U.S. Government Might Take Frequent Flyer Programs As Collateral For Bailout

In my policy paper on airline bailouts (co-written with Veronnique deRugy, summarized here and shared broadly on Capitol Hill and inside the Executive Branch) I point out that airlines have had little difficulty accessing liquidity markets. They’ve been loading up with cash, the government didn’t need to step in because private markets were shut to them.

And I pointed out that there were still significant assets that the airlines held, which they could use to get more cash. One of those is the airline frequent flyer program. When Air Canada was in difficult straits in 2005 they sold off their Aeroplan program, eventually buying it back.

[US airlines] also earn billions of dollars from the sale of frequent-flyer miles to banks.

Even without selling these lucrative assets, airlines have turned to their co-brand credit-card-issuing partners for liquidity during past challenges. American, United, and Delta have each presold between $500 million and $1 billion worth of frequent-flyer miles, including during the financial crisis of 2008.

Airlines should be expected to use their substantial assets, which include their multibillion-dollar credit card deals with banks that include JPMorgan Chase, American Express, and Citibank, before entering bankruptcy.

Airlines, several Senators, and labor unions are urging Treasury not to ask for much from airlines in exchange for bailout cash. However Treasury has learned about the hidden assets airlines have in their loyalty programs.

In fact, the Treasury Department is reportedly asking airlines eight questions about potential collateral. Four of them are about their loyalty programs.

COLLATERAL

– Overview of loyalty program

– Details on whether the loyalty program is encumbered or unencumbered

– Estimated value of the loyalty program

– Historical cash flow of the loyalty program

– An overview of all unencumbered aircraft, engines and spare parts

– The estimated value of the unencumbered assets broken down by asset class

Airlines are going to have to open up the books on their frequent flyer programs, it seems, if they want that sweet sweet taxpayer cash.

If airlines are going to receive a bailout, taxpayers should receive some assurance of recovering the funds when times are good. And any deal should be structured to incentivize airlines to get out from under partial nationalization as quickly as possible.

(HT: @TProphet)

About Gary Leff

Gary Leff is one of the foremost experts in the field of miles, points, and frequent business travel - a topic he has covered since 2002. Co-founder of frequent flyer community InsideFlyer.com, emcee of the Freddie Awards, and named one of the "World's Top Travel Experts" by Conde' Nast Traveler (2010-Present) Gary has been a guest on most major news media, profiled in several top print publications, and published broadly on the topic of consumer loyalty. More About Gary »

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Comments

  1. I recently expressed some concern about frequent flyer programs surviving this downturn. I was told my concern was overblown cause they survived the previous bankruptcy filings. This time it’s different and the airlines execs really prefer loans rather than bankruptcy as they have better chance of keeping their jobs. And I bet AOC will be pushing hard to do away with frequent flyer programs as part of the loan forgiveness. Why u ask? Because ending them would be the first and very small piece of the Green New Deal to be implemented in a round about way. The Green New Deal is coming to each elite flyers favorite airline faster than you think.

  2. Somebody has a lot of time on their hands now that the Trump rallies have been suspended..

  3. Ignore my last post. Working hard to save 134,000 jobs and your frequent flyer program. Stay safe my fellow Americans 🙂

  4. Here’s an idea: One loyalty program for all airlines, even if the exchange of points to miles is variable depending upon the airline.

  5. I worked Damn hard for my 1 million mile stayus and no FRIGGIN Republican or Democrat is gonna take that away from me – green red or yellow deal or not !

  6. As an employer, I’d LOVE to see the end of the KICKBACK “miles” programs! My doctor shouldn’t get kickbacks from drug companies to push pills, and my employees shouldn’t get kickbacks from airlines to book expensive tickets with company money. Just because FF programs have a long history doesn’t make them fair or legitimate. They facilitate EMBEZZLEMENT!!!

  7. I would be upset if _my_ status and perks were taken away, but if it happens to everybody, then so be it.

  8. Hmmm…can the government take one’s frequent flyer points (or perhaps status) without compensation? My sense of the Takings Clause of the Fifth Amendment says, “Not so fast.”

    If this happens, maybe I’ll write a “Frequent Flyer’s Guide to Proceeding in the U.S. Court of Claims”. Should be a best seller.

  9. @Retired Lawyer I don’t think they’re trying to “take” your miles. They’re trying to have ownership of an asset the airlines will be incentivized to buy back from them.

  10. Consumer protection laws should be required with any bailout. Perhaps in the future airlines will figure out how to manage their finances better if the alternative is new regulations/laws with government bailout.

  11. I cannot believe some populist senators didn’t impose a minimum seat width or seat pitch in the bailout bill; let alone ban resort fees.

  12. +1 Nick Thomas

    AA stopping investment in Oasis should be a condition of any bailout. Increasing density in this day and age is insane….

  13. @Tom

    If you let employees spend company money without proper control, then the problem is not with the airlines or FF programs.
    When I was a business manager, nobody could spend company money without proper approval.

  14. @Ric – you won’t get a vote on whether or not your miles are taken. Also for those asking can the be taken away or discontinued without compensation, each frequent flyer program gives the airlines the right to make changes or even discontinue the program entirely (with no compensation) at their sole discretion.

    The ONLY reason frequent flyer programs survived previous bankruptcies and are considered “sacred cows” is that they draw flyer to the airline. They are “sticky” in that people with miles and status tend to travel on that airline so they are valuable in longer term revenue projections. However, there is NOTHING that says airlines couldn’t end a frequent flyer program in bankruptcy court to cut the future obligations (which they are required to carry on their books as a liability). In that case you could be an unsecured creditor but would be at the end of the line and will get NOTHING.

    I don’t expect programs to go away even in the event of bankruptcy or government engagement due to their future value but just letting you know it could happen and, if it did, there is little to nothing any of us could do about it.

    BTW Ric I’ve accrued around 8 million miles (including over 3 million each of AA and DL) so you don’t get much sympathy from me over how hard it was for you to earn a million miles!

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