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slider
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UA monetizing frequent flyer program for $5B liquidity

Tue Jun 16, 2020 12:28 pm

https://seekingalpha.com/article/435399 ... leage-left

OK, loyalty program gurus--I understand the finance here, but not the concept of monetizing a loyalty program, per se.

I always thought it was treated as a liability not an asset. So now UA has $17B+ in liquidity (believed to be TOO high based on that article).

Interesting.
 
Someone83
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Re: UA monetizing frequent flyer program for $5B liquidity

Tue Jun 16, 2020 12:39 pm

slider wrote:
I always thought it was treated as a liability not an asset.


Yes and no. The miles owed the customer in terms of future travels is a liability, however the program itself is a huge assets. According to the artice it generated $5,3 billion in revenue and a positive EBITDA $1,8, by selling miles/point etc. So not exactly what I call a liability
 
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enilria
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Re: UA monetizing frequent flyer program for $5B liquidity

Tue Jun 16, 2020 12:40 pm

The miles are a liability. The program is an asset. They sell miles to others at high prices and presumably buy awards from the airline or partners at a lesser rate.
 
MO11
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Re: UA monetizing frequent flyer program for $5B liquidity

Tue Jun 16, 2020 12:50 pm

Remember, AC spun off and eventually sold its interest in Aeroplan, before buying it back last year.
 
ScottB
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Re: UA monetizing frequent flyer program for $5B liquidity

Tue Jun 16, 2020 1:14 pm

slider wrote:
https://seekingalpha.com/article/4353992-united-airlines-lots-of-mileage-left

OK, loyalty program gurus--I understand the finance here, but not the concept of monetizing a loyalty program, per se.

I always thought it was treated as a liability not an asset. So now UA has $17B+ in liquidity (believed to be TOO high based on that article).

Interesting.


Only the miles themselves are a liability. The program itself generates huge amounts of cash from partners (via credit cards, other airlines, hoteliers, car rental agencies, electricity providers, etc.) in exchange for the liability represented by the miles.

Numerous analysts have noted that AA (in 2018, I believe) lost money flying planes but made a few billion off AAdvantage.
 
moa999
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Re: UA monetizing frequent flyer program for $5B liquidity

Tue Jun 16, 2020 1:15 pm

As did Virgin Australia, selling off 35% of Velocity in 2014 and buying it back for double the price in 2019.... oops.

Yes we'll run programs generate significant external profit by selling points to credit card companies and others.
And internal profit by getting a small percentage of seats at marginal cost (which in theory would otherwise go empty) and selling them for points (the liability)
 
DeltaRules
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Re: UA monetizing frequent flyer program for $5B liquidity

Tue Jun 16, 2020 1:58 pm

ScottB wrote:
slider wrote:
https://seekingalpha.com/article/4353992-united-airlines-lots-of-mileage-left

OK, loyalty program gurus--I understand the finance here, but not the concept of monetizing a loyalty program, per se.

I always thought it was treated as a liability not an asset. So now UA has $17B+ in liquidity (believed to be TOO high based on that article).

Interesting.


Only the miles themselves are a liability. The program itself generates huge amounts of cash from partners (via credit cards, other airlines, hoteliers, car rental agencies, electricity providers, etc.) in exchange for the liability represented by the miles.

Numerous analysts have noted that AA (in 2018, I believe) lost money flying planes but made a few billion off AAdvantage.


Good posts. It's this logic I use to calm my mom's fears that the Big 3 will eventually shut down their FFPs causing one last mass run on award travel.
A310/319/320/321/333, ARJ, BN2, B717/722/73S/733/734/735/73G/738/739/744/757/753/767/763/764/777, CR1/2/7/9, DH6, 328, EM2/ERJ/E70/E75/E90, F28/100, J31, L10/12/15, DC9/D93/D94/D95/M80/M88/M90/D10, SF3, SST
 
muralir
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Re: UA monetizing frequent flyer program for $5B liquidity

Tue Jun 16, 2020 2:01 pm

I get that the program itself generates revenue, but to me, that still sounds like a bit of an accounting gimmick. They're selling points which will be redeemed for future flights. Meaning, the program gets the revenue right away, and the airline gets the liability which it must redeem in a few years (when the person uses the miles to buy a flight). Whether or not an FF program is "profitable" depends entirely on what price the airline wishes to "sell" its seat internally to its FF program. Here's a great (but old) article on how this works:
https://viewfromthewing.com/accounting- ... -programs/

They make the interesting point that a big reason for spinning off FF programs was to essentially keep the auditors at bay who were telling airlines they were underpricing the seats they were selling to their FF programs.
 
