There’s a meme circulating in financial twitter that airline frequent flyer programs are worth more than the market cap of the airline itself, which means the market is assigning negative value to the airline itself. The unstated implication here is that the airline should quit the flying and focus on the core credit card business.
I’ve offered the illustration of how programs are valued relative to other parts of an airline’s business to show that the tail now wags the dog, but never claimed airlines should shut down because that would undermine the loyalty business. Indeed, loyalty programs that aren’t attached in some way to a travel brand aren’t nearly as successful.
Frequent Flyer Programs Are The Most Lucrative Asset At Major U.S. Airlines
Several years ago Stifel analyst Joe DeNardi popularized the notion that frequent flyer programs were worth more than their underlying airlines, and therefore he argued that the programs should be spun off into separate companies in order to unlock their value.
The world certainly came to realize how much these programs were worth when United, Delta, and American borrowed between $6.5 billion and $10 billion apiece during the pandemic backed by the revenue streams of their loyalty programs.
But They’re Not Always Worth As Much As Some People Say
However I debated Joe about whether spinning off the programs made any sense at a major industry event shortly before pandemic. He overvalued the programs because he assigned too much growth potential to them, and assigned too little risk.
His multiple on the revenue was too high, and the revenue far from guaranteed in the long term if technology or regulation pushed down the profitability of interchange. And we’d just seen the first major spun off program – Aeroplan – revert back to Air Canada, crushing the value of the company that ran it.
Investors Aren’t ‘Assigning A Negative Value To Airlines’
When you see simple arguments like this one, that investors are ‘assigning a negative value to airlines’ apart from their frequent flyer programs that isn’t quite true.
"United’s rewards card program with JPMorgan Chase is valued today at $22 billion. But United’s market capitalization is $16 billion, meaning investors are assigning negative value to the part of its business that flies airplanes. The same goes for American and Delta." @semafor pic.twitter.com/4wBPAaU64W
— Sam Ro 📈 (@SamRo) February 15, 2023
What is true is that frequent flyer programs are the most profitable part of an airline’s business. At American Airlines you’ll often see them lose money flying planes (cost per seat mile greater than passenger revenue per seat mile, end even greater than passenger revenue per seat mile plus cargo). American’s profit, during some quarters, can be entirely accounted for based on selling frequent flyer miles – where they reported to investors a 52% margin.
However they’d never be able to earn that revenue without flying planes. They wouldn’t be able to sell co-brand credit cards to customers (which has picked up in the New York market substantially since they gained relevance by partnering with JetBlue). And they wouldn’t have access to the rewards that entice customers to choose those cards over others.
When Aimia planned to go it alone with Aeroplan, when they were going to lose the Air Canada tie-in, they worked on deals to buy airline tickets in bulk and charter planes for redemption, but no one has ever made a loyalty program work after disassociating itself from airlines. InterMiles became largely irrelevant after Jet Airways went under. GlobalPass couldn’t make its business work post-LatinPass where it was no longer the program for a consortium of airlines.
As a result the better metric would be the value of a loyalty program against its enterprise value, which includes accounting for debt, because that debt supports even a money-losing airline business. That debt needs to be allocated to the profitability of the loyalty program!
And indeed, with substantial debt raised against the loyalty program’s value itself you can’t just take the value of the program and compare it to the airline’s equity! You need to at least deduct that debt, putting the money airlines borrowed against their loyalty program on the airline piece of the ledger doesn’t quite make sense.
It’s also worth noting that the underlying data source for valuing the programs is wildly off in some cases.
Airlines Need To Become More Integrated With Their Loyalty Programs, Not Less
Ultimately loyalty programs need to be more integrated into airlines, not less, in order to unlock and grow value.
- When Scott Kirby joined United a key driver of his growth plan was that United’s domestic revenue didn’t support card acquisition. Critical mass in a market would make the product more relevant to card customers, improving card uptake and spend.
