threecap

Of course, big difference in the cash flow of the asset being contributed.

Repooc17

I would say there are definitely aspects of the FF program as intangible, maybe not indefinite-lived like trademarks, but finite-lived

jcain

I think that was labelled "illustrative" on the deck so not sure if $0.02 is the actual number. $0.02/mile seems really high given that would probably eat most/all of Chase's share of the CC interchange fee even on non-bonus spend categories. I guess they could make it up in interest charges?

spartacusmcfly

2 cents was an illustrative number, but whether it's 100% margin or 75%, it's a really good margin! And the relationship between UA and MP is a 20-year iron-clad, exclusive relationship from the date of the loan.

They've basically collateralized the loan with a money printing press. The only thing that breaks the printing press is dissolving the airline. That's why this loan could only be consummated once Chapter 11 was no longer a risk.

​​​​​​​There's real value here...

WineCountryUA

The illustrative $0.02 was for third parties, Chase was in a different category ("Customer signs up for MPH credit card or transacts with partner") and no equivalent number was provided.

UA is a bit more modest than this

threeoh

Buying for $.01 and selling for $.02 is 50% margin, not 100% margin.

A minimum margin of 20% means buying at $.01 and selling at at least $.0125. Presumably they sell at that amount to United and some close partners and higher margin to other partners.

There's an income statement there so it shouldn't be to hard to calculate the overall average margin.

J.Edward

What gives M+ its value is its ability to generate positive cash flow. Should UA face a default event, you'd probably see a move to restructure the existing debt at the expense of the bond, equity, lessors, and labor (and probably others too I'm not thinking of) but the key is UA would still operate and in turn, provide some increased level of value than if the operation ceased altogether.

I don't have enough info to speak to the specifics of this but as far as M+ goes the reason JPM pays UA for a mile is they in turn call sell it [by charging annual fees, higher APRs, etc.] to their customer base. Moreover, JPM is a creditor to UA - for example, they carried 500m of the 2b lending facility UA took out earlier in the year, IIRC. Take away is should UA find itself backed into a corner and needing to default on their debt, their creditors will be keen to preserve the value of their collateral. In M+'s case, this means ensuring co-branded customers still perceive enough value in paying higher co-branding costs to participate in the program. I doubt this would be possible should creditors seek to foreclose and/or liquidate M+...and that's assuming JPM would even allow the idea of liquidating M+ in the first place.

Also archive links of the good info posted upthread:

United to Put Up Frequent-Flier Program for $5 Billion Loan - WSJ
http://archive.is/NlzCn

Edited to add -

Archive link - http://archive.is/edYNK

spartacusmcfly

OMG, as I think through this, this is a godsend for flyers. All of a sudden, there is a strong disincentive for UA to dilute MP too much. Here's why:

Passenger redeems 40,000 mile award from SFO-LHR, MP pays UA $400 to fly that passenger. (1 cent/mile)
Passenger flys on a $4K ticket and earns 40,000 MP miles. UA pays MP $500 to credit 40,000 miles to the passenger account. (1.25 cents/mile)
Guaranteed 20% margin for MP, all good so far.

But now, let's say the world goes to hell, and UA jacks up the redemption rates on every route by 10x. Meaning SFO-LHR goes from 40,000 to 400,000 miles.
Well, most don't have 400,000 miles, so how do you get them? You buy them from MP at 2/10 of one cent/mile -- which is what it'll need to be to convince you to buy the miles.

Now, MP is screwed. They have to pay UA 1 cent per mile to fly the passenger on that redemption, but they only collected 2/10 of one cent per mile on that redemption.

Fear not MP bondholder, as t​​​​he footnote on page 12 says, UA is now forced to increase what it pays MP per mile to insure MP makes a 20% profit!

So UA doesn't really benefit from massive MP devaluation as their operating costs will rocket.

I think the days of devaluation are over. I bet this guaranteed profit thing is something they just implemented to sell these bonds. This is beautiful for all of us!!!

jsloan

Relatively few of UA's miles are awarded for actually... flying. Those that do are mostly awarded at 5:1, not 11:1; the number of 1K/GS members is tiny compared to the overall population.

That absolutely does not follow.

