Valuing multiple businesses within a business: the case of airlines and their frequent flier programs

Adam Johnson

It doesn’t take a business valuation expert to conclude that the airline industry is hurting during the coronavirus pandemic. It’s a matter of common sense that airlines have been bleeding cash and are looking for ways to fund their losses.

Enter their frequent flier programs.

This month, Delta Air Lines used its SkyMiles frequent flier program as an asset to secure a $6.5 billion loan to raise cash. In June, both United Airlines and American Airlines made similar moves, mortgaging their frequent flier programs in order to obtain loans of $5.0 billion and $4.5 billion, respectively.

These financings raise the obvious question: if people aren’t flying, why are creditors confident to lend against the airlines’ frequent flier programs? Are the programs really valuable assets in the age of COVID?

The answer is that these frequent flier programs can be viewed as their own distinct businesses with distinct revenue models that are more recession-proof than the core business of flying planes from Point A to Point B.

Take Delta’s SkyMiles program, for example. Delta explains in its 2019 10-K that “miles” are earned in two main ways: (1) through passengers flying and accruing miles on each flight; and (2) by selling miles for cash to credit card companies, car rental agencies, hotels, and ridesharing companies. As it turns out, the SkyMiles program has been somewhat of a cash cow for Delta: in 2019, Delta received over $4.2 billion in cash by selling miles. That’s approximately half of the ~$8.4 billion in total operating cash flows that Delta generated in 2019. It was the same story in 2018: Delta received $3.5 billion in cash by selling miles and this represented approximately half of its ~$7.0 billion in operating cash flows in that year.

In June, United stated that its MileagePlus program generates over $5.0 billion in cash per year and is worth over $20 billion. For context, United’s total reported enterprise value as of June 30 was only $28 billion, indicating that ~70% of United’s total enterprise value was attributable to its frequent flier business. Similarly, American Airlines said in June that its frequent flier program was worth between $19.5 billion and $31.5 billion, or ~53% to ~85% of its total enterprise value as of June 30. Both of these examples suggest that airlines’ frequent flier businesses are worth far more than the core airline businesses themselves. Given the impact of COVID-19, this is not entirely surprising.

The value of a business is a function of future cash flows and the risk attached to earning those future cash flows. United said that, during the 2008/2009 financial crisis, the company’s total revenue decreased by 19%, while revenue attributable to its frequent flier business decreased by only 2%. Clearly, the United States’ largest air carriers have developed loyalty programs which have more resilient revenue models than their corresponding air transportation businesses. While the value of core airline businesses may fluctuate significantly as demand for air travel rises and falls due to broader economic conditions, it appears that the value of frequent flier businesses may remain more stable over time.

The case of airlines and their frequent flier businesses is a reminder for valuators, analysts, and their clients that valuing a single business is often a more complicated task than estimating consolidated cash flows or earnings and applying a uniform “multiple” to those cash flows or earnings. Many businesses are, in fact, baskets of multiple distinct businesses that each have their own risk and growth profile. In these instances, a robust valuation can entail disaggregating consolidated financial information to isolate the cash flows of each separate business within a business. While this may be challenging to do, it is often the approach that is most likely to reach an accurate conclusion, and gives valuators more insight into how sensitizing a single valuation input in one business segment impacts the implied valuation of the broader “business” as a whole.

In the meantime, so long as the travel impacts of COVID persist, airlines should cross their fingers that they can continue to sell frequent flier miles for cash – and that this relatively stable business of selling miles can continue to prop up the flailing, cash-burning business of flying airplanes during a pandemic.

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