During the COVID-19 pandemic, nearly every popular industry took a financial toll. With lockdowns happening all over the world, airlines were left nearly empty-handed. Not being able to go anywhere meant no travel for a very long time. To offset these losses, several airlines did the justifiable act of taking out a loan.
Taking out a billion-dollar loan is no walk in the park. Like with any loan, there must be some collateral to replace the loan in the event that the airline cannot pay it back. For example, in 2020, “The U.S. Department of the Treasury agreed to make a loan of up to $7.491 billion to United Airlines, Inc. (the Company), a wholly-owned subsidiary of United Airlines Holdings, Inc. and one of the largest domestic airlines in the United States.” During the pandemic, several airlines were experiencing exponential losses in sales. This meant that the market values of many of these airlines decreased dramatically. The only option for collateral, readily available, would have been offering up a massive part of the company—but that was too risky.
So, what did airlines do? Considering these companies were depreciating at an alarming rate, they took another route. Airlines like United began putting a dollar amount on their frequent flyer programs. According to an 8-K Form submitted by United Airlines, “Multiplying MPH 2019 EBITDA by a factor of 12 equates to a MileagePlus valuation of approximately $21.9 billion.” By calculating and substantiating these values, United acquired a billion-dollar loan by offering its MileagePlus loyalty program as collateral. This newly acquired loan and proper investment became the key to balancing the offset brought on by the COVID-19 pandemic. Not only did loans like these give airlines some much-needed support—they also shifted the way airlines were running things.
Instead of relying solely on booking flights to make money, several airlines began to focus heavily on these loyalty rewards programs. Airlines were finding multiple ways to expand their mileage programs in order for more leverage and profit. One way was through partnerships—”partners would start buying loyalty points from the airline to distribute to their customers for various activities.” (Airline Geeks). Another tactic was to release co-branded credit cards to give customers more air miles. In both of these scenarios, the airlines are giving these companies exposure through the airlines’ markets and using it to their advantage. On top of that, the airlines can make billions selling their points to these partners. Because of the way this cash cow is structured, everybody wins. And these are only a few tactics used to keep United’s MileagePlus program alive and well.
There’s no doubt that airlines and several other businesses ate their weight in money during the beginning of the pandemic. Luckily, airlines were able to leverage their assets to bring in more money to expand even further. This has, without a doubt, created a shift in where these companies invest their revenue. Loyalty rewards programs have become a cash cow that will continue to be nurtured and fed until the market says otherwise.
