Frequent-flier programs -- to sell or not?

By Jui Chakravorty Das

NEW YORK (Reuters) - We've heard of airlines selling planes, selling airport gates and even selling regional carriers. But what is a lot less common -- and quite a bit more questionable -- is the sale of frequent-flier programs.

Air Canada parent ACE Aviation Holdings Inc (ACa.TO) has done it. Qantas Airways Ltd (QAN.AX) might do it. And American Airlines parent AMR Corp (AMR.N) could do it.

As airlines try to cut costs amid skyrocketing fuel prices, divesting frequent-flier programs could be a quick way to get some cash and to please shareholders.

Last week, news about Australian carrier Qantas Airways considering the sale of all or part of its frequent flier business sent the airline's shares to their biggest gain in more than a year.

"It's about trying to perform the magic known as unlocking shareholder value," Bob Mann, president of aviation consultant company RW Mann & Co, said.

Typically, frequent-flier programs are not fully valued when part of an airline. The market often values them at multiples that reflect the money-losing flying part of the business rather than the money-making mileage sale part.

So it could make sense, then, for airlines to sell or spin off those units to generate much-needed cash.

But it's probably not such a great idea for U.S. carriers.

For starters, frequent-flier programs -- which generate revenue by selling air miles to credit card providers and other companies -- are profitable units within carriers that are now bleeding billions of dollars because of high fuel costs.

Getting rid of the loyalty program, in many cases, would mean getting rid of what is currently the most lucrative aspect of the business.

Second, the interdependence between the carrier and the loyalty program means the airline has to be confident about a healthy future.

"The airline has to be around and functioning long-term for any of these spin-offs to work," Mann said.

"Two-thirds of the miles awarded come from credit card companies and other members, but the miles are created for the airline and they have to be redeemed from the airline. If there is a possibility of the airline going bankrupt, this is not going to work," he said.

Seven small U.S. airlines have filed for bankruptcy or stopped operating this year. Should oil prices not retreat by the end of the summer, some analysts expect several more carriers could file for bankruptcy protection in the fall.

TOUGH SELL