Amidst the significant drop in travel demand related to the Covid-19 pandemic, at least one thing is true: hotels, airlines, and most other companies in the travel space are keenly focused on preserving liquidity.
Airlines and hotel companies have been securing loans, tapping credit lines, and looking for new ways to raise funds. And increasingly, we are seeing these firms do something that has rarely been done except for during times of distress: leveraging their loyalty programmes to raise debt.
As the pandemic began to take hold, companies from both industries took similar approaches to raising funds from their loyalty programmes. But more recently, airlines are taking far more aggressive steps to use loyalty programmes as a tool to raise liquidity.
Why aren’t the hotel companies following suit? Could they? We believe the answer is yes.
In the first wave of financing transactions following the onset of Covid-19, Hilton, Marriott, and JetBlue all pre-sold loyalty points to their co-brand credit card partners, raising billions of dollars in the process. By doing this, the companies took money upfront in exchange for a chunk of loyalty points that their credit card partners will be allotting to customers over the years to come.
But since then, some airlines have taken this a big step further. United has been the leader in this area, recently pledging its entire Mileage Plus loyalty programme as collateral for $6.8bn in fundraising consisting of senior secured notes and term loan facility. Delta Air Lines has followed suit.
Contrast this with the $920m that Marriott has raised thus far - a combination of $350m in pre-sold points to American Express, and $570m in pre-payment of future revenues and additional bonuses from Chase. By using the entire Mileage Plus loyalty programme as collateral for its giant loan, United is taking a risk, but also acknowledging the tremendous value of its programme - estimated to be more than $20bn.
While few loyalty programmes can rival the scale of United’s, many hotel loyalty programmes are themselves large and highly profitable. Marriott’s Bonvoy programme - which brought together Starwood’s SPG programme with Marriott Rewards - is one such powerhouse within the space.
Yet we haven’t heard much being spoken about hotels taking the next step to further monetise their programmes, which is curious. We believe that there are numerous approaches that can be taken to generate value from loyalty programmes in ways that go farther than just pre-selling points, but not so far as mortgaging the whole programme. These could apply to hotels and airline loyalty programmes alike.
One such approach is to create securities backed by freshly-issued loyalty points that could then be used as collateral for new debt. Another would be for loyalty programmes to create a new kind of loyalty point - much like a reserve currency - that would be used solely for the purposes of financial transactions, and could be converted to regular points as needed. Such points would help reduce the risk for lenders providing the debt, likely resulting in lower borrowing rates for the hotels. Both of these approaches, we believe, result in better outcomes for the issuers, eliminating the need for putting the whole loyalty programme on the line. What’s more, these new solutions for generating liquidity can be deployed not only in times of distress, but also in the normal course of business.
So why haven’t we heard more from hotel companies about monetising their loyalty programmes in a bigger way? One reason may simply be that they haven’t caught up to where the airlines are in terms of liquidity needs.
But another reason may be found in the structural make-up of the hotel industry, where the corporate operating companies - the Marriotts and Hyatts of the world - are separate from the hotel property owners and operators. Unlike in the airline industry, where airlines own and operate the majority of their planes and flights, in the hotel space, the vast majority of hotel properties are not owned by the underlying company.
When a hotel firm undertakes a pre-sale of loyalty points with a bank, the revenue they raise stays with the corporate parent and its loyalty programme. None of that revenue immediately flows down to the operators to help with their liquidity challenges. Were they to undertake a significantly bigger transaction, this would pump yet more liquidity into the corporate entity, but still not immediately impact the rest of the hotel ecosystem. They may not need quite so much liquidity themselves, but their property owners and operators do.
So, is there hope for the operators to benefit from this situation? We believe there is, by focusing on the flows of dollars from the hotel loyalty programmes to the partner operators.
Today, when customers who are part of the hotel’s loyalty programme book a stay at a given property, the property owner/operator pays a fee back to the loyalty programme to fund the loyalty points that are awarded to the customer for their stay. Then, when customers ultimately redeem points for a free stay in a property, the corporate loyalty programme pays the property a fee for that room.
Needless to say, timing is not on the side of operators, who will not see customers resume normal travel anytime soon - nor the revenue that comes from hotel night redemptions or paid stays.
What if the hotel companies took some of the funds they raised from point pre-sales, or bigger efforts to monetise their programmes, and used those funds to help support the operators?
One novel opportunity would be for the hotels to pre-purchase hotel rooms from the operators. Pre-sales don’t have to be just for loyalty points between the loyalty programme and banks; they could just as well work in the form of nights bought in advance by the hotel company from the operators.
Of course, more standard approaches can and should be used-- reducing the cost of loyalty points that operators have to buy, boosting redemption rates paid, and improving marketing and customer bonuses to increase demand. But these approaches may not be enough to help operators get through the crisis.
Having hotels unlock more value from their programmes - for the benefit of both corporate parents and underlying operators - may be the better approach.
Hotel companies cannot exist without a robust and vibrant operator community, so there is an incentive for the corporate parents to find a way to ensure that the operators derive benefit from the current round of financial transactions. This is indeed a moment in which hotel companies can cement an even more productive, loyal, and mutually beneficial relationship with their operators by finding ways to “share the wealth.”
More than ever before, hotel loyalty programmes will be key to helping shape and shift customer behaviour as travel begins to rebound. And whatever forms the solutions to this crisis take, loyalty will be at the centre of the industry’s recovery.
Atanas Christov is the Founder and CEO, and Scott Resnick is the EVP of Operations, of Affinity Capital Exchange (ACE), a New York-based fintech startup.
ACE is building the world’s first technology solution and venue for the issuance and trading of a new class of loyalty points, enabling the creation of financial instruments backed by loyalty point portfolios. Through financial innovation that is supported by tried-and-tested market infrastructure and technology, ACE aims to revolutionise the loyalty economy by bringing the benefits of financial markets to loyalty in a way that respects the unique needs of the industry. Its technology and market platform will provide new solutions to members, initially focusing on generating collateral and attracting liquidity. For more on ACE, please visit afcx.co