What you actually do is fly somewhere else, or you have tons of miles because you don't earn them from flying, but rather from spending money on a credit card.

So, if you assume that the people running MileagePlus are terrible at math, your argument works.

Only if you cling to the fiction that UA will sell miles at a huge loss to try to give people an incentive to buy highly-devalued miles and thereby cause them an even larger loss.

If you re-start your analysis from the premise that the value of MileagePlus comes from the Chase agreement and the co-branded credit cards, you get an entirely different calculation. In that case, the more they can devalue them, the better.

spartacusmcfly

let me try and simplify:

Historically, when UA devalued miles, the airline's profit increased.
With this new structure, a devaluation of miles results in no change to airline profit
That's a big deal!

jsloan

Only if you make assumptions that have no basis in reality. UA has been able to devalue their program and still has an asset that they think is worth $21B; a $5B encumbrance of that program isn't somehow going to make program devaluations less valuable (or viable). If Chase hasn't been able to stop MileagePlus devaluations in the past, what makes you think that some creditor will?

MileagePlus miles will continue to be devalued. If you think otherwise, UA will be happy to sell you some.

J.Edward

Abscence of evidence is not evidence of absence.

Just because JPM has not [yet] cared enough to overtly intervene in M+ does not IMHO indicate they do not have the power to compel UA to change - or not change - M+ in a way the bank would view as detrimental to their interests. This is not to say JPM cares about M+; they do not. JPM cares about if their own customers care about M+ and are willing to pay higher costs to participate in JPM's offerings which give access to M+. We saw UA trying to buck this trend last year with the pushback against the CSR but as I'm fond of saying, the person who holds power in a relationship is the person who holds the power to walk away and seeing as how the airlines are hat-in-hand with the government and banks, I think it's clear who's always held power over who.

Like all fiat currencies, it's a [con]fidence game and to @spartacusmcfly point, Chase and the other creditors claiming M+ as collateral will not want to see customers' confidence in M+ impaired as it could mean disengagement with the program and the selection of other products over the existing co-branded offerings.
I think the logical order is backwards here. The airline did not achieve profitability by devaluing their own currency. Rather a strong demand environment afforded them a glut of profits driven by customers paying a high enough RASM who did not care enough about loyalty devaluations to select a competitor.

Devluation's always been supported by high demand from high RASM customers who are not willing to walk away over a loyalty devaluation (or close their co-branded credit cards) and necessitated by the ever-increasing units of currency chasing a shrinking number of tangible rewards.

jsloan

Correct. And that's basically the same argument that's being made here: if UA devalues things greatly, MileagePlus is less attractive, and therefore they'll have to offer cheaper prices on their miles to entice customers to use them, and then UA gets hurt.

The fact of the matter is that if JPM believed that M+ would be materially less valuable after a devaluation, United would never have been able to do the last devaluation, or the one before that, or the one before that, or the one before that.. etc. The longer that people keep signing up for the Explorer card or converting their Ultimate Reward Points to MileagePlus miles, the more UA can continue to devalue the program.

That's the one and only lever that anyone has -- not this line of credit, but rather the existing Chase relationship. If customers abandon the Explorer Card -- if people no longer care about earning miles -- then, and only then, will United be forced to act. Unless that happens, UA will continue to devalue the program, collateral or no.

ReinaDeLaSelva

Senors y senoras, why are any of you surprised at such valuations?

As long ago as 2005 si do you all remember when WorldPerks and NonePass were the best lol... This was even in 2005...not 2020...

" Indeed, calculations by The Economist in January 2005 suggested that the total stock of unredeemed miles was worth more than all the dollar bills in circulation."

https://www.economist.com/special-re...20/funny-money

cerealmarketer

Actually the example where credit card is mentioned was the one labeled $0.02. The left column is the 'member' action (where it mentions card, but no numbers) - the right side of it is the corresponding 'program' transaction.

But in the 'member action' they say partner 'or' credit card and that the member 'spends 10k with partner and earns 15k miles' which implies it could be a standard non card partner.

So same conclusion as you have - they are not stating Chase is paying $0.02 explicitly - but it is in the context of that example. I'd bet Chase is at less than 1.5 cents.