United plans $5 billion loan against MileagePlus

United Airlines will secure an additional $5 billion in funding by taking a loan against the MileagePlus loyalty program. The company announced the plans Monday morning as part of an update to its liquidity position. With the loan, and other CARES Act funds, the company anticipates approximately $17 billion in liquidity by September 2020.

Goldman Sachs Lending Partners LLC, Barclays Bank PLC and Morgan Stanley Senior Funding, Inc. have committed to provide, and have agreed to arrange the syndication of, the MileagePlus financing through a term loan facility, which is expected to close, subject to standard conditions precedent, by the end of July 2020. Goldman Sachs Lending Partners LLC will act as the sole structuring agent and lead left arranger for the transaction.

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No changes to the program

The loan does not change the operational or decision-making processes within the MileagePlus program, allowing United to retain full control throughout the term of the deal. It also represents only about 25% of the appraised value of the MileagePlus program. With more than 100 million members and significant marketing insights on those members the opportunity to continue to commercialize the data around those members is a huge draw for the program.

That the company continues to sell vast quantities of points to partners, and that it directly controls the redemption pricing on those points, helps ensure that the program generates “material and stable revenues and free cash flows” for the parent company.

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More than just the loyalty program

The loan news came as part of a broader announcement regarding liquidity. United is burning $40 million per day in Q2 (i.e. ~$2 billion for the quarter). The company expects that number to drop to $30 million per day in Q3. With the $5 billion loan against MileagePlus and another $4.5 billion loan available from the CARES Act, the carrier expects liquidity in the $17 billion range by September.

The CARES Act loan also requires collateral from the airline, however. This has led many analysts to question if the loyalty programs must be reserved for that use. By taking out a commercial loan against the program United is indicating it is unlikely it will use MileagePlus as that collateral. Instead, it expects “slots, gates and routes” to be sufficient to meet the US Treasury demand. Whether other carriers can deliver similarly remains to be seen.

American Airlines recently had its AAdvantage program appraised as part of the CARES Act program and came back with a $19.5-31.5 billion valuation. American expects “a significant portion…will be pledged as collateral to support the CARES Act loans.” American also has billions of equity in slots, gates and routes. But the largest chunk of that, $4.2bn across Central America and Mexico, was previously allocated to a 364-day Delayed-draw Term Loan, making it unavailable for CARES Act collateral.

Long-term debt risks for the industry

The airlines need this increased debt to survive the current downturn, with quarterly losses measured in the billions of dollars. But the increased debt load creates longer term challenges in terms of cash flow and profitability. IATA Chief Economist Brian Pearce noted last week that converting debt to equity could provide a smoother path for some carriers to shift that burden, “Airlines will need to get rid of some of that debt. And equity markets have remarkably strengthened. Perhaps now is a time for airlines to seek to raise that equity.”

Of course, United already took to that path, selling a billion dollars of shares in late April. Converting more debt to equity today is unlikely to be well-received by the markets.