer miles have typically been acquired by another large carrier. For example, when Pan Am went bust in 1991, customers’ miles were transferred to Delta.

While airlines themselves might be volatile businesses, their loyalty programs have proven to be quite solid collateral.