How United Airlines Transformed A Loyalty Program Into A Multibillion-Dollar Financial Asset

Summary

• Airline loyalty programs have evolved into multi-billion dollar profit earners.
• Carriers control loyalty points, sell miles in bulk to companies for profit.
• United Airlines used its MileagePlus program as collateral for a $5 billion loan.

When first designed, airline loyalty programs functioned similarly to the punchcard at one’s local sandwich shop, offering a free flight after passengers had purchased tickets for a number of previous journeys. With this kind of system, loyalty programs were designed to incentivize exactly what one would expect: loyalty to a given airline.

However, the concept of the original airline loyalty program, however, is virtually nonexistent today, as airline loyalty programs have expanded to do something that no one could have originally imagined. Today, major loyalty programs, such as Delta Air Lines’ SkyMiles program or United’s MileagePlus program, are multi-billion dollar organizations that are impressive businesses in their own right.

As a result, the drastic transformation of airline loyalty programs throughout the years has been remarkable, and has taken them from the original sandwich-shop-style systems to profit earners year after year. One particular program, United Airlines’ MileagePlus, has become a case study of exactly how these loyalty programs have become so valuable over time. In this article, we will take a deeper look at how United turned its loyalty program into such a valuable financial asset.

How loyalty programs make money

Intuitively, it can be difficult to understand exactly how loyalty programs like United MileagePlus actually manage to make money, considering that, by definition, their entire purpose is to give away free flights and other perks. Instinctively, one might argue that loyalty programs need not make profits on their own, as they incentivize passenger loyalty, which will ultimately drive revenue growth.

However, modern loyalty programs have created a unique system in which the carrier is able to fully control both the accrual of loyalty points while also serving as the only real place where they can be redeemed. As a result, carriers have begun to profit off of a currency which they alone control, one for which they are the only source of creation or redemption.

As a result, the dozens of partnerships that loyalty programs have do not just serve to incentivize passengers to continue flying a given airline, but rather are a profit-seeking measure. The best-known example of this phenomenon is with credit card companies, who often choose to offer cobranded cards with airlines, on which customers can earn loyalty points through expenditure on the cards. All three major US legacy carriers have such an arrangement:

With these kinds of cards, airlines profit by selling miles in bulk for a given price to credit card companies, who offer them as a tax-free benefit to their cardholders. As a result, the credit card company will be able to gain a leg up over their competition by offering points that can be redeemed with one’s favorite airline.

Airlines, on the other hand, benefit from this in a few different ways. For starters, carriers hold almost all the leverage in these kinds of situations, as they fully control the price at which miles can be sold. If a credit card company is unhappy with, say, the terms offered by United Airlines, the carrier could simply seek out Bank of America, Capital One, Discover or any other major credit card issuer that would be delighted to have a major airline partner.

And the opportunities do not just end there, as airlines will sell miles in bulk to everyone from hotel booking platforms to rideshare services to restaurants and clothing chains. These airlines’ ability to generate revenue from the sale of loyalty points is genuinely impressive, and provides a steady stream of income that is mostly immune to shifts in oil prices or passenger demand for air travel, at least in the short term.

The United Airlines case study

During the height of the COVID-19 pandemic, United Airlines, like many other airlines at the time, was extremely strapped for cash, finding itself in need of a large-scale loan. As a result, the airline sought financial support from leading investment firms such as Goldman Sachs, Barclays and Morgan Stanley, for a loan of about $5 billion.

The airline found itself in a difficult position, however, as it was required to put up collateral for the loan in order to secure the funds it so desperately needed. Without collateral, lenders would not be assured of their investment’s safety in the event that United defaulted on its debt.

With few assets on hand, United found an ingenious solution to its problem, and decided to offer its subsidiary, MileagePlus Holdings, as collateral for the loan. According to Medium, the carrier cited that the program generates over $5 billion in cash each year, leading the airline to estimate the value of its loyalty program at over $20 billion. With such a lucrative asset put up as collateral, institutional investors did not stray from the opportunity and authorized United’s funds.

This entire saga, however, proves an interesting point about the nature of airline loyalty programs, which can best be seen by analyzing the financials of the airline and its subsidiaries. The following table summarizes this date simply:

According to CNBC, the market capitalization of United Airlines Holdings, the company which owns both the airline that operates flights and the MileaguePlus program, is around $17 billion. This implies that United Airlines Holdings values ​​the airline and its loyalty program jointly at around that number.

However, filings from 2019 indicate that the company placed a value of roughly $20 billion on its loyalty program, implying that the airline itself, which operates thousands of daily flights, is less than worthless. At the end of the day, legacy carriers have slowly come to rely upon their loyalty programs to generate revenues, and have carefully created a system that provides consistent and stable returns for investors while continuing to offer reliable and consistent air service.

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  MileagePlus

  Participating Airlines:

  United Airlines

  Owner:

  United Airlines

  Region:

  North America

  Countries:

  United States

  Established Date:

  1981-05-00