Hilton has just found a way to raise a billion dollars in cash through their Honors loyalty program, and that potentially has some implications.
In this post:
Hilton pre-sells points to Amex
Per a new SEC filing, in April 2020 Hilton pre-sold one billion USD worth of Honors points to American Express. As this is described in the filing:
American Express and their respective designees may use the points in connection with the Hilton Honors co-branded credit cards and for promotions, rewards and incentive programs or certain other activities as they may establish or engage in from time to time.
Hilton plans to use the points from this sale for working capital, general corporate, and other purposes.
What are the implications of this points pre-sale?
A couple of days ago I wrote about how both Delta and United were reportedly in discussions with banks (Amex and Chase, respectively) about the possibility of pre-selling points.
The concept is simple — a major component of these co-brand credit card partnerships is banks buying points at pre-negotiated prices. When travel brands get into bad situations (as they are now), this is potentially a source of quick cash for them:
- Airlines and hotels can pre-sell a bunch of points to their partners
- However, you can expect that they’re doing so at a steep discount, both to account for the risk and the fact that they’re getting more money up front
While this is an easy source of cash, it also sends a bad signal:
- This was more or less guaranteed revenue in the future, which they’re accepting now at a discount
- This gives Hilton less leverage when it comes to negotiating with Amex in the future
How much could Amex be paying for Hilton points?
One certainly has to wonder at what cost Amex just bought Hilton points. These are all closely guarded secrets so we’ll probably never know, but if I had to guess:
- Hilton Honors points can be purchased by consumers for 0.5 cents each during a promotion
- Amex is buying points in massive quantities, so I’d assume they’re paying no more than 0.3-0.4 cents per point under normal circumstances
- I would assume the discount that Amex is getting for pre-purchasing points would be significant
While it’s total speculation on my part, I would assume Amex is probably paying under 0.3 cents per Hilton Honors point here.
Does this mean points will be devalued?
One logical concern would be whether this leads to points being devalued. After all, if Hilton is suddenly selling points at a discount to Amex, doesn’t this mean Hilton will have to reduce costs when it comes to redemptions? Yes and no:
- In many ways hotel groups will be more reliant on their loyalty programs to fill rooms as demand slowly recovers, and devaluing points would have the opposite impact
- Due to the way that loyalty programs reimburse hotels for award stays, redemption costs are likely to naturally go down if hotel demand doesn’t fully recover quickly
- While I’m not sure how exactly it’s structured, presumably there’s a provision in place preventing Hilton from devaluing points in a material way, given how much Amex has “invested” here
Personally I’m not too worried about Honors points being devalued.
Bottom line
Hilton has become the first major US travel brand I know of to pre-sell points to their co-brand partner as a way of raising cash. This is an easy lifeline for the company, though also takes away near guaranteed future revenue and discounts it…
Now we know why. 12x on Surpass and Aspire.
Saw the same thing after 9-11. travel cuts because "its just as effective to video call than it is to travel" the thing is nothing is better than a face to face meeting and travel will eventually boom.
Huge devaluation in US and but not so much in Asia. I think in future you might need 100k points to stay in a Hilton Garden Inn in US while 30k points to stay at a Conrad in China / India.
@ghostrider: I'm willing to bet that at least 1/3rd of business travel with never come back, possibly up to 1/2. Businesses becoming comfortable with video conferences is going to be the real pain point for the travel industry. ≈ The younger generation of business employees have been comfortable with technology forever. The older generation's learning through this time that video conferences aren't ideal but work a lot better than being on a telephone. The bean...
@ghostrider: I'm willing to bet that at least 1/3rd of business travel with never come back, possibly up to 1/2. Businesses becoming comfortable with video conferences is going to be the real pain point for the travel industry. ≈ The younger generation of business employees have been comfortable with technology forever. The older generation's learning through this time that video conferences aren't ideal but work a lot better than being on a telephone. The bean counters are going to show the suits how much less video calls are to airfare and hotel rooms.
As to how the industry reacts to it, that's a good question. Will prices go down in an effort to encourage more travel? US domestic airfare and hotels have had some major price inflation over the past decade. Hotels where I used to be able to stay for $100-125/night are now $350/night. Same hotel, no redecoration. At the same time, will prices go up due to fixed costs but fewer people traveling? Either way, I'm glad I'm not a revenue manager working in the travel sector.
Looks like it was a good idea to downgrade our Hilton Aspire cards. Now my wife and I can wait for a great upgrade offer back to the Aspire with no lifetime bonus language attached!
