See how frequent flyer schemes make money in this United MileagePlus presentation

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US airline United Airlines recently raised $5 billion secured against the assets of its United MileagePlus frequent flyer programme.  As part of this process, it was obliged to put full details of how the scheme works into the public domain.  This gives a rare insight into how money flows to and from a frequent flyer programme.

You can download the full presentation here as a 47-page PDF.  If that sounds too long, I’ll run through the core details below.

MileagePlus, like Avios, is run separately and on an arm-length basis from the airline even though it has the same shareholders.  This means that the airline pays money for the miles it issues, and receives money when miles are redeemed.  It is important to note that these numbers may not be ‘market rate’ – if MileagePlus had separate shareholders to the airline, I’m not sure if you’d see the same pricing.

Let’s look at the key facts:

MileagePlus has over 100 million members, growing at 9% per year

It generated $5.3bn of income in 2019 (12% of the total United group) and made $1.8bn profit on an EBITDA basis (26% of group profit)

There are 110 earn and spend partners

Over 50% of airline revenue comes from MileagePlus members, and this is accelerating

Only 29% of MileagePlus revenue comes from the airline – the other 71% is from partners, the vast majority being United’s credit card partners

97% of miles are redeemed for travel rewards and flights on United represent 80% of those (so very few partner flight, car or hotel redemptions)

External partners typically pay MileagePlus 2 cents per mile (I imagine that credit card partners will almost certainly pay less because of the quantity purchased)

MileagePlus typically pays the airline 1 cent per mile for flight redemptions, giving a 50% profit margin on third-party revenue

United pays MileagePlus 1 cent per mile when someone buys a cash ticket on the airline, plus an additional sum to guarantee that MileagePlus makes a profit at EBITDA level of at least 20% on its related party transactions

38% of members have been in the scheme for over 10 years

65% of members earn over $100,000 per year

52% of members do NOT live near a United hub airport

MileagePlus members give United a 7% higher ‘net promoter score’ in surveys than non-members

The scheme is more recession proof than the airline.  In 2008/9, the airline saw a 19% drop in revenue whilst MileagePlus saw only a 2% drop in revenue.

As per slide 23, MileagePlus can guarantee that it continues to make big profits because it can increase the cost of redemptions at any time or (interestingly) it can encourage members to redeem miles for those items which cost the scheme the least money.

Coronavirus has been a big cash generator for MileagePlus.  It generated $590 million of cash across April and May combined vs just $330 million in 2019.  Cancelled flight redemptions meant that the airline repaid it substantial sums and money kept coming in from credit card partners, whilst very few members made new redemptions. 

You need to take some of this data with a pinch of salt, and also think about the ‘chicken vs egg’ story when reading some of the statements.

For example, do MileagePlus members give higher ‘appreciation’ scores to the airline in surveys because the programme makes them feel more positive about United OR because they already like United and so joined the programme?

Similarly, you’d expect MileagePlus members to spend more with the airline than non-members, because very irregular United flyers are less likely to bother.  It doesn’t necessarily mean that they spend more because they are in the programme.

If you’ve got a bit of time today, there are lots of other interesting nuggets in the full PDF.

Thanks to Gregory for this.

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Comments

  1. Bagoly says:

    “if MileagePlus had separate shareholders to the airline, I’m not sure if you’d see the same pricing.”
    Very true.
    Which is an assertion that it is *not* run at arm’s length.
    And to their credit, in the presentation they nowhere claim to be run at arm’s length.

    • There are different definitions of ‘arms length’ though. It IS ‘arms length’ in terms of a) legal structure and b) the fact that money passes back and forth between the two entities. Whether it is done on ‘market’ terms is a different question.

  2. Genghis says:

    Thanks for the link.
    Some of the statements in the HfP article don’t match the PDF, however, e.g.
    You say, “It generated $5.3bn of income in 2019 (12% of the total United group) and made $1.8bn profit on an EBITDA basis (26% of group profit)”
    Whereas they say “~$5.3B cash flows from sales in 2019 (~12% of total United revenue) and $1.8B EBITDA (~26% of total United adjusted EBITDAR).
    Now “group profit” would be very much the bottom line whereas this is comparing the scheme’s EBITDA to the Group’s EBITDAR (reasonable since the scheme probably doesn’t have much “R”).

  3. Heathrow Flyer says:

    Isn’t the 26% of group profit figure a bit of a fallacy given ‘United pays MileagePlus…an additional sum to guarantee that MileagePlus makes a profit at EBITDA level of at least 20% on its related party transactions’?

    Therefore the 26% figure could be flexed depending on the value of the related party transactions.

    • Yes, but this was done on purpose to ensure that the lenders of the $5bn have adequate security.

      • Genghis says:

        I know none of the detail but given the value of a loyalty scheme is intrinsically dependent on its association with an operating entity, it would be interesting to find out how watertight such security actually is. Ie easily set up another loyalty scheme and dump existing one?

