United Airlines is taking out a $5 billion loan against MileagePlus, secured by the program’s intellectual property, future revenue streams, and the data of its members.
Nothing about the program changes immediately. And nothing may change that wouldn’t have happened otherwise. But the program’s $5 billion in new debt could create strong incentive for current cash flow versus long-term stewardship and profitability. Of course that is not new in the airline industry, at this time, or at United under Scott Kirby’s leadership in particular.
United has a need for current MileagePlus cash flow (1) to satisfy loan covenants, and (2) to pay down the loan. Rather than investing up front in the program to develop new tools and experiences, the airline may try to squeeze costs out of the program as a cash-conserving measure. Debt can make a company’s focus shorter-term. The airline even highlighted in their investor presentation that they could whether and how members can redeem.
The airline didn’t sell a stake in the program, where new owners have an incentive to see the largest profits over time (on a discounted net present value basis). Instead this is short-term debt the airline hopes to replace with long-term debt. The priority in the near-time is extracting cash from the program for debt service, while leaving as much as possible left over for the airline.
Of course United is already planning to delay customer-facing investments, and nearly all capital spending, not just until the end of the crisis but until it repairs its balance sheet. They’ve already been taking on debt, causing them to prioritize current cash flow over investment both until they return to profitability and then until they pay down that debt.
And United has already been devaluing the MileagePlus program in the midst of the pandemic. They’ve made it harder to earn elite status using their airline partners, even including their joint venture partners, and they’ve raised the price of award tickets on partners. That’s about encouraging customers to fly United over partners (generating current cash) and discourage customers from redeeming miles on partners (saving them from having to spend cash for those awards).
So it may be the case that United follows the course they were already on, regardless of this additional leverage, since they were already prioritizing current cash flow to begin with.