There used to be a big debate over whether airlines should spin off their frequent flyer programs. These are rich assets, that perhaps the market was undervaluing, and some investors thought selling them off would be the right move. (I consistently argued against this.)

During the coronavirus pandemic airlines got creative, and U.S. carriers have used their programs to raise significant sums of cash. United mortgaged MileagePlus, planning to raise $5 billion before raising the amount to $6 billion. Delta planned to raise $6.5 billion against their program but kept going until they’d brought in $9 billion. And American used AAdvantage as security for a $5.5 billion subsidized government loan which can grow to as much as $7.5 billion.

With securitizing frequent flyer programs the ‘new thing’ J.P. Morgan sees an opportunity to take smaller pieces of a program – rather than a whole thing – and turn them into tradeable commodities.

The bank is working with Affinity Capital Exchange to let companies turn rewards programs into a standardized, exchangeable currency to be traded by institutional investors and used as collateral to raise capital

…Using the ACE platform, a company could pledge a slice of its loyalty program as collateral instead of the entire thing.

…“Think of it as a way to take emergency financing and make it recurring, renewable source of liquidity, not a once-and-done event,” said ACE CEO and founder Atanas Christov.

It was probably inevitable that someone would try to turn frequent flyer-backed financings and create a trading market, in some sense perhaps like taking mortgages (loans secured by an asset) and turning them into commodities. Now, the loans are traded among investors. Why not take pieces of the loan and trade those, creating a more liquid market? Why not then package these into frequent flyer mutual funds, parts of various instruments backed by several airline programs? And why not make a leveraged bet on these?

What could possibly go wrong?