Hilton has just found a way to raise a billion dollars in cash through their Honors loyalty program, and that potentially has some implications.
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…
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