NonRev2Rev
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Re: UA monetizing frequent flyer program for $5B liquidity

Tue Jun 16, 2020 2:06 pm

Airlines have been monetizing frequent flyer programs for a while now, dating back to bankrupticies in the early '00s. Amex, Citi and others pumped liquidity by buying miles from airlines at about a penny a mile. The race for co-branded credit cards further increased the price the credit card companies were willing to pay. Airlines have then begun to successfully devalue their FFPs and enhance their profitability. After accounting for devaluation, wastage and inefficiencies of the unsophisticated mileage redeemers, the marginal cost of these miles are well below half a penny. Carriers make a penny a mile, while it costs them less than half a penny.
But ofcourse the FFPs fortunes are inextricably tied to that of the airline. So if UA were to cease operations, the FFP and the $5b would most certainly evaporate. (There are some exceptions, like, Air Berlin's topbonus program managed to eke out some value even after Air Berlin's bankruptcy)
 
dfwking
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Re: UA monetizing frequent flyer program for $5B liquidity

Tue Jun 16, 2020 2:06 pm

slider wrote:
https://seekingalpha.com/article/4353992-united-airlines-lots-of-mileage-left

OK, loyalty program gurus--I understand the finance here, but not the concept of monetizing a loyalty program, per se.

I always thought it was treated as a liability not an asset. So now UA has $17B+ in liquidity (believed to be TOO high based on that article).

Interesting.


Theoretically, United Airlines is giving up future revenues to build cash reserves today. While in the short term this may improve the solvency of the company, in the long-run that company becomes weaker from a financial standpoint.

Since United will have a huge debt load from all the 2020 borrowing and potentially a slow recovery to profitability, there could be a scenario where a small economic shock / recession in the upcoming years could put them under.

Anyone know how many years of loyalty revenue they will be giving up to generate the $5 Bn?
 
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jetblastdubai
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Re: UA monetizing frequent flyer program for $5B liquidity

Tue Jun 16, 2020 2:10 pm

ScottB wrote:
The program itself generates huge amounts of cash from partners (via credit cards, other airlines, hoteliers, car rental agencies, electricity providers, etc.) in exchange for the liability represented by the miles.


Businesses pay a higher credit card processing fee on "reward" credit cards than on standard credit or debit cards. The credit card companies aren't just giving away those free credit card miles out of the goodness of their hearts. My business uses Worldpay and that's the way they work.
 
Westerwaelder
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Re: UA monetizing frequent flyer program for $5B liquidity

Tue Jun 16, 2020 2:14 pm

dfwking wrote:
slider wrote:
https://seekingalpha.com/article/4353992-united-airlines-lots-of-mileage-left

OK, loyalty program gurus--I understand the finance here, but not the concept of monetizing a loyalty program, per se.

I always thought it was treated as a liability not an asset. So now UA has $17B+ in liquidity (believed to be TOO high based on that article).

Interesting.


Theoretically, United Airlines is giving up future revenues to build cash reserves today. While in the short term this may improve the solvency of the company, in the long-run that company becomes weaker from a financial standpoint.

Since United will have a huge debt load from all the 2020 borrowing and potentially a slow recovery to profitability, there could be a scenario where a small economic shock / recession in the upcoming years could put them under.

Anyone know how many years of loyalty revenue they will be giving up to generate the $5 Bn?


Not exactly. A substantial amount of miles being sold off for liquidity today are never redeemed. While they remain a liability (until they expire), the risk to the airline is minimal. And the airline controls the rewards inventory.
 
