After Just 3 Days, Delta Ups The Mortgage On The SkyMiles Program By 38%

On Monday Delta announced that they were mortgaging the SkyMiles program, taking out a $6.5 billion loan secured by their frequent flyer program and its revenue stream As part of the deal they had to disclose a great deal of the inner workings of the program including where members are located and how much they’re spending on Delta American Express credit cards, along with how much they’re generating in revenue selling miles to members.

Just three days after announcing this deal they’ve announced an upsizing. Instead of borrowing $6.5 billion, they’re going to borrow $9 billion.

  • $2.5 billion at 4.5% due 2025
  • $3.5 billion at 4.75% due 2028
  • $3.0 billion term loan

They’ve created a new entity to house the frequent flyer program, SkyMiles IP Ltd., and it will borrow $9 billion “at a blended average annual rate of 4.75%.” That’s 38% more than originally announced, and 38% more than United levered up MileagePlus for.

Meanwhile American Airlines is borrowing just $4.75 billion this month from the federal government in subsidized CARES Act loans, secured by the AAdvantage program. They’re raising less than United or Delta, but they’re happy because they can get the money for just under 4%. The low rates Delta is paying suggest that they may not have done as well as they think, or else that the market wouldn’t have offered American the low rates Delta expects.

Companies have been tapping markets at extremely low rates, not just because the Federal Reserve has been keeping rates low but also because it’s been pumping money into bond markets. Nonetheless it’s striking to see Delta decide to upsize its mortgage by $2.5 billion in a span of three days at a time when consumer spending on its cards is down, and travel on its planes is down. It seems like the 2020 equivalent of a NINJA loan.

I’ve been writing about the value of frequent flyer programs for 18 years, long before anyone noticed. Commentators used to argue that airlines would shut their programs down if they could, if others would do the same, because they didn’t provide enough of an advantage to justify their cost. What people missed for years is that airlines had turned their marketing programs from an expense into a profit center. Financial markets are recognizing that. But if the programs are worth as much as airlines are borrowing against, how little must the airline have been worth to justify their low market caps even before the pandemic?

About Gary Leff

Gary Leff is one of the foremost experts in the field of miles, points, and frequent business travel - a topic he has covered since 2002. Co-founder of frequent flyer community InsideFlyer.com, emcee of the Freddie Awards, and named one of the "World's Top Travel Experts" by Conde' Nast Traveler (2010-Present) Gary has been a guest on most major news media, profiled in several top print publications, and published broadly on the topic of consumer loyalty. More About Gary »

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Comments

  1. I think you got this wrong. It seems to be that there was more demand in the bond market than Delta and its bankers expected and that it got more money than it expected at the same rate for the same security. Gives Delta a lot of flexibilty in weathering this terrible period for the industry.

  2. There’s no disagreement here, Delta wasn’t required to borrow more against the program – they chose to. And they’re getting much better rates than American thought they’d have to pay for a loan in the private market.

  3. I’ve been trying to understand the valuations behind these programs. I don’t see why they are worth so much, but I must be missing something. Lets say one DL, AA, or UAL, go into bankruptcy and the lenders now own the frequent flier program. How does the frequent flyer program give them a return? They could try to sell it to another airline, but most airlines already have a established program. If somehow a new airline is formed I’m not sure they could afford to buy a “used” frequent flyer program. It seems the way they would make their money back is selling the frequent flyer program back to the airline after bankruptcy such as Air Canada with Areoplan.

  4. @Matthew agree 100%. These programs have no intrinsic value without the airline, exactly like Aeroplan. Plus they are utterly unattractive to the leisure traveler, especially after the mass devaluations, and for a while you won’t have other people’s money travelers (aka most business travelers). So they’re only attractive to credit card companies as signup bonuses until they realize that they are shuffling the same customers around with CAC absorbing the entire LTV. That’s some seriously depreciating collateral with zero diversification from the risks of the primary business — good for Delta for getting as much out of the market as they could!

  5. Good morning,
    I just woke up and my eyes and mind haven’t adjusted yet.
    Question: I currently have
    149,695 Delta Skymiles.
    How exactly will the mortgaging of the Skymiles, Frequent flyer program me?

  6. Delta,I commend for being at least innovative enough at getting more out of this program,then meets the eye.

  7. I stopped chasing SkyMiles years ago, but leveraging billions for less than 5% in the current environment is impressive…

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