Any sale of future travel points to any creditor by any travel entity is the absolute worst scenario for collateral transfer to debtor.
The banks have already told the airlines they do not want frequent flyer miles.
@ Mark LMAO!!!
333 billion Honors points huh?
Imagine having that many. Enough for 3.4 million nights at WA Ithaafushi...or 9,500 years.
That would be a hell of an F&B spend though.
Maybe the Hilton Amex cards will have increased sign up bonuses now that Amex has a lot more points to sell.
Just another reason not to sign up for any credit cards right now. The future value of these points is incredible uncertain. Go for a cash back card that comes with a small but certain cash bonus and stay the hell away from branded products.
Amex is already frequently offering a 50% bonus to convert Amex points into Hilton points (regular rate 1:2, with bonus 1:3). I can see Amex increase that bonus in order to incentivize people to use their points at a (on their end) low value. Additionally, we might see targeted spending bonuses for the Amex Hilton credit cards and even higher sign-up bonuses.
I heard it was 500 Billion Hilton points 0.2 cents per Hilton point
@ Ben -- Now maybe we'll finally get a better deal on buying points than the awful 0.5 cpp. ;) Regardless, I won't be buying ANY points or miles for a very long time.
Frankly many people are too worried about what they can see inside the box, rather thinking outside the box does anyone really know how this is going to look 6/12/18 months out? Certainly business travel will change as more companies ( mine included) are finding conference calls/video working well, the mass marketing of conferences and seminars will drop significantly going forward. That all directly affects the leisure travel segment.
Will people be chasing points...
Frankly many people are too worried about what they can see inside the box, rather thinking outside the box does anyone really know how this is going to look 6/12/18 months out? Certainly business travel will change as more companies ( mine included) are finding conference calls/video working well, the mass marketing of conferences and seminars will drop significantly going forward. That all directly affects the leisure travel segment.
Will people be chasing points as before? How soon will travel really rebound, especially cruises and long haul flights in packed main cabins?
Buying points by CC issuers is a solid business decision which locks that hotel or airline into their programs which are extremely profitable for them. I was once involved in direct negotiations with a bank purchase of a company I had interest in, they used cash from their CC operation to complete the deal, whats I found was the huge profits they generated. Names withheld.
Amex did this with Delta a long time ago. Saved delta from bankruptcy afaik.
The hotel owners get screwed given the occupancy levels are likely to below the threshold so they get paid the full bar rates , thus more rooms being occupied with points lice
Using tomorrows money today. This is just an endless vicious cycle with no good ending.
It’ll just keep on going on eating into the future going deeper and deeper until its unrecognizable
This is one of those things where we know so little about the actual deal, other than the total amounts, that I don't think it's worth speculating. We have no idea what else there is to this deal and what they discussed behind closed doors.
TD is right, the agreement definitely includes provisions preventing material devaluations while they distribute these.
I would also question the value of the discount, it likely isn't as big as you would expect. A billion dollars in points is maybe 1-2 years of points being issued for spend (and then there are a bunch issued for spend bonuses, referrals, etc.); my guess is they received about a 10% discount over what they usually pay as...
TD is right, the agreement definitely includes provisions preventing material devaluations while they distribute these.
I would also question the value of the discount, it likely isn't as big as you would expect. A billion dollars in points is maybe 1-2 years of points being issued for spend (and then there are a bunch issued for spend bonuses, referrals, etc.); my guess is they received about a 10% discount over what they usually pay as that's a good ROI for a fairly low-risk investment.
Also, Amex lawyers aren't suckers... they certainly drafted provisions to protect the value of the asset they just acquired against unilateral devaluation by Hilton.
It costs Hilton very little to reimburse a hotel when a customer uses points while the hotel isn't at or near full occupancy, which I should imagine will be for quite a while so this makes for a good move for them I'd say.
"Personally I’m not too worried about Honors points being devalued."
If Amex did, indeed, buy these points at 0.3 cents each, then they have just purchased 333.3 billion points, which they will have every possible incentive to get into the hands of their customers as quickly as possible in order to recoup their investment. I would not be surprised if the injection of this much currency into the market ends up with another devaluation within...
"Personally I’m not too worried about Honors points being devalued."
If Amex did, indeed, buy these points at 0.3 cents each, then they have just purchased 333.3 billion points, which they will have every possible incentive to get into the hands of their customers as quickly as possible in order to recoup their investment. I would not be surprised if the injection of this much currency into the market ends up with another devaluation within the next year or so after the pandemic ends, especially since there likely will be other incentives by Hilton (in the form of bonus point promos and the like) to get people back into rooms once all this ends.