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JerseyFlyer
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Re: UA monetizing frequent flyer program for $5B liquidity

Tue Jun 16, 2020 2:28 pm

Airlines restrict the availability of flights booked by Miles to ensure they incur only marginal costs in actually flying those pax.
 
drdisque
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Re: UA monetizing frequent flyer program for $5B liquidity

Tue Jun 16, 2020 2:31 pm

United miles never expire. They aren't held on the balance sheet as normal liabilities, which enabled carriers to make them not expire.
 
Cubsrule
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Re: UA monetizing frequent flyer program for $5B liquidity

Tue Jun 16, 2020 2:37 pm

JerseyFlyer wrote:
Airlines restrict the availability of flights booked by Miles to ensure they incur only marginal costs in actually flying those pax.


Some do, some don't. The most significant example of one who doesn't is WN, on which any flight with availability for purchase with money also has availability for purchase with points.

muralir wrote:
I get that the program itself generates revenue, but to me, that still sounds like a bit of an accounting gimmick. They're selling points which will be redeemed for future flights. Meaning, the program gets the revenue right away, and the airline gets the liability which it must redeem in a few years (when the person uses the miles to buy a flight). Whether or not an FF program is "profitable" depends entirely on what price the airline wishes to "sell" its seat internally to its FF program. Here's a great (but old) article on how this works:
https://viewfromthewing.com/accounting- ... -programs/

They make the interesting point that a big reason for spinning off FF programs was to essentially keep the auditors at bay who were telling airlines they were underpricing the seats they were selling to their FF programs.


Somebody has to carry the liability, BUT lots of people do not use their miles.
I can't decide whether I miss the tulip or the bowling shoe more
 
Exeiowa
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Re: UA monetizing frequent flyer program for $5B liquidity

Tue Jun 16, 2020 2:40 pm

The perceived value of miles by customers might diminish in the future if this pandemic situation lingers. Why use a card to accumulate miles that you do not expect to use. That only comes in to play if this lasts a long time. But cutting off an airline from this source of revenue would be quite damaging.
 
MIflyer12
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Re: UA monetizing frequent flyer program for $5B liquidity

Tue Jun 16, 2020 2:41 pm

muralir wrote:
I get that the program itself generates revenue, but to me, that still sounds like a bit of an accounting gimmick. They're selling points which will be redeemed for future flights. Meaning, the program gets the revenue right away, and the airline gets the liability which it must redeem in a few years (when the person uses the miles to buy a flight). Whether or not an FF program is "profitable" depends entirely on what price the airline wishes to "sell" its seat internally to its FF program. Here's a great (but old) article on how this works:
https://viewfromthewing.com/accounting- ... -programs/


That's an old article that has become worthless. Accounting standards and practices have changed re: FFPs. You can find the details in the annual reports (and notes - deep in the notes). I don't recall the mandatory changeover year... 2017?

Very generally, carriers sell miles at a price of $0.00x per mile. (Yes, under a penny.) Some of that revenue they can recognize immediately - the marketing value received by the buyers of miles being able to advertise 'Earn AAdvantage Miles, SkyMiles, MileagePlus miles...' with your purchase of a bicycle, coat, mortgage, whatever. Some of the revenue from $0.00x/mile is deferred until award travel has been flown -- that's the liability. The annual reports may outline 'breakage' rates - the miles that expire or don't otherwise get redeemed. IIRC, United does a pretty good job outlining the assumptions... Alaska not so much.
 
MIflyer12
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Re: UA monetizing frequent flyer program for $5B liquidity

Tue Jun 16, 2020 4:05 pm

dfwking wrote:
slider wrote:
https://seekingalpha.com/article/4353992-united-airlines-lots-of-mileage-left

OK, loyalty program gurus--I understand the finance here, but not the concept of monetizing a loyalty program, per se.

I always thought it was treated as a liability not an asset. So now UA has $17B+ in liquidity (believed to be TOO high based on that article).

Interesting.


Theoretically, United Airlines is giving up future revenues to build cash reserves today.


