Airlines Consider Selling Miles to Credit Card Companies to Raise Revenue During the Coronavirus
Joe Cortez April 13, 2020
With airlines spending millions per day on empty flights and grounded fleets, their latest fundraising plan doesn’t involve a government bailout but turning to a reliable friend in the space instead. The Wall Street Journal reports both Delta Air Lines and United Airlines are considering a bulk sale of miles to their credit card partners.
Dumping miles off to credit card partners
During good economies, airlines are among the best partners for credit card-issuing banks. With flyers eager to spend money, banks pay little for the frequent flyer miles they are issuing as rewards, while they reap benefits in both transaction fees and interest on open balances.
However, during the novel Coronavirus pandemic, spenders are conserving cash and airlines aren’t making money from flyers through airfare and ancillary fees. As a result, both Delta and United may be considering dumping off miles to American Express and JPMorgan Chase, respectively, to raise cash.
According to anonymous sources “familiar with the matter,” both airlines are debating opening up miles to their credit card partners sooner than scheduled, and at a lower price than negotiated. Analysts note that American Express paid Delta $4 billion for their lot of SkyMiles in 2019, while JPMorgan Chase paid $3.4 billion to United for their share of MileagePlus miles.
If the airlines sell off miles to credit card partners, it could be a last-ditch effort to raise capital before flyers take to the skies once again. Because the partnerships are lucrative for both sides, selling off miles is an easy way for airlines to raise cash before they are forced to take money from the federal bailout fund. Many of the domestic carriers note they do not want to surrender an equity stake of their airlines to the government in exchange for support money.
How this could benefit frequent flyers
During economic downturns, airlines and banks are affected in similar ways. While airlines aren’t welcoming as many passengers, banks aren’t issuing as many credit cards to new account holders. The result is lost potential revenue.
If the air carriers offer a bank of miles to their bank partners at a discount, it could benefit qualified flyers to gain major airline bonuses. Historically speaking, some of the biggest mileage offers came as the economy bounced back from several downturns, including the 2008 recession. If history is an indicator to future directions, credit card issuers could offer major bonuses once again for new accounts, thanks to the influx of miles they purchased at a discount.
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If, as the story says, the airlines would be selling miles to the credit card companies at a reduced price, I'm not sure this will benefit flyers. The airlines will still have to redeem the miles, and if they sold them at a loss (or below market), how do they avoid losing money on the deal? How? By yet again devaluing the miles of course. Some of us old-timers remember when we could reasonably redeem miles for a value of two cents per mile or more, then came the devaluations until Delta was issuing their SkyPesos with a redemption value of about a penny per. If they devalue again, they'll break the penny and the redemption value will again decline. It could get to the point that cash-back cards are a much better deal than mileage-earning cards. In that event, we'd all lose, the miles collectors, the airlines, and the credit card issuers.