America’s airlines are in line to receive tens of billions of dollars in bailout money from the federal government in the form of partially forgivable loans. But some of them are looking to an unlikely part of the private sector for additional financing: credit cards.
Airlines don’t want to run up debt on those cards. Instead, credit card companies and banks that offer credit cards would buy up air miles to offer to their customers as incentives for cards with large balances and hefty annual fees. That regularly happens now. A few airlines are pushing for much larger miles purchases faster in order to raise cushion capital for what has been a very bumpy year.
“All of the major airlines can benefit from selling miles in large quantities to banks because it’s likely to be liquidity on more attractive terms than the market will otherwise provide,” Gary Leff, author of the influential travel blog View from the Wing, told the Washington Examiner.
Leff said that these large purchases tend to happen in $500 million to $1 billion chunks and speculated that United Airlines and American Airlines stand to “benefit from this the most because American is the most leveraged and United recently failed to place $2.25 billion in debt backed by old aircraft earlier this month at terms they could live with.”
At a discount, Delta Air Lines and United are reported to be in talks with credit card-issuing banks for a larger-than-usual mileage purchase. “We don’t comment on industry speculation,” said Delta spokeswoman Kathryn Steel when the Washington Examiner inquired about the size of the advance mileage buy that Delta is negotiating.
In a May 28 earnings call, United CEO Scott Kirby said the airline’s loyalty program is “the largest asset we have, and we think we can raise capital against that.” Kirby said his airline is in line to receive $4.5 billion from the federal government but is still weighing its options there. He emphasized that raising capital is incredibly important to United, and so is “flexibility” in the size of United’s workforce. The bailout stipulations of no layoffs until Oct. 1 would limit that flexibility.
As for American Airlines, spokesman Matt Miller said that “a forward sale of AAdvantage miles is not something American is pursuing at this time” for one reason in particular. “Our focus is on completing the Treasury Department loan that is part of the CARES Act,” Miller said. The airline is offering up miles as collateral to the government. Cutting a deal with credit card issuers first would make that more difficult.
In a closely related part of the travel industry, American Express purchased $1 billion in discounted Hilton Honors points in April. This purchase will help the hurting hotel chain deal with the considerable drop in demand brought on by a global pandemic and local shelter-in-place orders.
“We will use the proceeds from the Hilton Honors points sale for working capital,” Hilton told the U.S. Securities and Exchange Commission in a filing.
If large purchases of miles happen, as expected, it would not be the first time that America’s airlines were bailed out by credit cards.
In 2004, Delta received $100 million in credit as well as $500 million in prebought SkyMiles from American Express. That infusion helped shore the air carrier up just enough to weather a bankruptcy restructuring. Also, Leff points out that “United’s co-brand partner [Bank One] put up debtor-in-possession financing for its bankruptcy 18 years ago.”
Yet this is a time when banks and credit card companies are looking to trim costs because of a worldwide dearth of demand. American Express announced it would reduce overall spending this year by $3 billion.
Putting out vast sums of money for something during a cash crunch suggests that the buyer really needs that thing. How badly do the credit cards need miles at a time when flying is down by as much as 90%?
“Everybody’s trying something to retain their customers,” frequent flyer Al Canata explained to the Washington Examiner.
Canata lives in Washington and travels extensively for both business and leisure. He has several cards that offer miles and other benefits. Like most large cardholders, he is currently weighing his options.
Last year at this time, Canata said that he had “already flown six to eight round trips” and had two international trips and “at least two domestic” planned. This year, he’s flown one round trip and has another one, to the Midwest, planned in late June.
Canata says that he is “reasonably confident” the June flight will take off as advertised, which is more confidence than many would-be flyers can muster these days.
According to an April survey of travelers by the International Air Transport Association, 40% of flyers are jittery about flying for safety reasons for the next six months. Almost 70% may hold off for financial reasons.
A big reason people have been willing to pay hefty annual fees for credit cards was for all the air miles and other flying perks, such as access to exclusive airport lounges. But with most flights grounded and most travel halted, says Canata, “Their value proposition has gotten tougher for some people.”
Both credit card companies and airlines are offering goodies to longtime customers. Many airlines are extending status regardless of miles flown this year. Credit card companies are offering credits for things such as streaming and cellphones and have extended some travel-based perks, such as flight vouchers, by moving expiration dates one or two years out.
If air travel picks up again, it will give frequent travelers a reason to keep their cards. If not, many will cancel.
On that front, Leff has some tentative good news. “Air travel is beginning to rebound slightly from a very low level. We’ll see more flights in June and more in July. People are buying travel to domestic leisure destinations especially,” he said.
