Airlines Are Secretly Banks (The SEC Filings Prove It)

Intro

June fifteenth, twenty twenty. Planes are parked. Cash is burning. So United Airlines goes to Wall Street with an unusual offer.

Not its planes. Not its airport gates. Its frequent flyer program. United told investors that MileagePlus was worth about $22 billion.

That same day, the stock market valued the entire airline at around 11 billion. The miles were worth almost twice the airline. Weeks later, United borrowed $6.8 billion against them. In September, Delta borrowed 9 billion against SkyMiles.

And in twenty twenty-five, American Express paid Delta $8.2 billion. About one in every $7 Delta brought in. So are airlines still airlines? Or are they banks that happen to fly planes?

A Price War

To understand how this happened, we have to go back to nineteen seventy-eight. That year, the United States deregulated its airlines. For the first time in decades, airlines could set their own fares and choose their own routes. Prices fell.

Competition exploded. And loyalty disappeared. If a rival was $10 cheaper, you switched. So on May first, nineteen eighty-one, American Airlines tried something new.

It called it AAdvantage. Fly with us, and we'll count every mile. Fly enough, and the next trip is on us. Less than a week later, United launched its own version.

At first, miles were a marketing trick. A way to keep business travelers coming back. Nobody imagined they would one day be worth more than the airline itself.

The Card

The real turning point came a few years later, and it had nothing to do with flying. In nineteen eighty-seven, American teamed up with Citibank on a credit card that earned AAdvantage miles. Think about what that means. Suddenly, you didn't need to board a plane to earn miles.

You could earn them buying groceries. Paying for gas. Booking a hotel. And every one of those miles had to come from somewhere.

Here's how it works. When you swipe an airline credit card, the bank puts miles in your account. But the bank doesn't create those miles. It buys them from the airline.

In cash. The bank can afford it, because every purchase earns it a small fee from the store, and many cardholders carry a balance and pay interest. So the airline gets paid today, for a seat it might fly years from now. Or never.

Because if you never use your miles, the airline keeps the money anyway. The industry even has a name for miles that are never used: breakage.

A Private Currency

In twenty nineteen, United's MileagePlus sold about $5.3 billion worth of miles. That year, the program alone generated about $1.8 billion in earnings before interest, taxes, depreciation and amortization. And the miles brought in about 12% of United's total revenue. Roughly $1 in every eight.

Its profit margin was 34%. Compare that with flying. Delta ended twenty twenty-five with an operating margin of about 10%. That's the secret.

An airline that runs a loyalty program has its own currency. It prints that currency. It sells it to banks. And it decides what that currency is worth.

Imagine a flight that costs 25,000 miles this year. Next year, the same flight could cost 40,000. No central bank. No vote.

The airline simply changes the price.

The Pandemic Proof

For decades, this was an open secret. Then twenty twenty made it impossible to ignore. In the spring of that year, air travel almost stopped. Airlines needed cash, fast.

The usual collateral was planes. But nobody wanted planes in a pandemic. So the airlines offered the one asset still bringing in money every month. Even with planes on the ground, people kept swiping their cards.

United put a $22 billion value on MileagePlus, and borrowed 6.8 billion against it. On June twelfth, twenty twenty, American told investors that a third-party appraisal valued AAdvantage at between 19.5 and $31.5 billion. And it planned to pledge the program to the US Treasury, as security for a government loan. The next March, American borrowed $10 billion from private lenders against AAdvantage, and used part of it to pay the government back.

Delta borrowed 9 billion against SkyMiles. Add it up, and three airlines borrowed $25.8 billion against their points. That's not a perk. That's a balance sheet.

The Real Customer

Today, the money is even bigger. In twenty twenty-four, American collected $6.1 billion in cash from its co-branded credit cards and other partners. 17% more than the year before. Then it signed a ten-year deal making Citi the only issuer of its credit cards in the US, starting in twenty twenty-six.

Delta's numbers are even more striking. In twenty twenty-five, American Express paid Delta $8.2 billion. Delta's entire pre-tax profit that year? 6.2 billion.

Let that sink in. The credit card partner paid Delta more than Delta earned in profit. And the machine keeps growing. Delta says it signed up more than a million new card accounts a year, four years in a row.

Which raises an uncomfortable question. Who is the airline's real customer? The passenger in seat thirty-two B? Or the bank?

The Backlash

Here's the catch. A currency is only worth what people believe it's worth. In September twenty twenty-three, Delta announced that elite status would be based only on how much money customers spent, and that many credit card holders would lose easy access to its lounges. The backlash was immediate.

Loyal flyers threatened to cancel their cards. Delta's CEO, Ed Bastian, admitted it: No question, we probably went too far. Weeks later, Delta softened the changes. Then Washington started paying attention.

In September twenty twenty-four, the US Department of Transportation opened an inquiry into the rewards programs of American, Delta, United and Southwest. It looked at devaluation, hidden and dynamic pricing, and extra fees. As Transportation Secretary Pete Buttigieg put it, unlike a traditional savings account, these rewards are controlled by a company that can unilaterally change their value.

What It Means For You

So what does this mean for you? First, miles are not savings. Their value can change overnight, and you have no say in it. Second, the best time to use miles is usually sooner rather than later.

A mile sitting in your account is money the airline already has, at zero interest. Third, before you redeem, compare. Look at the cash price of the same flight, and ask whether your miles are really getting you a good deal. And if you're choosing a credit card just for the miles, remember: the bank has already run these numbers.

Very carefully.

Secretly Banks?

So, are airlines secretly banks? Not exactly. They still fly millions of people every day. But the most valuable thing they own isn't an airplane.

It's a promise. A promise that the miles in your account will be worth something tomorrow. Banks pay billions for that promise. Lenders lend billions against it.

And the airline decides, every single day, what that promise is worth. $22 billion in miles. 25.8 billion borrowed against points. 8.2 billion from a single card partner.

So the next time a credit card offers you miles, remember who's really earning them. If you like stories about the money hidden in everyday things, subscribe. See you in the next one.