United Airlines moved to shore up its balance sheet on Monday with a plan to sell new shares, tap $4.5 billion in US taxpayer-backed loans and borrow $5 billion from banks, including Goldman Sachs, by pledging the airline's mileage programme as collateral.
The capital-raising measures, designed to cover a cash burn averaging $30 million a day in the third quarter, is one of the most expansive to date in an airline sector reeling from the coronavirus pandemic.
In particular, it is a significant move for an airline to use its profitable mileage programme to back a loan, analysts said.
“These frequent-flyer programmes are really the golden goose of the airlines,” said Morningstar’s Burkett Huey. “They’re the reason why North American airlines have historically...only had about 20 per cent of global capacity but half of global airline profit.”
He added: “Pledging the frequent-flyer programme is probably one of the most of the aggressive moves I’ve seen so far.”
United attempted a $2.3 billion bond offering in May backed by some of its older aircraft, but that flopped after tepid investor demand, except at higher interest rates than it was willing to pay.
The Chicago-based carrier said it expected its new plan would top up its cash reserves to $17 billion by the end of the third quarter. It said the “additional liquidity will provide even more flexibility as the airline navigates the most disruptive financial crisis in the history of aviation”.
Financing
Goldman, Barclays and Morgan Stanley will provide the $5 billion term loan backed by the frequent flyer programme while the company seeks longer-term financing, according to a Securities and Exchange Commission filing. Goldman is the sole structuring agent and lead left arranger.
Mileage programmes generate revenue for airlines by selling miles to banks and other businesses that distribute them as rewards to customers. They are some of the most profitable parts of airline's businesses. United's rival American Airlines has indicated it will use its mileage programme as collateral for a US government loan.
United said it expects to generate revenue between $300 million and $350 million from its mileage programme in the second quarter. Using 2019 earnings before interest, taxes, depreciation and amortisation, the airline valued the programme at $21.9 billion – nearly double the airline’s market capitalisation.
Offering the programme as collateral is better than forward mileage sales, when airlines sell miles at a discount, or selling the programme outright, said Savanthi Syth, an analyst at Raymond James.
“When airlines are desperate they sell off their loyalty programmes,” she said. “This is a good way for them to raise money against that programme without losing control.”
The peek into the financial details of United's mileage programme suggests it generated between a quarter and a third of the airline's profits last year, said S&P Global Ratings analyst Philip Baggaley.
“The big airlines have indicated to analysts [the mileage programmes are] profitable and valuable,” he said. “But they’ve been very cautious about saying just how profitable they are. It might be that it shows the rest of the business is rather less profitable.”
United plans to offer airport landing slots and gates and routes as collateral for a $4.5 billion low-interest loan from the US government, Monday’s filing also disclosed. This will be on top of $5 billion it is already receiving under the recent Cares Act to cover payroll for its staff of 96,000 until the end of September.
Government funds
Taking the additional loan, which comes with warrants for new shares, would bring the US government’s share of the company to 6.5 per cent. The decision makes United the second of the large US carriers to say it will tap this second tranche of government funds after American Airlines.
United also plans to sell 28 million shares at a maximum price of $34.30, which would raise up to $960.4 million. United last sold stock in April, generating more than $1 billion.
“United is following the precedent of Delta and Southwest in trying to arrange a series of big transactions at the same time so the confidence created by one part of it helps the marketing of the other part,” Mr Baggaley said.
United’s stock fell 2.5 per cent in midday trading to $38.66.
– Copyright The Financial Times Limited 2020