Use 'em or Lose 'em

American airlines are looking seriously at the possibility of selling your unused frequent flier miles to raise cash to satisfy investors. The world’s largest carrier, American Airlines and its U.S. competitors are sitting on frequent-flier plans that may be worth as much as the airlines themselves. One estimate of American’s AAdvantage program with more than 57 million members is that it may fetch as much as $5.7 billion. That’s about the same as American’s market value. United Airlines Mileage plus may go for as much as $22.8 billion, more than four times the airline’s value.

Investors say selling the mileage plans would help reverse this years 20 percent drop in airline stocks and a more than 50 percent rise in jet-fuel costs. While airline executives have resisted giving up exclusive access to their best customers, they are now considering the view of activist shareholders who say it’s time to copy the 2005 spin-off of Air Canada’s Aeroplan which has grown to about the same market value as Northwest Airlines.

“Spinning out the mileage programs would be very beneficial to shareholders,” said Craig Hall, who owns the fifth-biggest stake in American and wants American to divest AAdvantage. Hall calls the frequent-flier plans a “ hidden asset” not reflected in airline valuations.

Carriers would gain cash from any sale and could still reap profits by keeping stakes while the loyalty plans expand. Released from airlines’ control, mileage programs could move outside the air-travel industry, adding retail partners and luring more members.

The five biggest U.S. airlines said in the past month they’re reviewing the possible sale of their loyalty units. United, number two behind American, is developing a profit-and-loss statement for Mileage Plus, although it hasn’t yet decided if it will share the information. Delta Air Lines plans increased financial disclosure of SkyMiles next quarter.

Carriers are responding to pressure as airline shares have underperformed the Standard & Poor’s 500 Index by 23 percent this year. Reykjavik-based FL Group, which owns 9.1 percent of American, urged American to sell its frequent- flier program in an open letter to American’s board in September.

“This has the potential to become a sustainable source of value creation if it’s done in the right way,” FL CEO Hannes Smarason said in an interview.

As you can guess by now, all the calculations and arguments are done with find what happens to the current holder of the unused frequent-flier miles. So, it looks like once again, the “little guy,” that’s you and me, are getting the shaft from Corporate America, once again. Surprise! Surprise!

Source:

Susanna Ray and Hugo Miller, Bloomberg News, as reported in The Seattle Times, American Airlines investors push for sales of frequent-flyer plans, November 23, 2007.