No, that's not what responsible articles from respected news organizations say. The choice of monetize is the OP's word. Monetize doesn't even appear in the source the OP linked. Other sources say 'mortgage' or 'pledge as collateral.' Those don't imply in any way that bankers are getting a cut of current or future revenues. UA is getting a loan. If UA defaults on the loan the banks will have a claim on MileagePlus.

https://www.wsj.com/articles/united-to- ... 1592227825

https://www.businessinsider.com/united- ... mic-2020-6

https://www.reuters.com/article/us-heal ... SKBN23M1PB
 
ScottB
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Re: UA monetizing frequent flyer program for $5B liquidity

Tue Jun 16, 2020 4:26 pm

muralir wrote:
I get that the program itself generates revenue, but to me, that still sounds like a bit of an accounting gimmick. They're selling points which will be redeemed for future flights. Meaning, the program gets the revenue right away, and the airline gets the liability which it must redeem in a few years (when the person uses the miles to buy a flight).


Eh, it's an accounting gimmick in the same sense that gift cards are an accounting gimmick. But it's a better gimmick than gift cards because they can devalue the points in a completely opaque way and they can play with availability to make the marginal revenue foregone approach zero. They can make points expire and many, many miles go unused ultimately.
 
cschleic
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Re: UA monetizing frequent flyer program for $5B liquidity

Tue Jun 16, 2020 4:39 pm

MIflyer12 wrote:
dfwking wrote:
slider wrote:
https://seekingalpha.com/article/4353992-united-airlines-lots-of-mileage-left

OK, loyalty program gurus--I understand the finance here, but not the concept of monetizing a loyalty program, per se.

I always thought it was treated as a liability not an asset. So now UA has $17B+ in liquidity (believed to be TOO high based on that article).

Interesting.


Theoretically, United Airlines is giving up future revenues to build cash reserves today.


No, that's not what responsible articles from respected news organizations say. The choice of monetize is the OP's word. Monetize doesn't even appear in the source the OP linked. Other sources say 'mortgage' or 'pledge as collateral.' Those don't imply in any way that bankers are getting a cut of current or future revenues. UA is getting a loan. If UA defaults on the loan the banks will have a claim on MileagePlus.

https://www.wsj.com/articles/united-to- ... 1592227825

https://www.businessinsider.com/united- ... mic-2020-6

https://www.reuters.com/article/us-heal ... SKBN23M1PB


Correct. Even based on UA's own press release, they're pledging the program as collateral for a loan. That's not "monetizing" as in selling all or a portion of it. It's simply collateral.
 
MohawkWeekend
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Re: UA monetizing frequent flyer program for $5B liquidity

Tue Jun 16, 2020 4:48 pm

So just to stir the pot :lol: The market sets a $5 billion dollar value for something that the users get without tax liability. How is that fair?
    300 319 320 321 707 717 720 727 72S 737 73S 734 735 73G 738 739 747 757 762 ARJ B11 C212 CRJ CR2 CR7 CR9 CV5 D8S DC9 D9S D94 D95 D10 DH8 DTO EMB EM2 E135 E145 E190 FH7 F28 F100 FTRIMTR HRN L10 L15 M80 M90 SF3 SWM YS11
     
    anrec80
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    Re: UA monetizing frequent flyer program for $5B liquidity

    Tue Jun 16, 2020 5:19 pm

    MohawkWeekend wrote:
    So just to stir the pot :lol: The market sets a $5 billion dollar value for something that the users get without tax liability. How is that fair?


    Users get this already for their after tax money. More and more mileage programs work like Delta’s - essentially a percentage of fares paid towards future travel. It’s like Amazon Prime with Amazon Prime credit card - you get 5% towards future purchase on Amazon essentially, and this is not a taxable event.

    Speaking of fairness - my wish is that our “social fairness” advocates spend their energy in helping the state become more efficient with tax base they already have, instead of looking what else there goes untaxed.