- Meanwhile, American Airlines has created a reason for loyalists to spend on their cards even though competitor bank products offer more lucrative points-earning because they’re able to deliver status experiences in exchange for driving revenue on card and other activities that generate partner mileage sales.
I argued four years ago that American Airlines had made a mistake drawing down in New York. They were doing the accounting wrong if they thought New York was an unprofitable market, because they weren’t properly attributing card revenue to the flights that supported that revenue in the most important spend city in the country. They essentially came around this view, and found a way to become more relevant with their JetBlue partnership, and now report New York as the fastest-growing city for the AAdvantage program.
The Underlying Idea Is Right, But The Meme Is Wrong
Frequent flyer programs are valuable, and in some cases represent the bulk of value in an airline, but it is not quite correct to say that investors assign negative value to the airline.
Thank you for saying this. I am not a credit card barker. That is not what I signed up for almost 30 years ago. To me, and I only speak for myself, we would be in a sorry state without our top tier passengers. I’m not knocking Barclays hustle, but I’m not a fan.
Do you mean “worth more than its planes” in the title? Otherwise, this doesnt make sense. I honestly dont know why you refuse you disrespect your readers and absolutely refuse to proofread.
The airlines have a much better understanding of their financials than does Wall Street. Market capitalization isn’t the only way to value a company. And it’s not always accurate. Capital stock is a form of financing. Income and cash flow are more important than a company’s arbitrary resale value. That’s why most takeovers and mergers tend to be priced at premiums to “market” value. One last point: It’s pretty hard to have a frequent **flyer** program if there’s no way to fly.
@ Jason Are you criticizing the author for refusing to disrespect his readers?
For failing to proofread?
@Brutus LOL, nicely done ✅
The reason why analysts and commentators overinflate the value of airline loyalty programs is the same reason they undervalue Delta’s refinery.
Both exist for the benefit of their parent company but, because they have standalone financials, are reported separately and as a part of the parent’s finances.
Delta has saved over $2 billion on its fuel bills – sometimes as low as a couple cents/gallon last decade but 6.5% of its $10 billion plus 2022 fuel bill. Delta reports the contribution of the refinery both as a standalone – because they are required to do so – but also its relation to DL’s finances – which is where they always expected to see the benefit.
FF programs have no value without the underlying airline just as the refinery has no value to DL unless it benefits the airline; it was sold because it didn’t make financial sense to an oil company but does to DL.
The refinery, like loyalty programs, can’t turn around a poorly run airline or one facing major macroeconomic challenges as happened during the pandemic. But both can improve otherwise marginal airline operational financial performance.
How would a stand-alone loyalty program maintain unfettered access to taxpayer cash, as legacy airlines do? For example, $54 billion COVID-19 government lifeline.
The FFP is only valuable because it has access to the airline. They are synergistically tied.
No one is going to sign up for a frequent flyer program that has no flights to use it on.
The effort involved in creating an airline mile is nothing. But the value it represents requires a physical airline to exist, and that has a lot of costs.
You can say that an airline can exist without a frequent flyer program, but a frequent flyer program cannot exist without an airline.
What a fantasyland, Tim. Delta even tried to sell the refinery in 2019 but couldn’t because there was a reason they were the only ones that wanted it in 2012. In 2020, The NY Times wrote a great article about the how the refinery never even slightly realized the goal of $300M reduction in fuel expense that delta predicted. It’s had good years and bad years but has hardly offset the initial expense delta put in when looked at from an NPV perspective.
There have been plenty of refineries for sale (including trainer) over the last ten years, If delta was getting anywhere near the kind of benefit you suggest; what they’ve done is easily replicable by other airlines but no one has done it and for good reason.
Delta still owns it because it’s more expensive to shut down than it is to keep it running, for now, and no one wants to buy it.
The problem with buying a refinery by an airline is that any benefit you’d get from the crack spread is shared to other airlines by delta buying less off the market. Delta doesn’t get to enjoy any theoretical benefit alone.
