United’s financial advisors “have begun contacting potential investors including private equity firms” about a sale of less than 15% of the MileagePlus program. The buyer may be a strategic partner “to help better monetize data from the business.” A sale could certainly bring over $3 billion in cash while the carrier has huge capital expenditures coming for aircraft acquisition and retrofits, depending on how much its existing debt load affects its valuation.
That loyalty programs as big business are nothing new. MileagePlus was the only profitable part of United when the airline filed for bankruptcy 20 years ago. United leaned on the currency in bankruptcy and during the Great Recession for liquidity. And now has over $6.5 billion in debt financing against it.
Air Canada and Aeroplan show what can happen with a complete spinoff, where interests of separate companies aren’t aligned and the airline can’t stay competitive in its loyalty offerings. It wasn’t possible to make changes that required coordination between the loyalty program and the airline. Air Canada ultimately bought back the program at a huge discount after announcing it wouldn’t renew its 15-year deal with Aeroplan. United considered a similar spinoff shortly after Air Canada did it.
Since the programs are already working hard to monetize, and already have outside financial interests, there’s no reason that selling a small minority stake changes things fundamentally for customers.
However there’s the risk as additional financial parties become involved that they exercise pressure for short-term results – cost cuts, degradation of service, higher award pricing – in ways that can make sense for immediate financial return at the cost of long-term value (the very essence of loyalty marketing, where United is one of the most successful players). Ultimately it matters who the investors are.
Consumers shouldn’t see this as an abrupt departure for United, but a continuation of its existing strategy. They did more than anyone to become a ‘cash first’ program tying elite status directly to high levels of ticket spend and selling debt backed by the program in a way that competitors copied.
Please explain how investors will not lose when the value of miles continues to decline. Also how it makes sense to buy a minority interest in a subsidiary when the parent company can benefit from extracting the value from the subsidiary and driving it to zero. I just don’t get it.
I’m sure they will sell out the program to some company and they will infect the program with pop-up ads, just like view from the wing.
@ Gary — Let’s just hope Marriott isn’t the investor.
@nsx- the new investors would gain if the value of miles declined- they are a liability on the MileagePlus balance sheet. The second point is more valid; being a minority partner in a subsidiary can be problematic, though there’s ways to structure shareholder agreements to compensate. Certainly United has a huge to continue to feed it’s cash cow- its the main profit generator for the company.
I’d guess they are just floating a trial balloon, after raising so much cash by taking on new debt, to see if there are any takers for equity. Probably due to both the conflicts and the debt load, United will not get their target price and MileagePlus will remain a wholly owned subsidiary. But good for them for thinking outside the box…
Cash grab!