How important are airline frequent flyer programs? United, Delta, and American Airlines have each mortgaged their frequent flyer programs for between $6.5 billion and $9 billion apiece. Stifel analyst Joe DeNardi says that without the ability to attract this cash, both American Airlines and United Airlines would be in bankruptcy.
Speaking on a panel at the Loyalty Summit online conference on Wednesday, DeNardi made this bold claim – but one that’s backed squarely by the numbers around cash burn and how much airlines have raised.
I think American would either have filed [bankruptcy] or their shareholders would have been diluted far more than they already have if they weren’t able to finance the program…United’s in the same camp, and then Delta’s probably in the same camp. Southwest could probably make it through, they probably will make it through without financing them.
I think in American’s case their loyalty program has kept them out of bankruptcy, that’s obvious. United is probably in that camp also.
Investors willing to lend money to airlines in exchange for a piece of the future revenue streams from their frequent flyer programs showed great confidence in the ability of these programs to continue attracting customers and driving spend on their credit card products.
In order to do this airlines need to continue to offer an attractive value proposition to consumers who are interested in receiving free travel as a rebate for their spend. DeNardi points out that the programs have great opportunity to continue to expand, reaching more consumers, and fighting aggressively for wallet share. But there’s risk, he warns, and the risk is that loyalty program managers could screw up their businesses.
The greater risk is mismanagement of the programs over time which erodes the demand consumers have to earn this currency rather than running out of addressable market.
If loyalty programs devalue their programs, and push consumers away, so that other card products are more attractive – such as Chase’s Ultimate Rewards cards or American Express’ Membership Rewards cards – then they’ll be killing off the golden goose. The securitization of loyalty programs includes contractual language not to do that but it’s weak and doesn’t really stop airlines from shooting themselves in the foot.