Max,
Delta specifically said that it wanted to retain the fuel cost saving capability of the refinery and have someone else manage selling non-jet fuel products to other customers. The refinery produces less than 50% jet fuel so Delta has to exchange products other than jet fuel for jet fuel in other parts of the world.
I would suggest you read company financial statements including their annual reports. Since the day that Delta began operating the refinery, they have reported the cost impact to Delta of operating the refinery.
Neither the NYT or any other general media source has ever cited the totality of Delta’s statistics about the refinery – but solely the profit or loss of the refinery as a standalone entity – which is precisely my point.
All you have to do to prove whether the refinery makes a difference or not to Delta is look at Delta’s fuel cost per gallon which is reported on a quarterly basis in their earnings statements – just as every other airline does. Delta has had a fuel cost per gallon advantage over American and United for years but usually only a few cents to 10 cents/gallon – which adds up when you burn one billion gallons of jet fuel per year – but that has grown to 25 cents or more over the past year.
Whatever the refinery did or did not do for a decade is moot now; United paid $650 million on a volume comparable basis than Delta. American was lower because they do not have as large of a presence in NYC where fuel costs have been the highest and where Delta has had the greatest advantage from the refinery.
The only other airline that has paid less for jet fuel is Southwest – but they have also paid hefty premiums because of bad hedges.
Other airlines are simply not sharing in the crack spread savings now.
The only people that are fighting to admit that DL made the right strategic move are the fans of airlines that aren’t seeing the $2 billion in savings that Delta has accrued over a decade – and which continue to grow.
Tim, Delta the airline had an extra 25 cent per gallon benefit. Delta the refinery got 25 cents a gallon less than it could have gotten selling that fuel in the open market. Delta the corporation is left with no gain. This is all a game on transfer pricing and which part of the corporation should be more attractive.
Tech companies manipulate transfer prices all the time, but the reason they do it is for tax purposes. If Ireland has an attractive tax rate, that’s where Apple and others will put their license revenue. United was doing something similar in Illinois, where all their fuel was being bought and paid for in Bourbonais, Illinois at a lower sales tax rate (Illinois charges sales tax on fuel) than in Chicago, until they got caught. I don’t know how New York State and City tax aviation fuel, but Delta could be saving on that. Otherwise, the only real saving is if there is some state income tax benefit for having the refinery earn less money while the airline earns more. Delta, the corporation, has decided to make Delta the airline more attractive in hopes people will ignore the less profitable than it could be refinery.
John
The reason why Delta is getting a benefit is because of the refining crack spread on jet fuel. Crack spreads do not necessarily apply to other types of fuel.
Delta operates an airline that uses jet fuel. They have tuned the refinery to maximize jet fuel production with a double or higher percentage of production going to jet fuel.
Delta is a REFINER and gets benefits because the crack spreads are out of line for jet fuel. Delta bought the refinery to address crack spreads on jet fuel; as MAX did note, Delta’s ownership just pushed down the price of jet fuel for everyone with Delta getting primary distribution benefits of 3-10 cents/gallon in most quarters.
As refineries continue to shut down, jet fuel supplies are falling. Delta is a larger enough user of jet fuel that it benefits by using its own supplies for its own uses which is why other airlines are paying a higher price.
And all of the theory doesn’t change that Delta has translated its jet fuel price advantage into a competitive advantage. Given that Delta is saving $750 million/year against its most direct competitors – American and United – the pricing transfer DOES make sense even if your logic was right.
When you have a 2% total cost advantage (6.5% just on fuel), that is enough to make a difference on the bottom line.
Just as with a loyalty program, Delta’s refinery won’t fix a bad a business plan but it is enough to put a significant difference in margins between you and competitors.
Delta’s refinery is part of a number of cost advantages that Delta has relative to its competitors
– Delta’s labor costs per seat mile are lower because it is non-union and its employees are more productive (Delta’s labor efficiency was lost last year because the amount of capacity it flew was lower than what it should have been given the size of its workforce – in order to restore its operations to industry leading levels – which it did.
