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Airline miles are big business for airlines. Long gone are the days of frequent flyer programs being just a punch card to generate a little extra loyalty from flyers. Instead, airlines are now dependent on their mileage programs for survival.
In efforts to raise cash to get through the pandemic, American Airlines and United Airlines are mortgaging their mileage programs. As part of this process, both airlines have disclosed valuations of their mileage programs—And the numbers are in the tens of billions of dollars.
How are these mileage programs so valuable? Let’s take a look into how airline mileage programs make money.
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In the U.S., mileage programs are an integrated part of their respective airlines. As airlines don’t share many critical details about the programs, analysts can only estimate the value of the mileage programs. For years, stock analysts have estimated the valuation of major U.S. airline mileage programs to be in the tens of billions of dollars.
Now, as airlines are having to mortgage their mileage programs, these estimates are being proven out.
In a bid to get a Coronavirus Aid, Relief, and Economic Security (CARES) Act loan of $4.75 billion, American Airlines recently completed a third-party appraisal of the AAdvantage program. That appraisal placed the value of just the U.S. portion of the AAdvantage program at between $19.5 and $31.5 billion.
The American Airines Group—which includes the AAdvantage mileage program—is currently valued by the stock market at $5.9 billion ($11.58 per share with 508.11 million shares outstanding as of July 14, 2020).
If you subtract the conservative valuation of $19.5 billion from the $5.6 billion market capitalization for the combined group, the implied value of the airline operations is a negative valuation of almost $14 billion. Indeed, American Airlines’ own filings show that the airline had been losing money from its passenger operations even before the coronavirus pandemic sent airline travel into a tailspin.
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However, by generating billions of dollars in loyalty revenue, the airline has been able to report billions per year in profit.
The situation is similar for United Airlines’ MileagePlus program. United is currently valued by the stock market around $9.2 billion ($31.80 per share with 290.45 million shares outstanding as of July 14, 2020). Yet, in an investor filing in mid-June, United valued its MileagePlus program at $21.9 billion by using a 12X multiple of the program’s 2019 earnings.
As with American Airlines, if you subtract the mileage program’s estimated $21.9 billion valuation from the market’s $10.1 billion value of the airline group, the implied value of United’s airline operations is also negative.
However, the United’s financial situation isn’t as bleak as it is for American Airlines. In United’s disclosure about the MileagePlus program, the mileage program generates $1.8 billion in Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA). That $1.8 billion only accounts for 26% of the airline group’s total adjusted EBITDA, meaning that the airline generated significant profit from operations.
Airline mileage programs have two main sources of revenue: the airline itself and third parties. In its filing, United provided this handy flowchart to show how cash flows in and out of the MileagePlus program.
In the case of United’s program, MileagePlus received 71% of its 2019 cash flow from over 100 third-party partners and just 29% of its cash flow from United itself.
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