Delta & United Looking To Pre-Sell Miles To Banks

Filed Under: Delta, United

It looks like at least a couple of major airlines might be looking to pre-sell miles to their co-brand card issuers, which is never a good sign (but also shouldn’t come as any sort of a surprise, since we all know how dire the current situation is).

Airline loyalty programs are huge businesses

Here in the US, loyalty programs have largely become the most lucrative parts of the airline business. These are no longer rewards programs intended to fill seats, but rather have become massive profit centers in and of themselves.

The most revenue from these programs comes from co-brand credit card agreements. Just to give a sense of how lucrative these are, Delta and American Express recently renewed their agreement through 2029 — in 2018 the partnership was worth $3.4 billion to Delta, while they hoped that it would be worth $7 billion by 2023 (this was before the whole COVID-19 pandemic, so I doubt that’s still on track).

Loyalty programs are huge profit centers for airlines

Airlines are considering pre-selling miles to card issuers

A major component of these partnerships is banks buying miles at pre-negotiated prices from airlines. After all, these are an element of the rewards being offered on co-branded cards.

The Wall Street Journal is now reporting that both Delta Air Lines and United Airlines are in discussions with their credit card partners (American Express and Chase, respectively) to pre-sell miles at a discount.

Credit card companies buy miles on an ongoing basis, but the concept is that they’d buy miles now so the airlines could get more cash. This isn’t the first time this has happened, as there were similar deals after 9/11, after the 2008 market crash, etc.

While this might sound like a no brainer, there are some major downsides to this:

  • Airlines would be selling miles at a discounted price compared to what they’d usually sell miles for, which will take away from future revenue; this accounts for the risk that banks are undertaking
  • This gives the airlines less leverage when it comes to negotiating with their credit card partners; then again, both Delta and United recently renewed their credit card contracts long-term

It’s worth noting that as of now nothing seems to be finalized, as airlines are only trying to explore more avenues for survival, if the situation becomes more dire.

Airlines may be pre-selling miles to banks

Bottom line

Airline co-brand credit card agreements are massive businesses for airlines. Both Delta and United recently renewed their agreements, and it looks like they might be going to Amex and Chase (respectively) to explore the possibility of pre-selling miles.

While this is an easy way to get liquidity short term, they’re essentially taking a significant cut on what would otherwise be (near) guaranteed future revenue. Then again, when staying in business is the priority, that’s fair enough.

Comments
  1. As you say Lucky, not surprising.

    But yet another sign that it is best to stay away from the miles credit cards and the miles/points programs more generally.

  2. To clarify by “never a good sign” I think you mean from the perspective as a miles arbitrageur. Ticket prices will most likely be higher in the future to account for changes in the business model – i.e. tickets paid with cash being treated as restricted cash rather than as cash available for internal use.

  3. @ ADP — I meant “never a good sign” in terms of the financial health of a company. From the perspective of those of us collecting miles, I actually think we’ll see a renaissance over the coming months and years, as airlines will hopefully actually use loyalty programs as they were initially intended, to fill seats and make people loyal.

  4. Citi sold miles to AA to stave off bankruptcy (was it after the financial crisis?).

    Makes sense for airlines – although it shows they’re scraping the bottom of the barrel in terms of what they’re borrowing against.

    If I was a bank, I’d want a significant discount for buying these miles. Presumably customer behavior is going to be moving away from travel rewards that aren’t seen as valuable as they once were.

  5. Hopefully we will see bigger signup bonus on new Chase United cards. Their current offer 100k for $550 United card (with mostly useless features) isn’t worth it. If 150-200k offer then maybe…

  6. For the consumer, this is good, isn’t it?
    Wasn’t because AA sold one billion dollars points to Citi, to avoid bankruptcy, that we saw a great increase in AA credit cards sign-up bonuses and spending categories?

  7. I don’t know why anyone would want Delta miles. Instead of extending status, they should have brought value back to Sky Miles:

    1) Bring back fixed, award-redemption chart
    2) Allow stopover and around-the-world tickets, which fosters aspirational travel and loyalty
    3) Allow regional upgrade certificates to be used for economy to premium economy

  8. @Lucky

    As you have asked in the other post, this obviously is a cash grab scheme, difference here is dealing with one big entity with a long history and obviously a huge sum of money that makes it worthwhile. In this particular case why it didn’t happen sooner in my opinion is there isn’t much reason to buy a doubtful airline miles when, as banks, they can loan the same money with collateral. If DL and UA is to get attention of banks, they really really have to sell it cheap.

    Depending on the deal size, it will show how desperate airlines are. If they think they can survive there is no reason to pre sell to make less money 5 years from now unless there is no 5 years from now. Likely airlines now think this will last longer than expected so they probably should sell it now since it would look much worse on them trying to raise money few months from now.
    I also might be overthinking this (because its very unlikely) but another reason this just came up is DL UA might reject the loan package so there are seeking funding elsewhere.

    I do agree with your “renaissance” theory if they come out weak like most of us predicted. But I have to warn all of you if they come out strong only a sneaky quite “devaluation” will happen.

  9. I’d be interested to see how many signups Chase could muster for the new United Club Infinite card—a $525 annual fee for clubs that are closed and 100,000 miles for an airline with very few flights.

  10. If the airlines take government money. You as a tax payer you be on the hook for years. Then the airlines the ticket prices will go thru the roof so it will be a double whammy.

  11. I have a United presidential plus card. It’s a Chase MasterCard. I get free bags for me and three travel companions, free upgrades to economy plus on United flights for me and three people traveling on my itinerary and entrance to the United club. I’ve already canceled two trips since COVID-19 and in May my presidential plus card will be up for renewal. Should II pay $450 to renew this card? I contacted Chase twice in the last month and they said contact them next month. What do you think?

  12. I’m changing my spending and gutting my travel plans indefinitely. Never was a fan of the points game and this is the nail in the coffin.

    As such I’m canceling my airline co-branded cards. Along with my CSR which has points bonuses for travel and dining out spending, something I’m not going to do for a while. Replacing these will be low or no fee cards that give cash backs for stuff like gasoline and grocery stores.

  13. @Alan Sells

    United presidential plus card is a legacy product means you can’t get it anymore.
    The biggest benefit for this card that current cards don’t have is the ability to earn PQP that can get you up to 1K. So if you never put spend on it and never make it beyond Platinum then cancelling the card might not hurt much. But if you spend your way to status and hope to qualify for 1K, this card should be a keeper.

    Calling Chase wouldn’t help you until after the fee post to your statement. Please do share if you receive some retention offers.

  14. It seems to me the airlines are their own worst enemy when it comes to this. They have devalued miles to the point they really are not worth it. With very few exceptions, you would be a fool to buy miles or spend on a credit card for whatever pittance they offer.

  15. Hopefully the Airlines, credit card companies will come up with something , that satisfies all, no point in having loads of points, only for airlines to increase these miles for flights ,or upgrades I feel Delta , American Express will come out good(hopefully) as they seems to know what customers like, plus give good value, I feel if they do start with great offers, try not to increase miles needed ( if they don,t should kick start seats not revenue, being kept empty) this will kick start Airlines, plus knock on effect for airports, who in turn , will have to do their part, on reduced fee,s etc,Lets firstly hope everyone stays indoors , or keep away from everyone for next 3 weeks, keep well everyone, One person catching this Virus is one too many x

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