– Delta’s fuel efficiency is 7.5% higher than AA and UA because DL has acquired more fuel efficient aircraft and used them more to maximize cost reductions
– Delta’s refinery reduced fuel costs by 6.5% in 2022, as noted
And on the revenue side, Delta’s loyalty program including its Amex agreement generates the most revenue of any loyalty program in the world.
The refinery isn’t the only reason DL has a financial advantage but it is a major contributor
Even delta tried to sell Trainer in recognition of its failure and you still try to defend it… get a grip.
What delta did with the refinery is incredibly replicable yet no one did.
Walk away…
Max,
you can’t even get the facts straight.
Delta wanted to sell the refinery but retain the price benefit. They didn’t really want to sell it at all – but you believe it because you can’t accept that Delta paid $750 million less in 2022 for the same amount of fuel than United.
And you continue to post 4 year old stories, even if inaccurate. This is post-covid and the world has changed.
The refinery is becoming MORE SUCCESSFUL for Delta each year because of environmental campaigns and the continued closure of refineries and the reduced production of jet fuel.
It took Delta 7 years to record a $1 billion benefit from the refinery. They have doubled that amount in just the last two years.
You are the one that needs to walk away – but first you need to read actual financial statements from airlines including AAL DAL LUV and UAL instead of the NY Times.
It’s no wonder you get the basic facts wrong when you have someone else digest information for you
American’s fuel bill for 2022 was $13.8 billion to generate $49 billion in total operating revenues, burning 3.9 billion gallons of jet fuel at $3.54/gallon
Delta’s fuel bill for 2022 was $11.5 billion to generate $50.6 billion in total operating revenues, burning 3.4 billion gallons of jet fuel at $3.36/gallon
United’s fuel bill for 2022 was $13.1 billion to generate $45 billion in total operating revenues, burning 3.6 billion gallons of jet fuel at $3.63/gallon.
Delta generated more total revenue with lower fuel burn (a demonstrating of its fuel efficiency relative to revenue generation) and paid less for every gallon of jet fuel it did burn.
The numbers don’t lie and they are all verifiable in each airline’s earnings statements.
The reason why so many people argue is because they haven’t read the facts and don’t want to know them because facts eliminate lies and attempts at manipulation.
Walk away, Max
Just wow.
Delta separately wants to sell Trainer but can’t because every other airline realizes delta messed up, including delta
From any normal financial NPV look.
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American’s net income for 2022 was $127 million
Delta’s net income for 2022 was $1.3 billion
United’s net income for 2022 was $737 million
We’ll keep this up as long as you deflect and divert attention from the fact that Delta is running the best business among the big 3.
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Many things contribute to an income statement comparison. You show your ignorance trying to say income statement = you win off a topic on refineries. A different topic completely that delta admits was a bad idea.
Thanks for showing you have no idea how a P&L works or what plays into them.
As a reminder, topic is trainer refinery.
Again, delta tried to sell it because it was loss making.
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thank you, Gary, for stepping in and cleaning up the conversation.
Max fundamentally cannot accept that Delta has strategic advantages that will increasingly translate not just into a competitive advantage financially but also fund Delta’s ability to grow its network and minimize its competitors’ ability to execute their own plans.
The simple verifiable reality is that Delta wanted to have someone take the worst performing parts of the refinery – swapping out non jet fuel products but retain the fuel cost benefits and, to no one’s surprise, no one was interested. Now, the refinery is saving Delta $750 million/year in fuel costs and that is not changing because it is due to supply chain issues which Delta saw developing 10 years ago but are just now reaching a point that have translated into a major cost advantage. The refinery did not generate a sufficient ROI compared to other spending but it most certainly does now.
It is no secret to anyone that Delta’s loyalty program and relationship with Amex is the most lucrative to Delta of any airline in the world. That in itself is a competitive advantage worth billions of dollars per year.
