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U.S. airlines have confirmed during the past three days what seemed impossible a few weeks ago — that this is probably the worst period in U.S. aviation history, likely more disruptive than the months after 9/11. Almost no one is traveling, and few people are buying airline tickets.

As in previous crises, U.S. carriers are looking everywhere for liquidity, including mortgaging airplanes and engines. But, at least through Monday morning, they had not gone to one of their favorite places — their frequent flyer programs.

It’s an open secret that, at big airlines, loyalty programs are the crown jewel, an asset that generates billions of dollars per year during boom times. Airlines in recent years have treated loyalty programs as the secret sauce, not giving investors much information about how they operate or what margins they produce. But some suspect the programs may throw off more cash than the core airline.

When airlines do release numbers, they can be eye-popping. After Delta Air Lines signed a new 11-year contract with American Express last year, it said the agreement could be worth $7 billion in 2029, double its 2018 value. The agreement is so lucrative because American Express buys SkyMiles from the airline and gives them to customers to reward them for spending. Banks pay about 1.25 to 1.5 cents per mile, according to analysts.

Investors have been salivating at Delta’s deal terms. But if Delta isn’t around in 2029 — the airline already has grounded a significant number of jets — will that money matter?

To have the best chance at getting through this period, Delta is going to need cash. Its best option could be to leverage its frequent flyer program, asking American Express to prepay for some miles it planned to buy over the next five years. American Express would demand tough terms but may not say no to Delta, which accounts for about 8 percent of its global billings.

“Delta is too big to fail for Amex,” Joe DeNardi, an analyst with Stifel, said in an interview late last week. “In 2019 Delta disclosed they received $4 billion in cash proceeds from selling miles to Amex. The way I would look at it is, as a minimum, they could get a year’s worth of presales of miles now, if they wanted to, and probably more.”

Typical Strategy

In past crises — none of which have been as consequential as this — big U.S. airlines looked at card issuers as ATMs, relying on them for cash infusions whenever business took a dip.

Delta in 2004 received about $600 million in advanced payment from American Express, most of it tied to a presale of miles. In December 2008, it did it again, taking $1 billion from American Express for an advance purchase of SkyMiles.

United Airlines has also dipped into the pot. In July 2008 — before the worst of the financial crisis — United Airlines took $600 million up-front from Chase Bank, as a presale of future miles. Chase’s predecessor, Bank One, also helped provide United with financing in 2002, during a rough time for the airline.

For the airlines, the terms were terrible. And as business improved, executives swore off these deals, saying they finally had leverage over banks and they intended to use it. Delta was only able to get that massive deal because it no longer was tied up by long-term agreements negotiated at weaker times.

“The power balance shifted from banks to airlines,” said David Feldman, a partner at New World Loyalty, a consultancy. “It is why Amex is clearly paying through the nose with Delta. I think current airline executives looking back at those deals probably do think, ‘We undercut ourselves back then.’ But if cash comes to a crunch, it’s obviously an easy option.”

Last Resort

Speaking to investors on March 10 at an industry conference, several executives from U.S. airlines said they hoped to avoid using their loyalty as piggy banks.

Among the six airlines presenting at the JP Morgan Industrials Conference, United President Scott Kirby was the only executive to give it serious consideration. At the conference, United reported that it had about $20 billion in unencumbered assets, a sum that included not only aircraft, engines, slots and gates, but also the loyalty program, MileagePlus.

“Those are the kinds of things that have happened in the past,” Kirby said. “I am sure that if one day we decided we needed to tap that as security, whether it is MileagePlus sales or using the program as security, I would expect we will do that.”

American Airlines CEO Doug Parker said he agreed preselling miles could work in a pinch but suggested he would prefer not to. Still, he said, American’s program is highly valuable.

“I’m told that American in — back in 2008 or ’09, during the Great Recession — basically sold forward miles to Citi to the tune of about $1 billion of cash inflow,” Parker said. “The program today is about three times the size as it was in 2009.”

Meanwhile, Delta CEO Ed Bastian said, “We haven’t considered doing anything like that.” But that was three days before Friday, when the airline announced a short-term capacity cut of 40 percent, a bigger cut than at any time in the airline’s history, including after 9/11.

Given the depth of this crisis, the next step could be for Delta and other airlines to do what they said they would try to avoid.

“If you start to see airlines start to tap that line of liquidity, you know airlines are not in a good position,” DeNardi said. “That would be the last line of liquidity you would want to tap.”

One Other Option

Airlines have another lever they can pull in a cash crunch, but no matter how bad finances get, they could be reluctant to use it.

Carriers can sell stakes in their frequent flyer programs, as Aeroméxico and Avianca have done during cash crunches. Air Canada about 15 years ago also spun off its loyalty plan to raise money, buying it back in 2019.

“Those are airlines that needed cash badly, so they sold all or part of their loyalty plans,” said Jay Shabat, senior analyst at Skift Airline Weekly. “They hated to do it, and they especially hated it in retrospect. I think airlines have learned that selling ownership stakes in their loyalty programs is a very last resort.”

Even with the industry in crisis, an investor probably would jump at a chance to own a piece of a big airline’s loyalty program, DeNardi said.

“Maybe Delta could raise $5 to 8 billion using a presale of miles strategy,” DeNardi said. “They could raise $10–15 billion monetizing it by selling an equity stake. But that would be a far less desirable option for them.”

It may seem odd that any company would want to help an airline now. But airlines and their frequent flyer programs have stood the test of time, through 9/11 and multiple bankruptcies.

“These relationships are so lucrative for all parties involved that I suppose if things really hit the fan for Delta they can go back to American Express and just be like, ‘Give us a loan, we are desperate,'” Shabat said. “American Express would have to pay attention. The last thing American Express would want to see is for Delta to go out of business.”

Shabat said he’s seen similar bailout deals before, consummated when no one thought the carrier had a chance at receiving a cash infusion.

“That’s the thing with airlines,” he said. “There are so many stakeholders that want to keep them alive. It’s very easy for airlines to get capital, if you are big.”

Photo Credit: A Delta Air Lines customer hands over an American Express credit card during happier times. American Express for Digitas