    And speaking of miles taxation - there actually are excise taxes on those, believe it or not. When you transfer credit card points to miles, you sometimes pay excise tax on the transfer.
     
    davidjohnson6
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    Re: UA monetizing frequent flyer program for $5B liquidity

    Tue Jun 16, 2020 6:05 pm

    Usually when a loan is given in return for collateral, the lender is trying to ensure it has something of value in case the borrower goes bankrupt.
    If United Airlines goes bankrupt, what value is there for the lender in the mileage program ?
    Yes, there's a marketing database on millions of people, but I'm not sure anyone would pay $10bn for that database
     
    hohd
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    Re: UA monetizing frequent flyer program for $5B liquidity

    Tue Jun 16, 2020 6:12 pm

    While airlines such as UA restrict the use of miles, however UA and others have standard rewards where one can redeem at a multiple of the lowest award and generally there are only limited restrictions for a general member and no restrictions for an elite member or credit card holder.
     
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    adamblang
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    Re: UA monetizing frequent flyer program for $5B liquidity

    Tue Jun 16, 2020 6:40 pm

     
    dstblj52
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    Re: UA monetizing frequent flyer program for $5B liquidity

    Tue Jun 16, 2020 6:53 pm

    davidjohnson6 wrote:
    Usually when a loan is given in return for collateral, the lender is trying to ensure it has something of value in case the borrower goes bankrupt.
    If United Airlines goes bankrupt, what value is there for the lender in the mileage program ?
    Yes, there's a marketing database on millions of people, but I'm not sure anyone would pay $10bn for that database

    United would most likely go through chapter 11, not chapter 7 so whoever owns millage plus would likely just do what happened with Aeroplan, for a few years before selling it back to united in say 2023 because a FF program is always most valuable to the airline which it is attached to.
     
    cschleic
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    Re: UA monetizing frequent flyer program for $5B liquidity

    Tue Jun 16, 2020 6:53 pm

    davidjohnson6 wrote:
    Usually when a loan is given in return for collateral, the lender is trying to ensure it has something of value in case the borrower goes bankrupt.
    If United Airlines goes bankrupt, what value is there for the lender in the mileage program ?
    Yes, there's a marketing database on millions of people, but I'm not sure anyone would pay $10bn for that database


    Good points although if the lender(s) were truly concerned about bankruptcy, or some other reason they wouldn't get paid back, they wouldn't do the loan in the first place regardless of collateral. There are types of loans for which the collateral is the primary source of repayment (asset based loans) but I don't see that applying in this case. They probably expect that United will make it although as a smaller company. There's probably intellectual property value to the mileage plan brand name, it's tied in with other Star Alliance airlines (it's not like Lufthansa is going to go away) and it does generate its own income stream which certainly has been pledged as part of the deal. As has been described above, FF plans are businesses themselves.
     
    MohawkWeekend
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    Re: UA monetizing frequent flyer program for $5B liquidity

    Wed Jun 17, 2020 1:44 am

    anrec80 wrote:
    MohawkWeekend wrote:
    So just to stir the pot :lol: The market sets a $5 billion dollar value for something that the users get without tax liability. How is that fair?


    Users get this already for their after tax money. More and more mileage programs work like Delta’s - essentially a percentage of fares paid towards future travel. It’s like Amazon Prime with Amazon Prime credit card - you get 5% towards future purchase on Amazon essentially, and this is not a taxable event.

    Speaking of fairness - my wish is that our “social fairness” advocates spend their energy in helping the state become more efficient with tax base they already have, instead of looking what else there goes untaxed.

    And speaking of miles taxation - there actually are excise taxes on those, believe it or not. When you transfer credit card points to miles, you sometimes pay excise tax on the transfer.



    Except most of the FF's aren't spending their own money. It most likely from his/her employer. When I was a travel manager, I appreciated the loyalty program Delta has which gave the small to mid-size companies (the guys who paid for the tickets) reward travel for our spend. That meets your comparison with the Amazon Prime Credit card. But our travelers received Frequent Flier miles too. IMO those rewards had a value that should have been taxed based on what those tickets would have cost the traveler. I believe airlines were brilliant when they intermingled other sources of miles (e.g. credit cards). They muddied it up so much the IRS probably said "forget it". Thats for now. A lot in this industry is changing and so is the country.
      300 319 320 321 707 717 720 727 72S 737 73S 734 735 73G 738 739 747 757 762 ARJ B11 C212 CRJ CR2 CR7 CR9 CV5 D8S DC9 D9S D94 D95 D10 DH8 DTO EMB EM2 E135 E145 E190 FH7 F28 F100 FTRIMTR HRN L10 L15 M80 M90 SF3 SWM YS11
       
      muralir
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      Re: UA monetizing frequent flyer program for $5B liquidity

