Airlines' frequent flyer programs prove a lifeline even as travelers stay home in pandemic

Published Wed, Oct 14 202012:40 PM EDTUpdated Wed, Oct 14 20204:36 PM EDT

Key Points

Passenger revenue has plunged at airlines, making their loyalty programs more important than ever.
American and United are using these programs as loan collateral.
Airlines and credit card companies have added new ways to earn and redeem miles that aren't related to travel, like streaming services and groceries.

You know things are bad for airlines when Delta loses more than $5 billion and it's an improvement from the prior quarter . By now it's no secret that the coronavirus pandemic has devastated demand for air travel. A web of travel restrictions, limited tourism attractions, endless Zoom calls and worries about the virus itself are keeping a lid on bookings. Demand has climbed back from 1950s-era levels hit in April, but not enough. The Transportation Security Administration screened 64 million people at U.S. airports in the third quarter, which coincides with the peak summer travel season. A year ago it screened more than 220 million, a 71% decline. The six biggest U.S. airlines lost more than $10 billion in the second quarter . Executives say the pandemic will have longer-lasting financial scars than the Sept. 11 attacks and the Great Recession. A recovery could take years , with once-lucrative business and international travel expected to bounce back last. This time around though, airlines have a special weapon: their frequent flyer programs. These loyalty programs, which started in the 1980s, have proved a lifeline for airlines. For one, loyalty revenue has dropped less than ticket sales. More important: airlines are leveraging these programs like never before. Delta, United , American and Spirit used loyalty platforms to back more than $20 billion in debt this year to weather the crisis. Their strategy came with disclosures that are illuminating this once opaque business. Investors should pay close attention. How it works Airlines make money selling frequent flyer miles to credit card issuers like American Express , JPMorgan Chase and Citigroup , through co-branded and other rewards cards. In exchange, airlines deliver strong and steady spenders to card issuers. "The business is super profitable and they're being paid a huge fee for delivering valuable customers to the credit cards," said Stifel airline analyst Joseph DeNardi, who has urged airlines to provide more information about this business. Airlines have turned to these programs to stay liquid during the crisis, proving they're a useful asset like multimillion-dollar aircraft, airport slots and gates that can back debt. American Airlines is using its AAdvantage frequent flyer program to back a more than $5 billion federal loan that could be upsized to $7.5 billion. The carrier said in a filing that the program was appraised at between $19.5 billion and $31.5 billion. American's market capitalization as of Tuesday's close was $6.6 billion. United's MileagePlus program was valued at close to $22 billion, eclipsing the Chicago-based carrier's $10.6 billion market cap. Despite the difficult path to a recovery in travel demand, lenders have showered carriers with funds backed by these programs. Delta in September set out to raise $6.5 billion and ended up selling $9 billion, the biggest debt sale by a U.S. airline ever. United's offering in June was upsized to $6.8 billion from $5 billion. "What we did not anticipate at the time was the magnitude of Loyalty financing (a nice upside surprise notably at DAL, UAL, and AAL)," wrote JPMorgan airline analyst Jamie Baker last week, referring to earlier forecasts. Airlines' challenge There's no sugar coating just how bad things are for airlines. Delta lost $5.4 billion in the third quarter, compared with a $1.5 billion profit a year earlier. It pushed back its breakeven target to early next year from its goal of the end of 2020 though it reduced its daily cash burn to $18 million in September from $27 million a day in June. The Atlanta-based carrier's shares are down 45% this year, as of Tuesday's close. United, which reports third-quarter results after the bell on Wednesday, is down 60%. American and Southwest, set to report Oct. 22 are down 57% and 28%, respectively. Delta's revenue in the third quarter plunged 79% to $3.06 billion from more than $12 billion a year ago, a gauge of just how severely the pandemic spoiled what is normally the peak summer travel season. Meanwhile, the loyalty program, mostly sales from a co-branded credit card partnership with American Express, fell 60%. Airline loyalty programs aren't enough to prop up carriers, but they do generate sales at a time when every drop of revenue is needed. Delta's loyalty program revenue came in at $486 million, 16% of the airline's total sales in the quarter, up from a 9.6% revenue contribution a year ago. "We have seen continued spend improvement through the second, third and now fourth quarter," CEO Ed Bastian said on Tuesday's earnings call regarding Delta's co-branded credit cards. He added that it's too early to say what holiday spending would be but said "we've been very encouraged by the trends we've seen." Such an improvement has been echoed by banks. JPMorgan Chase CFO Jennifer Piepszak on Tuesday said that net sales in the credit card business fell 8% in the third quarter year on year but were improving. "In the month of September, sales were down only 3% year-on-year, reflecting the lowest decline since March," adding that retail is a particular "bright spot." Some airlines are holding out hope that lawmakers and the White House will reach a deal on another coronavirus aid package that includes another $25 billion in federal aid to cover carriers' labor costs until the end of March. But a national stimulus for American households could also further drive consumer credit card spending, Bastian said. Still, airlines and their investors can't divorce the loyalty program from the carrier and prospect of future travel. Swiping that co-branded card means there has to be a reward at the end, usually cashed in for a trip. If you — or if you're lucky, your company, has spent enough, at the front of the plane. If customers don't regain their appetite for travel, airlines lose the draw of the co-branded cards. "Without the airline the loyalty program would be worthless," said Savanthi Syth, Raymond James airline analyst. Because of the underwhelming increase in air travel, carriers and card issuers in recent months started offering new ways to earn bonus miles, including pandemic-friendly activities like entertainment streaming, grocery shopping and meal delivery, all in hopes of keeping customers earning those cash-generating miles. American Airlines on Wednesday announced it would allow 2020 travel to count toward elite status next year and that it will extend some benefits to the cheapest tickets. "We realize this year has been challenging for our members, so we're happy to provide more ways to achieve more rewards," Rick Elieson, president of American's AAdvantage said in a release. Airlines need to do all they can to retain prized customers like Los Angeles-based filmmaker Ramon Goni. The 38-year-old spent years racking up miles from business trips and thousands of dollars of film equipment and other expenses on his credit cards that are co-branded by Delta and American Express, cashing in later for trips home to his native Spain, with free upgrades to business class. With his work trips halted in the pandemic and work slower, Goni is weighing whether he needs both cards. Such thinking could be bad news for airlines when they need customers like him most. "It's been more interesting to me to use cards that are giving me cash back," he said.