Spirit Airlines is raising $500 million in debt against its frequent flyer program and Spirit Saver$ Club program. This is the second time they’ve added cash backed by loyalty. In September 2020 Spirit raised $850 million at 8% backed by its loyalty program and intellectual property, $340 million of which was paid down last year.

This underscores a major reason why Spirit Airlines launched a major revamp of its loyalty program, introducing a relevant program which replaced a completely irrelevant one.

• This deal values Spirit’s loyalty assets, whose 2021 revenue totaled $96 million, at $4.2 billion. They project revenue of $200 million for 2022 and to grow to $360 million by 2026.
  
• The airline, including loyalty assets, has a total market cap of less than $2.3 billion
  
• One way of looking at it – and it’s not entirely fare to compare market cap with an appraised piece of the company – is that without loyalty, the airline is ‘worth’ -$1.9 billion.

The valuation multiple Spirit places on the loyalty program seems high to me, given risks to future revenue. And it somewhat surprises me that they’re able to pursue load up the loyalty program with $1 billion in total debt under Spirit’s agreement to be acquired by JetBlue.

Nonetheless, $155 million of the $500 million will be used to pay down aircraft obligations. This new debt comes at an 8% price tag, similar to what Spirit had to pay two years ago, reflecting current market and risk. A year and a half ago American raised at an average rate of 5.75%, while Delta raised two years ago (and with its overall stronger balance sheet) at an average rate of 4.75%.

During the pandemic American Airlines raised $10 billion in debt backed by the AAdvantage program (they had earlier pledged the program as collateral against a $7.5 billion subsidized CARES Act loan). Delta stopped raising debt against SkyMiles when they hit $9 billion. United was first to play the loyalty program debt card raising ‘only’ $6.8 billion.

American Airlines claims its AAdvantage program operates with a 52% margin. The AAdvantage program is now owned by American Airlines Group subsidiaries based in the Cayman Islands. Someday I hope for promotion redemptions there so that members can ‘visit their miles’.

I’ve always said that airlines should not stop flying to concentrate on the underlying loyalty business. They wouldn’t sell credit cards without flights (to offer as redemptions, and on board to pitch applications). But the loyalty program tail very much wags the airline dog, more so than is often acknowledged. Indeed, airlines lose out on significant value when they fail to acknowledge this in their route planning.