      Wed Jun 17, 2020 6:14 pm

      ScottB wrote:
      muralir wrote:
      I get that the program itself generates revenue, but to me, that still sounds like a bit of an accounting gimmick. They're selling points which will be redeemed for future flights. Meaning, the program gets the revenue right away, and the airline gets the liability which it must redeem in a few years (when the person uses the miles to buy a flight).


      Eh, it's an accounting gimmick in the same sense that gift cards are an accounting gimmick. But it's a better gimmick than gift cards because they can devalue the points in a completely opaque way and they can play with availability to make the marginal revenue foregone approach zero. They can make points expire and many, many miles go unused ultimately.


      Right, which is why no store splits off and sells their gift card business as a separate entity. And no one would be foolish enough to buy it. And that's gift cards, which, as you mention are a much stronger guarantee i.e. $1 in gift card value is redeemed for exactly $1 retail price of goods.

      If United really wants to mess with the buyers of mileagePlus (I realize they're not selling it, just getting a loan using it as collateral, but let's take Aeroplan or some other program that was actually sold), they can show enormous profits in MP by "selling" tickets to it at very low prices and maintain a generous redemption chart. Then, once MP is sold for some high number based on the "profits" it generates, they can change what they charge MP for seats, all the way upto full price if they wish, while devaluing the redemption chart, making those points less valuable to sell to CC companies, etc. I'm sure some of these things would be covered by contracts when a FF program is sold, but those contracts don't last forever.

      IOW, I still fail to see how FF programs can be thought to have value as an entity independent of the airline it's attached to. It's so attached to the hip of its parent airline, that any notion that it's some arms-length independent entity capable of generating its own profit and loss and charting its own business strategy without extreme dependence on the airline, is kinda far fetched. It's like buying a business while leaving full control of the business to the previous owner.
       
      RDUDDJI
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      Re: UA monetizing frequent flyer program for $5B liquidity

      Wed Jun 17, 2020 6:32 pm

      muralir wrote:
      IOW, I still fail to see how FF programs can be thought to have value as an entity independent of the airline it's attached to. It's so attached to the hip of its parent airline, that any notion that it's some arms-length independent entity capable of generating its own profit and loss and charting its own business strategy without extreme dependence on the airline, is kinda far fetched. It's like buying a business while leaving full control of the business to the previous owner.


      That's pretty much exactly what I was going to say. A FF program has no value without an airline. While I don't think our Gov't will let airlines fail (and I'm sure that's what the underwriters are also thinking), if they did, the attached FF programs would be worthless. While it is theoretically possible they could some to an agreement with some other carrier, it would likely be for pennies on the dollar.
      Sometimes we don't realize the good times when we're in them
       
      ScottB
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      Re: UA monetizing frequent flyer program for $5B liquidity

      Wed Jun 17, 2020 6:45 pm

      muralir wrote:
      If United really wants to mess with the buyers of mileagePlus (I realize they're not selling it, just getting a loan using it as collateral, but let's take Aeroplan or some other program that was actually sold), they can show enormous profits in MP by "selling" tickets to it at very low prices and maintain a generous redemption chart. Then, once MP is sold for some high number based on the "profits" it generates, they can change what they charge MP for seats, all the way upto full price if they wish, while devaluing the redemption chart, making those points less valuable to sell to CC companies, etc. I'm sure some of these things would be covered by contracts when a FF program is sold, but those contracts don't last forever.

      IOW, I still fail to see how FF programs can be thought to have value as an entity independent of the airline it's attached to. It's so attached to the hip of its parent airline, that any notion that it's some arms-length independent entity capable of generating its own profit and loss and charting its own business strategy without extreme dependence on the airline, is kinda far fetched. It's like buying a business while leaving full control of the business to the previous owner.