Delta’s refinery is no different to Delta than loyalty programs are for the big 3 – huge sources of cash and savings that have given them enormous advantages over low cost carriers.
The problem is that MAX and others simply cannot see the big picture of the US airline industry.
American stumbled for years to integrate US, failing to dump poor performing hubs while trying to be all things to all people which included flying routes around the world which lost them billions of dollars. Coming out of covid, AA has the advantage of having more of its hubs in the southern US which is growing while the north and west continues to shrink. The light finally went on at Centerpork and AA is no longer chasing things it cannot succeed at financially and is pouring even more resources into its strong southern hubs. AA’s balance sheet, once a disaster, is going to dramatically improve as it dramatically slows its fleet spending and uses its cash to pay down debt. AA’s outlook is stronger than it has been for decades.
Delta has long had advantages in revenue generation because it dominates its interior US hubs (ATL, DTW, MSP and SLC) and because of its ability to manage its fleet, often older than competitors, more efficiently. Delta’s labor cost advantage from being heavily non-union has translated into hundreds of millions in savings per year. Its international network was heavily dependent on its global partners which angered its pilots. Delta’s weakness was its presence in large coastal markets; it never fully gained the benefit of its Pan Am NY acquisitions or its Western merger in LAX. It turned its attention to fixing NYC first, then went back to Boston to regain its strengths from its Northeast merger which it let go of in order to defend NYC post 9/11. Delta fixed its high international fleet operating costs by dumping the 777s which AA and UA still have and Delta now has a newer and more cost efficient international network than AA or UA, aided by the refinery which reduces Delta’s costs in NYC and Boston by hundreds of millions of dollars per year, more than enough to tilt the competitive advantage in those cities in Delta’s favor compared to JetBlue, American and United. Delta bungled its handling of pilots during the pandemic and has taken an eternity to get pilots retrained on the right planes but is set to come back in 2023 larger than pre-covid with a more efficient fleet, better cost management and revenue generation than ever.
Southwest realizes they are no longer a scrappy little upstart and has grown into the top markets of the country outside of the northeast. They overlap more with United than any of the big 3 and have grown into United’s best performing hubs of Chicago ORD, Denver and Houston IAH while defending their positions in their core strengths of Texas, Florida and California even though the latter continues to shrink as people leave. WN has badly stumbled operationally, culminating in their Christmas disaster and has destroyed their employee culture as management fails to recognize and own the root problems. Still, WN is very strong financially and is smart enough to fix its problems – which they will do.
United has long been far weaker domestically than any of the big 4, in part because of Continental’s focus on 50 passenger regional jets which provide very little market strength outside of UA’s hubs. UA’s loyalty program is the weakest of the big 3 financially. UA has been very strong in its coastal and northern hubs and internationally but economic contraction in UA’s northern hubs (UA has the most hubs in the economically most vulnerable parts of the country) and Southwest’s growth in UA’s strongest hub metros is a huge threat to UA while Delta’s desire to grow internationally challenges UA’s international strength. UA intends to spend tens of billions of dollars more on fleet than any other airline to fix its fleet problem which includes the oldest fleet among US airlines and thinks it will use NEXT to invade other airline’s strength markets but every other airline is fighting back and will fight back. UA will have the most debt of any US airline and won’t strategically gain much while seeing its core strengths eroded. AA is still a pain in UA’s side in Chicago, UA’s position in Texas is smaller than it has been in decades with its only real strength in Houston – which WN is eroding, WN is aggressively growing DEN along w/ UA, and UA’s single hub strategy in NYC has reached the physical limits of that airport while DL continues to grow its larger NYC presence overall by upgauging.
UA tried to buy a refinery in Houston to replicate what DL has in Philadelphia but that failed. They know exactly what the refinery does for Delta.