        Even in top banks I’ve seen examples of poor security arrangements where assets have been transferred between legal entities with no recourse and then the creditor legal entity is effectively a dead entity.

    • “As per slide 23, MileagePlus can guarantee that it continues to make big profits because it can increase the cost of redemptions at any time”

      or alternatively, MileagePlus profits could crash if the cost of redemptions was moved against them !

  4. Fully agree with the post’s assessment.

    The presentation takes correlation for causality more than once. E.g., one slide states that people fly substantially more the year after joining the program. Obviously, it’s fallacious to interpret that as the membership causing increased flight purchases. People may well have joined the program because they anticipated they’ll fly more UA in the upcoming year.

  5. Jessiefan says:

    SO this puts more of a positive spin on the viability of the Virgin FC miles scheme, no?

    • No! When airberlin went bust (and airberlin’s FF scheme was TOTALLY arms length, with different shareholders) it turned out that airberlin hadn’t bothered paying the scheme for the past couple of years. The scheme was therefore insolvent the second that the airline stopped trading.

      Flying Club – which is now separate to the airline – is only solvent if a) the airline has paid it for all outstanding miles and b) Flying Club kept that cash in the bank rather than paying it out to Delta and Virgin Group, its shareholders.

      The bottom line is this: if (picking numbers out of the air) there are 100 billion Flying Club miles in issue and Flying Club doesn’t have (100 billion x 0.5p) £500 million in the bank, it will be insolvent immediately if the airline fails. It could avoid insolvency, of course, by changing all redemptions immediately so that you only got 0.05p per mile instead of roughly 0.5p, which is more likely to happen. 1,000 miles would then be worth just £5 of rewards.

      We can be pretty sure that Flying Club doesn’t have £500 million in the bank, because both its shareholders are desperate for money.

    • marcw says:

      Essentially a Frequent Flyer Scheme is profitable and cash cow whenever there’s an airline attached to it. Once the airline dies, history has shown us, that the Frequent Flyer Scheme is useless/irrelevant and sooner rather than later, also folds its wings.
      So as long as Virgin Atlantic doesn’t collapse, your miles and program is ok. If it doesn’t…

      • This is why the whole United thing – and indeed all the articles see you see saying ‘the FF scheme is worth more than the airline and should be sold’ – are nonsense. They are, intrinisically, one and the same and the scheme can’t outlive the airline.

        The very best scenario if a sponsoring airline failed would be that the scheme was fully funded and could turn into something like Nectar offering revenue-based redemptions. I’d be very surprised if there were ANY fully funded frequent flyer schemes though. They need to be fully funded because there would be a huge run on the scheme once the airline got into trouble.

        • Huge run on the scheme is right, look at Velocity in the run up to VA’s administration. KrisFlyer transfers were suspended, followed by everything else not long afterwards. It lives on for now, but we’ll see.

  6. The data manipulation on United’s part here is so obvious the lenders should almost be offended: “65% of members earn over $100,000 per year” on a figure of 100m+ total members.. there are not anywhere close 65m Americans who earn over $100k/year, so this figure must be on some measure of active members or elites, which goes unmentioned.

    • AndyF says:

      I was looking at exactly the same figure and thinking someone’s gone wrong somewhere. 1/5 Americans earning over 100k is wishful thinking.

      • Bagoly says:

        It is presumably household income (the slide just says “income range”) which is intended to mislead as it did most of us on first reading, although not actually manipulated.
        So a couple both earning $60k and their two children counts as four people from a household earning more than $100k.

        https://www.statista.com/statistics/203183/percentage-distribution-of-household-income-in-the-us/ says 30% of US households earn more than $100k.
        There are about 130m households so about 40m of them earning such.
        65m / 40m so 1.6 per household.
        So the numbers do add up – although it will not be 1.6 per 100% of every such household, but perhaps 2.7 per 60% of high-earning households.

        (I have assumed non-US membership immaterial, although the proportion of HfP readers who are members may not be!)

        • Bagoly says:

          Oh, and the income level is presumably self-reported.
          I’ll guess that the average American whose household earnt $95k in the previous year and is on target for $80k in the current year ticks the $100-150k box ?
          Similarly if $80k last year but hoping for a big raise this year.

  7. Mikeact says:

    Not forgetting that around 36000 United employees face a very uncertain future come October.

  8. “Coronavirus has been a big cash generator for MileagePlus … Cancelled flight redemptions meant that the airline repaid it substantial sums and money kept coming in from credit card partners, whilst very few members made new redemptions.”

    This is somewhat misleading. MileagePlus recognise their profits when users book their United redemption flights, and the difference between the issue price and the redemption price is crystallised.

    So whilst Covid19 may have been good for cashflow – it will have been disastrous for profit at MileagePlus … something which they don’t bother to mention on page27.

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