NEW YORK: The current credit crunch alongside a growing shortfall in seat utilization is taking its toll of US airlines, many of which now seek to monetize their frequent-flyer programs by selling tranches of 'miles' to credit card partners.
The ice age in the world's capital markets has not only restricted the available options for raising cash – but has also made the process far more expensive. Many carriers, including Continental Airlines, are turning to their affinity partners – in the latter's case JPMorgan Chase – for a cash injection.
Last month, Continental raised $413 million (€261.76m; £207.23m) by selling miles and assigning some of its routes and airport slots as collateral.
American Airlines and United Airlines are likewise stretched and aware that they may need to monetize the billions of dollars in miles values and other unencumbered assets.
In a research note issued last week JPMorgan analysts Mark Streeter and Jamie Baker observed: "The wheels are already in motion.Can a similar deal between American and Citibank [its affinity card partner] be that far off? Not in our opinion." The cash drought is also affecting airlines elsewhere on the globe. JAL, whose loyalty programme boasts twenty million members, sold 50% of its credit card subsidiary in May to Japan's biggest bank Mitsubishi UFJ.
The Japanese carrier will use the money to purchase new aircraft and reduce debt.
Australia's Qantas too is mulling a similar move – a partial flotation later this year of its frequent flyer scheme – which if implemented could generate between A$2 billion and A$3.5bn.
The blueprint makes sense even in less turbulent times. In 2001 Air Canada floated its Aeroplan frequent flyer rewards program as a separate business. Seven years on, it trades at a stratospheric multiple of eighteen times earnings.
Data sourced from Financial Times; additional content by WARC staff