Who’s got airlines’ crown jewels?

When the coronavirus pandemic brought travel to a standstill, airlines turned to every financing source they could find — even their previously untouched frequent-flier programs. Whether this is a positive development for the industry depends on who you ask.
United Airlines, Delta Air and American Airlines Group have raised more than $25 billion through debt deals backed by their traveller loyalty programs. American’s $10 billion offering, a combination of bonds and loans, was the largest ever for an airline and reportedly drew $45 billion in orders from yield-hungry investors.
The carrier used the proceeds to repay a pandemic loan from the US Treasury that carried more onerous terms. Spirit Airlines Inc and Hawaiian Holdings Inc raised an additional $2.05 billion backed in part by their loyalty programs.
It’s all the more incredible because no airline had tried to monetise its frequent-flier program in this fashion until the pandemic. On the face of it, this looks like an incredible feat of Wall Street ingenuity. United pioneered the financing vehicle with the help of Goldman Sachs Group Inc after a separate earlier debt deal backed by aging aircraft had to be scrapped because of investor concerns about the value of that collateral amid a potential glut of retired jets. Frequent-flier programs, on the other hand, throw off a lot of cash and in theory tend to be less volatile than airlines’ traditional ticket revenue or the value of the underlying fleet.
All it takes is a quick glance at the yields on these bonds to see that investors think highly of loyalty programs. United’s MileagePlus debt priced in June to yield 7%, compared with the 11% yield that was floated in unofficial price discussions a month earlier, just as Warren Buffett said Berkshire Hathaway Inc exited its stakes in a handful of airlines. In September, Delta issued eight-year debt that yielded just 4.75%. American’s eight-year bonds this month priced at 5.75%, which was due mostly to the recent climb in benchmark US yields. The spread to Treasuries was just 20 basis points wider than Delta’s, even though Moody’s Investors Service rated American’s securities four steps lower.
Mileage credit redemptions declined by two-thirds at American in 2020, in line with the drop in overall passenger revenue, according to the company’s annual filing. But revenue associated with the marketing component of the frequent-flier program — defined as the use of intellectual property, including the American brand, advertising and access to the loyalty member list — fell by only about one-fifth. The average AAdvantage member has participated in the loyalty program for 10 years, and 40% of users have income greater than $100,000, according to a report from Raymond James Financial analyst Savanthi Syth. This type of stability helps explain why credit ratings firms are willing to give a higher grade to these debt deals than the companies themselves.
Loyalty programs offer “a lot of what’s good about the airlines without what’s bad about the airlines,” Syth said in a phone interview. But if the airlines are offering up their crown jewel to debt holders, what’s left for equity investors? Retail traders have piled into these stocks as the pandemic shows signs of easing: the US Global
Jets exchange-traded fund (ticker: JETS) surpassed $4 billion in assets this month, an increase of more than 2,600% from a year earlier.
Some airlines including Air Canada and Gol Linhas Aereas Inteligentes SA spun off their loyalty programs in an attempt to monetize these lucrative programs and create value for shareholders.

—Bloomberg