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?