#369 2020 · United Airlines · Aviation
United mortgaged its frequent-flyer miles for $6.8B while its planes sat grounded
the problem
Zero revenue, bills still due
background
By spring 2020, COVID-19 had grounded most of the global fleet: United was flying a fraction of its 2019 capacity, cash was burning fast, and revenue had collapsed toward zero even as fuel leases, payroll, and debt service kept coming due. Airlines across the industry were racing to raise emergency liquidity before reserves ran out.
Conventional financing routes were either shut or punishing: equity issuance would have diluted shareholders into a stock that had already lost most of its value, unsecured debt markets were pricing airline risk close to distressed levels, and United's physical collateral — aircraft, slots, routes — was already heavily encumbered or hard to value with planes parked and travel demand uncertain.
what everyone would do
Raise cash through the standard channels available to a distressed airline -- issue new equity, sell unsecured debt, or borrow against physical assets like aircraft and gate slots -- all of which were either badly priced or already exhausted, since the market had already marked down the flying business and much of its physical collateral was encumbered or hard to value with planes grounded.
what they saw
The loyalty program wasn't just a marketing perk bundled inside the airline, it was a standalone, cash-generating asset in its own right -- co-branded credit card partners keep paying for miles regardless of how many planes are flying, so MileagePlus's future revenue stream could be isolated, valued, and pledged to lenders as if it were a completely separate business from the grounded fleet sitting on the tarmac.
the move
United moved its MileagePlus loyalty program into a new, bankruptcy-remote subsidiary and used it as collateral to raise $6.8B — $3.8B in senior secured notes at 6.5% and a $3.0B term loan at LIBOR+5.25% — while keeping full ownership and operational control of the program, closing July 2, 2020.
why it works
Moving the loyalty program into its own bankruptcy-remote subsidiary let lenders underwrite against a cash flow stream (largely credit-card partner payments for miles) that was structurally insulated from the airline's own operational and bankruptcy risk, rather than against the airline's uncertain ability to keep flying. Because that cash flow barely correlates with how many seats United actually sells day to day, the program could be valued on its own multiple (around 12x EBITDA) independent of the grounded airline's collapsed market capitalization, unlocking far more borrowing capacity than pledging aircraft or unsecured airline debt could have provided at the same moment. United kept full ownership and operational control throughout, since the securitization only pledged the future cash flows as collateral, not control of the program itself.
the payoff
United disclosed MileagePlus was worth close to $22B, roughly 12x program EBITDA — several times United's own market capitalization, which had fallen to around $5-6B during the pandemic collapse. Two months later Delta ran the same play on SkyMiles, upsizing a planned $6.5B deal to $9B on strong investor demand.
where it breaks
The technique depends on having a subsidiary revenue stream genuinely separable from, and structurally insulated from, the core business's own risk -- a loyalty program, subscription base, or data asset that's tightly coupled to the parent's operational performance (rather than a partner's independent payment stream) wouldn't isolate cleanly enough for lenders to price it separately. It also requires the asset to be large and stable enough relative to the parent to matter at scale; a small or highly volatile ancillary revenue stream doesn't unlock meaningful financing capacity even if it can technically be carved out and pledged the same way.
what came after
United's deal became the template: Delta ($9B, September 2020) and later American Airlines (~$10B) securitized their own loyalty programs the same way, and analysts began treating airline loyalty programs as standalone financial assets that could be valued, rated, and financed independently of the flying business underneath them.
references
- [1]Kirkland Represents United Airlines on $6.8 Billion Financing Secured by MileagePlus ProgramKirkland & Ellis LLP, 2020kirkland.com
- [2]What's Behind the Billions That Airlines Raised via Frequent Flier Programs? You're the CollateralWolf Street, 2020wolfstreet.com