Delta to Mortgage Frequent Flyer Program for Cash: Coronavirus
- Delta Air Lines said it would raise $6.5 billion by mortgaging its SkyMiles loyalty program.
- The airline will spin the program into a separate holding company for the deal, which United kicked off with a similar deal in July.
- Airlines, including Delta, continue to bleed cash during the coronavirus pandemic.
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Delta Air Lines will become the latest airline to raise funds using the billions it earns from its frequent flyer program as collateral.
The airline said on Monday it would raise $6.5 billion in loans backed by its SkyMiles program in a private ticket offering.
Airlines have raised funds during the pandemic largely by offering physical assets like aircraft as collateral, as well as commercial airline assets such as slots, routes and airport gates.
For US airlines, however, loyalty programs, with valuations in the tens of billions of dollars, offer another lifeline. While airlines market their frequent flyer programs – fairly, in many cases – as valuable to passengers, rewards programs earn airlines far more than they cost them.
Airlines make billions a year selling frequent flyer miles to their credit card partners. In turn, credit card companies issue them to cardholders as a reward for spending.
For example, American Express, which issues co-branded credit cards with Delta, purchases miles from the airline and issues them to customers as rewards for spending, typically at a rate of 1 to 2 miles per dollar spent on the card. credit concerned.
American Express paid Delta $4.1 billion for miles in 2019, according to a filing Delta filed with the Securities and Exchanges Commission. The airline earned $6.1 billion last year from mileage sales.
The loan offer required Delta to turn the SkyMiles program into a separate, wholly-owned subsidiary: SkyMiles IP Ltd. This decision should have no impact on customers.
Airlines have seen their revenues plummet during the coronavirus pandemic, with demand plummeting 97% at the height of the crisis in April.
Although there has been a slight recovery, travel demand remains stagnant at around 30% of 2019 levels, and airlines say they don’t expect a full recovery until 2024.
Delta is still burning $27 million a day as demand recovery stalls. The $6.5 billion loan would give it an additional 240 runway days at current burn rates, but the airline has told shareholders it will reduce its daily cash losses to zero by the end of the year. year through staff furloughs, reduced working hours and the like. cost reduction measures such as the grounding or retirement of some of its older aircraft.. He also has $16.5 billion in
available in addition to this loan.
Removing the frequent flyer program allows the airline to issue the program as collateral without exposing the rest of its business to creditors, while retaining full control over the program. United raised $6.8 billion in July using a similar maneuver.
American also offered its loyalty program as collateral for a $4.8 billion government loan through the CARES Act. Delta is also eligible for a loan under this program, but seeks credit from private lenders instead.
In past recessions, airlines have pre-sold large amounts of miles to credit card partners. However, airlines usually have to offer a discount rate for such a sale, which would hurt potential future revenue.