They’re Not Down To Hocking Mom’s Rings, But United And American Are Taking Painful Steps To Raise More Cash

United and American airlines are both finally ready to take the family jewels to the pawn shop in their increasingly urgent efforts to build large enough stacks of cash to survive another year or more of unprecedented weak demand for air travel.

Last month United had to scrap an offer to sell $2.25 billion worth of junk-rated bonds when investors demanded much higher yields and better collateral than the collection of older planes and spare parts United had offered. So now it has pledged a portion of its MileagePlus frequent flier program, estimated to be worth at least $20 billion, in order to secure a $5 billion loan package put together by Goldman Sachs, Barclays Bank and Morgan Stanley Senior Funding. United says it will retain full control of the MileagePlus program.

Meanwhile, only a couple of weeks ago rival American ago was showing a bit of public disdain for the notion of having to use its even larger and more valuable AAdvantage frequent flier program as collateral for a big loan. But on Friday American disclosed that if it decides to accept the $4.5 billion low interest loan it is authorized to take from the federal government by congressional action back in April such a loan will be backed by a portion of the AAdvantage program. Given its need for additional cash to help whether the currently raging economic storm, American almost certainly will take that low interest government loan.

The decisions by both carriers are just the latest evidence of how desperate the big carriers are to raise more liquidity that they think they’ll need. They need lots of extra cash, of course, to ride out the financial hurricane brought on by the global COVID-19 pandemic and the drastic economic responses to that pandemic imposed by local, state and federal governments.

For the biggest conventional U.S. airlines – which also includes Delta – their customer loyalty programs are considered their family jewels; the most valuable units in their respective corporate portfolios and the real producers of the carriers’ profits.

United’s MileagePlus program has more than 100 million members and generally is estimated as being worth more than $20 billion. It is capable of producing $5.3 billion in free cash flow in a normal year. That cash flow – and MileagePlus $1 billion-plus in annual operating profit – is driven by banks and other marketing partners that buy mileage points from the airlines to use as inducements to their own customers to use credit cards issued by that bank.

Delta’s SkyMiles program has been estimated to be worth around $25 billion. American’s AAdvantage program, the oldest such program in the industry and the largest in terms of membership, has been estimated to be worth $30 billion or more. Of course, such generalized valuations were made before the pandemic caused a near-collapse of air travel demand in April, a calamity from which the airlines could need multiple years to fully recover.

Southwest’s Rapid Rewards program also is a valuable asset for the Dallas-based mega-discounter that operates more domestic flights and offers more domestic seat miles to the public than any of the so-called Big Three conventional carriers. But because of its different way of operating Southwest’s customer loyalty program never has been viewed as being as valuable, or as critical to Southwest’s success as have the loyalty programs at the Big Three.

Indeed, for the big conventional U.S. airlines their frequent flier programs, invented in the early and mid-1980s, have become so critical – and so profitable – that they’ve sometimes been described wryly as profitable marketing companies that own unprofitable airlines.

The financial maneuvers by United and American are not all that surprising, and point clearly to the carriers’ need for cash to fund daily losses that now range between $30 million and $50 million – losses that the companies say they expect to be able to bring down to between $20 million and $0 daily cash burn rates by year’s end under certain favorable market conditions.

United’s most recent financial moves are expected to push its cash pile up to about $17 billion by the end of the third quarter (Sept. 30).  That amount would include:

·        The $5 billion loan covered by a portion of the MileagePlus program

·        A $4.5 billion low interest loan made available by Congress’s action, though United has not yet made the final decision to accept that loan. It likely would be collateralized by airport gates, landing and foreign route rights and facilities, and/or some some combination other unencumbered assets including older planes like that those the carrier unsuccessfully tried to use as collateral for that failed $2.25 billion bond offering

Additionally, United said Monday that it has agreed with a group including Citigroup Global Markets, Bank of America Securities and J.P. Morgan Securities, to issue 28 million new shares of stock, a number equal to just under 10 percent of currently outstanding United Shares. If sold at Monday’s closing share price of $39 such sales would yield around $1 billion before brokerage fees and taxes. No specific date or time frame for selling the new shares, though indications in the notice were that the new shares would not be sold all at once.

Officials at American, meanwhile, have said they expect to begin the third quarter on July 1 with about $11 billion in liquidity. But that figure does not include the low interest government loan that it likely will take in August or September. Nor does it include any proceeds from the sale of junk-rated bonds. Multiple publications reported Monday that American is in talks with Citigroup about such a deal.

Potential terms were not mentioned, but the Fort Worth-based carrier has an estimated $11.3 billion in unencumbered assets; most airport facilities, landing rights and foreign route rights. Thanks to American’s aggressive re-fleeting program in recent years many of its new planes already are pledged as collateral or were acquired through leases. And most of the older jets still in its fleet have relatively little value left in them and therefore likely can’t be used to back loans that would add lots of additional cash for the carrier.

Nor is Southwest, the only large U.S. airline with investment grade debt ratings, likely to need to use a stake in its Rapid Rewards program as collateral for a loan to help it survive the current travel demand crisis.

The airline expects to end the second quarter in two weeks with about $13 billion in cash. And two weeks ago it set the price a new investment grade bond offering that would bring in $1.8 billion. It also has the option of accepting a $1 billion low interest government loan. That level liquidity, plus Southwest’s debt ratio of less than 50 percent mean that it already is in by far the best shape of any U.S. carrier when it comes to its ability to survive the current economic challenges.

Though Delta has fallen to a junk-rated credit this year in route to building up what it expects to be a $14 billion cash pile at the end of the second quarter on June 30, it remains in the strongest financial position among the conventional Big Three and trails only Southwest in overall financial strength. It also has a current offering for unsecured notes in the market that would add $1 billion more to its liquidity levels. And it has not yet availed itself of a $1.6 billion loan from government that was made available by Congress. Delta also has an estimated $6 billion to $7 billion in unencumbered assets that it could put up as collateral for loans should need additional cash.