      If you want to use the direct example of Aeroplan... AC partially spun it off in 2002 and it went public in 2005 at a presumed valuation of C$2 billion (12.5% sold for C$250 million.) In 2017, AC announced they were going to launch a new loyalty plan and end participation in Aeroplan, but ultimately bought it back in partnership with a consortium of Canadian banks and Visa for C$450 million -- a devaluation of nearly 80% vs. the 2005 IPO.

      So basically... AC was able to get a bunch of cash from suckers for a loyalty plan which they could exit in future -- clearly an airline loyalty program without an attached airline has severely impaired value. It's not all that different from how CO was able to monetize Expressjet for a boatload of cash while ultimately forcing the value of that enterprise down to near zero after they had exited their investment.
       
      UA772IAD
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      Re: UA monetizing frequent flyer program for $5B liquidity

      Wed Jun 17, 2020 6:58 pm

      muralir wrote:
      I get that the program itself generates revenue, but to me, that still sounds like a bit of an accounting gimmick. They're selling points which will be redeemed for future flights. Meaning, the program gets the revenue right away, and the airline gets the liability which it must redeem in a few years (when the person uses the miles to buy a flight). Whether or not an FF program is "profitable" depends entirely on what price the airline wishes to "sell" its seat internally to its FF program. Here's a great (but old) article on how this works:
      https://viewfromthewing.com/accounting- ... -programs/

      They make the interesting point that a big reason for spinning off FF programs was to essentially keep the auditors at bay who were telling airlines they were underpricing the seats they were selling to their FF programs.


      There are numerous bodies of research, in addition to industry analysis that concludes that most people don't utilize their miles, but rather hold on to them. There is a psychological effect of losing something, even if it is a virtual item. Think of how much "pain" it takes to accumulate miles (both in terms of time and money). The airlines know this as well- which is why it is relatively easy to accumulate small amounts of miles, but costs the customer a significant amount to utilize them (or they are prevented from doing so based on award calendar restrictions, for example).
       
      Aptivaboy
      Posts: 898
      Joined: Fri Jul 15, 2016 3:32 pm

      Re: UA monetizing frequent flyer program for $5B liquidity

      Wed Jun 17, 2020 7:56 pm

      I get that the program itself generates revenue, but to me, that still sounds like a bit of an accounting gimmick. They're selling points which will be redeemed for future flights. Meaning, the program gets the revenue right away, and the airline gets the liability which it must redeem in a few years (when the person uses the miles to buy a flight)


      Yes and no. A lot of these miles are never used for airfare. I get United Mileage Plus offers in the mail and via email all of the time - so many miles for this, so many miles for that, all from their retail partners. In other words, some of these miles are never used for tickets, but for other things, so they don't actually hurt United at all. Yes, the miles are there as a potential future liability, but if they aren't used for airfare then in actuality they aren't a liability at all. In addition, we've all seen airlines devalue their miles, requiring more and more for a free ticket or an upgrade, for example. I remember when a flight on United cost roughly 18-22 thousand miles, then 25, now 50... So again, the miles are there as a potential future liability but by requiring more miles for the same flight, the carrier can essentially make them worth less and take less of a hit.

      There are plenty of other things that airlines can do to reduce the mileage hit, but I'll let the accounting folks detail those.
       
      tphuang
      Posts: 5071
      Joined: Tue Mar 14, 2017 2:04 pm

      Re: UA monetizing frequent flyer program for $5B liquidity

      Wed Jun 17, 2020 8:13 pm

      ScottB wrote:
      muralir wrote:
      If United really wants to mess with the buyers of mileagePlus (I realize they're not selling it, just getting a loan using it as collateral, but let's take Aeroplan or some other program that was actually sold), they can show enormous profits in MP by "selling" tickets to it at very low prices and maintain a generous redemption chart. Then, once MP is sold for some high number based on the "profits" it generates, they can change what they charge MP for seats, all the way upto full price if they wish, while devaluing the redemption chart, making those points less valuable to sell to CC companies, etc. I'm sure some of these things would be covered by contracts when a FF program is sold, but those contracts don't last forever.

