Delta Airlines, which is struggling to stay afloat amid the decline in air travel during the coronavirus pandemic, is turning to its popular frequent flyer program to exploit financial options.
Essentially, the Atlanta-based airline plans to mortgage its SkyMiles loyalty program up to $ 6.5 billion. Loyalty programs are lucrative assets for airlines which earn billions a year by selling frequent flyer miles to credit card partners who offer the miles as a reward for their spending. American Express, for example, paid Delta $ 4.1 billion for miles in 2019, according to filings with the Securities and Exchanges Commission.
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The private funding deal comes as the Atlanta-based carrier continues to lose up to $ 27 million a day in cash amid an unprecedented drop in air travel due to COVID-19. The proceeds will be used to bolster the $ 15.7 billion in cash and short-term investments Delta had at the end of June.
In a press release, Delta said it is forming a new company, SkyMiles IP Ltd., which will be based in the Cayman Islands to facilitate the new funding. The Atlanta Journal-Constitution reported that as a result of this new action, Delta would abandon a new federal government CARES Act loan.
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The move will bring immediate and much-needed relief as the airline continues to spend $ 27 million in cash per day as travel demand remains low due to the coronavirus pandemic.
In an 8-K filing on Monday, Delta reported a 78% drop in miles redeemed in the first half of the year, resulting in a 60% drop in passenger revenue. However, frequent travelers continued to use their Delta SkyMiles credit cards, and cash from sales to American Express only declined 5% year-over-year to $ 1.9 billion. dollars.
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According to an investor presentation, Delta will purchase miles from the new SkyMiles subsidiary for issuance to frequent flyers, and the subsidiary will purchase seats from Delta when frequent travelers use miles to reserve their seats. During this time, American Express and other SkyMiles partners will purchase miles from the affiliate to issue them to credit card holders.
Delta received $ 5.4 billion under the CARES Act Payroll Support Program, which was repaid in installments until July. The airline also signed a letter of intent giving the option of an additional loan of $ 4.6 billion under the federal aid program.
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Delta is not alone in operating its loyalty program. In June, United Airlines was the first to take out a mortgage on its MileagePlus program for debt of up to $ 5 billion.
While this move should give Delta a boost, it shouldn’t affect Sky Miles members or their redemption of miles for flights.
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