Scott Kirby’s bravado at United is laudable but he is fighting against 3 other carriers that have far more combined strengths than United, are doubling down on their own advantages while eroding United’s historic advantages. United, far more than any other of the big 4 US airlines, is strategically very vulnerable
United cannot reproduce American’s strength in the southern US which is shifting revenue from the north to the south. United cannot reproduce Delta’s loyalty program, its labor cost or core hub revenue generating, or its refinery advantages. United cannot reproduce Southwest’s balance sheet or its labor efficiency or stop WN from growing in UA’s top markets.
It isn’t a surprise that people like MAX come out of the woodwork to attack anyone that highlights what other competitors including Delta are doing that United cannot match.
For those that can think in 3D and see industry trends, loyalty programs are simply a microcosm of the industry.
Delta’s 2019 deal with Amex made their loyalty program the strongest financially, American’s was stronger prior to that.
Higher oil prices in the past couple of years have improved the value proposition of Delta’s refinery, which was historically viewed as a poor investment.
The airline has several advantages, from a mostly non-union workforce, a strong brand, and a fantastic position in key hub cities. Their TechOps has historically been a very strong advantage as well.
However advantages don’t necessarily translate into dominant positions in the future, remember when the DOJ went after Microsoft for using their operating system to dominate the browser market? And now Google is scared about being behind bringing AI products to market. Facebook was a monopoly too, but that’s being eroded.
It’ll be fascinating to watch whether Delta can regain their DEGREE OF operating superiority, for instance.
Gary, what do you think would happen to the value of Frequent Flier programs if the airliners keep devaluing their programs? I would think that at a certain point, the consumer wises up and no longer will participate and just gets a cashback card.
Gary,
of course history does not control the past nor does present success necessarily mean future success.
But strategically Delta has moved further forward than any other airline during the pandemic, strengthening its advantages while reducing its disadvantages.
Delta’s operations are already back to industry leading. That is why they slowed their growth in 2022 but they are confident they can reinstate their growth in 2023 and will do so from a stronger position in terms of costs and revenue generation.
Delta’s product quality has taken a hit relative to AA and UA – but it simply isn’t big enough to make a difference strategically or on the bottom line and Delta can and will spend money to keep whatever advantage it thinks it needs.
Delta is nowhere near the point of gaining an advantage by blocking competitors as Microsoft or Google have done. DL’s hubs all have open access to competitors except LGA and JFK where DL is playing by the rules which is what AA and UA did not do and why they have each lost some of their strength there.
American has done a phenomenal job of addressing its disadvantages while no longer trying to be what it cannot. I was at ORD just a few weeks ago and it was striking how much smaller they are than UA but they are still there – will stay there because it is strategically necessary to do so – while building its presence at DFW, CLT, PHX and MIA – all of which are growing metros.
AA is dealing w/ its balance sheet issues and has the advantages of taking a few years off from aggressive fleet spending to use cash to pay down debt.
You look at AUS but there are far bigger markets that are defining the future of the industry. DL has been the biggest winner in both NYC and LAX relative to AA. DL is growing in AUS but is happy to let AA and WN duke it out right now.
WN has major strategic issues to work through but will fix its operations. They have enormous advantages.
UA is the big 4 that thinks it can rearrange the pecking order and will face pushback from ALL of the big 3 plus simply lose whatever advantages they had in one category to another.
Happy Saturday to you!
@Ed – it’s just not clear what that point is! Though we did see elite customers abandon American prior to the pandemic, based on their own released numbers. I suspect that was more about product quality and reliability than about AAdvantage however.
When my airline went bankrupt they said the program was a liability. After exiting bankruptcy they said it was an asset.
Corporate accounting is a black art.
AA exited NYC for the same reason it’s exiting LAX-Asia: they are America’s top 2 metros in individual disposable (after-tax) income. Basically people there who are profitable to an airline can afford (and want!) higher quality products and services, and voted with their wallet with AA being the biggest loser.
AA strength comes from lower disposable income places like Florida and Texas.