Everyone knows that airlines around the world, including the United States, faced a significant revenue shortfall in 2020. For any airline, money from the sale of airline tickets is essential. . In 2020, most people stopped flying, and cash from airline ticket sales dried up. But the airlines continued to spend money. With the income from ticket sales disappearing, airlines had to seek other sources of cash.
Loyalty programs resist travel slowdown
In the United States, funding through the CARES Act has helped keep airline workers employed. Airlines have also obtained liquidity by borrowing on assets such as unencumbered aircraft and airport slots. But airlines have also ventured into new financial territory – raising funds against their frequent flyer programs.
It was not a symbolic sum either. United Airlines, Delta Air Lines, and American Airlines raised around US $ 25 billion against their frequent flyer programs in 2020.
Together, these three programs have approximately 290 million members. While not all members are active, a good number are. These active members earn points in the air and on the ground. Airlines sell these points to partner companies (the best known examples are credit cards). Frequent Flyer members accumulate their points and spend them on free flights and cabin upgrades.
The model works because the revenue generated from selling points to credit card companies, etc., exceeds the cost of redemptions and flight upgrades.
And most loyalty programs have proven to be relatively resilient to the travel slowdown. Last year, although most Frequent Flyer Members didn’t fly a lot (and therefore spend no points), many were still earning points in the field. This makes loyalty programs an attractive asset. But until last year, they had not been used to secure large-scale financing.
Why have US airlines borrowed against their frequent flyer programs?
United Airlines was one of the first airlines to borrow as part of its frequent flyer program. In June, United raised US $ 5 billion guaranteed through its MileagePlus loyalty program. The airline wanted to consolidate its cash flow as it lowered itself to weather the travel slowdown. At the time, a statement issued by United Airlines mentionned;
“The extra liquidity will provide even more flexibility as the airline goes through the most disruptive financial crisis in aviation history.”
In September, Delta Air Lines raised US $ 9 billion against its SkyMiles Loyalty Program. Delta said it is also raising funds to boost its liquidity levels. Last fall, the airline was burning cash at the rate of US $ 27 million per day.
Just a few weeks ago, American Airlines decided to raise several billion dollars by borrowing against its frequent flyer program AAdvantage. Among other uses, American Airlines plans to deploy the money to repay government loans. Americans’ debt levels rose 23% last year to reach US $ 41 billion by the end of 2020.
Contemporary loyalty programs started in the early 1980s. Basically, they are a marketing tool to link passengers to a particular airline. Along the way, they have become popular income generating assets for airlines that ultimately are downturn proof. This makes them very valuable assets. As one financial commentator said The Financial Times;
“These frequent flyer programs are truly the airline’s golden goose.”