United Airlines shopped the MileagePlus loyalty program around to lenders to raise cash, and they had to present a lot of internal data as part of the process. Now that the transaction is moving forward, they’ve had to make this data public.
Here’s how the $5 billion loan is going to work, and some facts about the program they hadn’t previously revealed.
United Will Raise $5 Billion Debt Secured By MileagePlus
United Airlines filed an SEC 8-K saying that they’re taking a $5 billion loan against MileagePlus, and that they won’t need the loyalty program as collateral for a government-subsidized $4.5 billion CARES Act loan. Instead, they’ll use currently-unencumbered slots, gates, and routes as backing for a government loan should they accept it.
The airline is valuing MileagePlus at $21.9 billion based on 12 times 2019 earnings before interest, taxes, debt, and amortization. (American Airlines had AAdvantage appraised at $18 to $30 billion.)
Goldman Sachs, Barclays, and Morgan Stanley committed a $5 billion term loan, though the airline plans to “seek long-term debt financing in lieu of borrowing the full available amount under the committed term loan facility.” So this is a short-term bridge that they plan to replace with less expensive capital if possible
- The loans are backed by MileagePlus “brands and member data.” In addition to your account information, the loan is backed by domain names, copyrights, patents, trademarks, and software including the MileagePlus X app as well as a non-compete clause.
- And repayment takes first priority out of “accounts into which MileagePlus revenues are or will be paid by its marketing partners and by United.” So they’re effectively pledging credit card revenue from Chase.
It’s striking that they’re taking out a loan against MileagePlus, rather than pre-selling miles, though this likely allows them to access more capital than a mileage sale would have. It’s also telling that Chase, which recently renewed their credit card deal with United, isn’t participating.
Disclosure Filings Give Us A Peak Behind The Curtain Of MileagePlus
Investors, and now the SEC, have been provided with data on the program that’s now public:
- over 100 million members
- 65% of members make over $100,000 per year [there’s an incongruity, since less than 20 million people in the U.S. earn over $100k per year]
- $5.3 billion cash flow (12% of airline revenue)
- $1.8 billion EBITDA (26% of United adjusted EBITDAR)
- 71% of cash from miles came from sales to third parties, mostly Chase, while 29% came from miles awarded from flying United
48% of members live in United hubs, the largest concentration in New York followed by San Francisco a distant second.
Members have consistently been earning 20% – 30% more miles than they redeem, though program profitability has been fairly flat.
One selling point, though this really isn’t news, is that the airline can limit redemptions or devalue their proprietary currency as-needed.
The extent to which United is raising even more money in the market than the government is offering – indeed, that funding markets remain open to the airline at all – underscores how inappropriate the CARES Act subsidized loans were in the first place.