US-based airlines American, Delta, and United, have all issued debt backed by their respective frequent flyer programs to the tune of $6B or more each.
Hilton and Marriott have presold Honors and Bonvoy points in advance to credit card issuers (American Express and Chase).
Financial Times ran an interesting story this week about the valuation of these programs and how profitable they are.
Airlines have tended not to disclose the profitability of frequent flyer programs but were forced to do so during the debt issuance process.
You can access the article here, or you can do a Google search with the title “US airlines reveal profitability of frequent flyer programmes” that should open the essay inside the paywall.
Here’s an excerpt from the Financial Times:
Valuations recently put on the loyalty schemes have exceeded the market capitalisations for the airlines themselves — implying that investors value the business of flying passengers at less than zero.
MileagePlus was valued at just under $22bn in bond documents, while United’s stock market capitalisation is just $10.6bn. Appraisers pegged American Airlines’ programme at a valuation between $18bn and $30bn, versus its equity market cap of less than $7bn.
Delta Air Lines did not offer a valuation but in January, On Point Loyalty, a consultancy specialising in frequent flyer programmes, independently valued SkyMiles at almost $26bn, making it the most valuable programme of its kind in the world. Delta’s market cap totals $20.7bn.
Strong financial figures underpin the hefty valuations. Pro forma financials for Delta’s SkyMiles show gross revenue of $5.7bn and net income of $2.5bn in 2019, for a profit margin of 42 per cent. At United the loyalty programme earned $1.8bn before interest, taxes, depreciation and amortisation last year, for a 34 per cent profit margin. It was responsible for roughly a quarter of the Chicago-based company’s profits.
The problem is, how do you value the frequent flyer program that is inherently intertwined with the airline itself? You can have a book (accounting) value of a mile and then book the excess as a profit when sold to partners.
But the key is, what value do you use when they are redeemed for airline tickets? It is easy to value miles and points when used towards merchandise on second/third-party partners because the airline pays cash for the products sent to members.
How much does the airline “invoice” the frequent flier program when a business class seat between London and New York is redeemed using miles? With some airlines, close to 10% of the seats are award redemptions that are surely displacing paid trips.
Financial Times continues:
Not everyone is convinced the valuations put on the frequent flyer schemes stack up, however. Some appear “surprisingly high”, said S&P Global analyst Philip Baggaley, who pointed out loyalty programmes only generate profits when “there is an airline, with its planes and other assets, flying to provide rewards to those who want to use their miles”.
You can assign a value of $26B to SkyMiles, but what would be the value of the program if Delta ceases to exist and you could only redeem your miles to merchandise and not turn them to aspirational trips? Why collecting SkyMiles then would be any better than using a cashback credit card?
I, for a moment, don’t believe in any of these made-up valuations where the program’s value is entirely dependent on how much the airline charges for award tickets (miles) issued.
It is easy to show that a frequent flyer program is hugely profitable by charging less than market rates for tickets issued using miles. You could argue that it is in the airlines’ interest to show the high profitability of their programs (can be used as collateral in the time of troubles).
Also, it would be great if one of these big airlines would collapse, and we could then see what is the actual value of standalone frequent “flyer” program without an airline backing it up. A fraction of the valuations shown above.
You could argue that a modern airline is not worth much without a frequent flyer program, while the program itself is not worth much either without an airline.
Loyalty schemes have become an integral part of running any hotel or airline business.
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