      IOW, I still fail to see how FF programs can be thought to have value as an entity independent of the airline it's attached to. It's so attached to the hip of its parent airline, that any notion that it's some arms-length independent entity capable of generating its own profit and loss and charting its own business strategy without extreme dependence on the airline, is kinda far fetched. It's like buying a business while leaving full control of the business to the previous owner.


      If you want to use the direct example of Aeroplan... AC partially spun it off in 2002 and it went public in 2005 at a presumed valuation of C$2 billion (12.5% sold for C$250 million.) In 2017, AC announced they were going to launch a new loyalty plan and end participation in Aeroplan, but ultimately bought it back in partnership with a consortium of Canadian banks and Visa for C$450 million -- a devaluation of nearly 80% vs. the 2005 IPO.

      So basically... AC was able to get a bunch of cash from suckers for a loyalty plan which they could exit in future -- clearly an airline loyalty program without an attached airline has severely impaired value. It's not all that different from how CO was able to monetize Expressjet for a boatload of cash while ultimately forcing the value of that enterprise down to near zero after they had exited their investment.


      I totally agreed with that. Which is why i'm always confounded why people think a ff program that's valued at $20 billion can somehow secure a loan of similar amount. That ff program is only worth that amount of money as long as it's under the airline ownership. Airlines are not going to be incentivized to make ff program profitable if they are not going to gain from it.

      And this is even assuming the airline doesn't go under or create its own new loyalty program.
       
      Exeiowa
      Posts: 327
      Joined: Fri Jul 06, 2018 4:49 pm

      Re: UA monetizing frequent flyer program for $5B liquidity

      Wed Jun 17, 2020 8:21 pm

      When Jet Airways was going through its death spiral one of its early actions was to sell off its loyalty program, do not imagine that worked out well for the buyer. The fact that something like this can have such a high perceived value is an indication of how strange our capital markets can be.
       
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      ztarizona
      Posts: 22
      Joined: Mon Apr 27, 2015 6:59 am

      Re: UA monetizing frequent flyer program for $5B liquidity

      Wed Jun 17, 2020 8:58 pm

      On the surface this makes sense, but what happens to the investor holding the bag when the airline and the associated FF program eventually goes belly up, or the airline decides to suspend the program (since they can do that at whatever whim they want, per the FF terms and conditions guidelines). Seems a little bit like a house of cards to me. Hey, as long as the taxpayer isn't holding this bag. Oh wait, Wall street will find a way that we surely will.
      “The strain of anti-intellectualism has been a constant thread winding its way through political and cultural life, nurtured by the false notion that democracy means that 'my ignorance is just as good as your knowledge.” ― Issac Asimov
       
      ScottB
      Posts: 6923
      Joined: Fri Jul 28, 2000 1:25 am

      Re: UA monetizing frequent flyer program for $5B liquidity

      Wed Jun 17, 2020 9:16 pm

      tphuang wrote:
      I totally agreed with that. Which is why i'm always confounded why people think a ff program that's valued at $20 billion can somehow secure a loan of similar amount. That ff program is only worth that amount of money as long as it's under the airline ownership. Airlines are not going to be incentivized to make ff program profitable if they are not going to gain from it.

      And this is even assuming the airline doesn't go under or create its own new loyalty program.


      Yeah, I have to expect that the lenders put in some pretty ironclad guarantees that United will maintain (at least) the status quo with regard to Mileage Plus for no less than the full duration of the loan. That said, lots of protections in a contract go out the window in the event of a bankruptcy, and it's really difficult to write a contract which the debtor cannot void in the event of a bankruptcy.

      If I were involved in writing a loan against a loyalty program, I'd only lend up to the borrower's cost of walking away from the program; i.e. UA would bear some hit due to impaired loyalty relationships but I'm not certain that even amounts to $5 billion. AC no doubt bought back Aeroplan because their share of the purchase price was lower than the tangible and intangible costs of trying to start a new loyalty program.

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