Delta Airlines struggling to stay afloat amid declines in air travel during the coronavirus pandemic is turning to its popular frequent flyer program to tap into financial options.
Essentially, the Atlanta-based airline plans to mortgage its SkyMiles loyalty program for up to $ 6.5 billion. Frequent flyer programs are profitable assets for airlines that make billions annually selling frequent flyer miles to credit card partners who offer miles as a reward for spending. American Express, for example, paid Delta $ 4.1
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The private financing deal comes as the Atlanta-based carrier continues to lose up to $ 27 million a day in cash due to an unprecedented decline in air travel due to COVID-19. The proceeds will be used to support the $ 15.7 billion in cash and short-term investments that Delta had at the end of June.
In a press release, Delta said it was forming a new company, SkyMiles IP Ltd., which will be based in the Cayman Islands to facilitate the new financing. The Atlanta Journal-Constitution reported that as a result of this new action, Delta would forgo a new loan from the federal government’s CARES Act.
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The move will provide immediate and much-needed relief as the airline continues to burn $ 27 million in cash a day as travel demand remains weak amid the coronavirus pandemic.
In an 8-K statement 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 flyers continued to use their Delta SkyMiles credit cards, and the money from sales at American Express only dropped 5% year-on-year to $ 1.9 billion.
|FROM||DELTA AIR LINES INC.||34.57||+1.06||+ 3.16%|
|AXP||AMERICAN EXPRESS COMPANY||105.98||-0.70||-0.66%|
According to an investor presentation, Delta will purchase miles from the new SkyMiles branch to issue them to frequent flyers, and the branch will purchase seats from Delta when frequent flyers use the miles to reserve their seats. In the meantime, American Express and other SkyMiles partners will purchase miles from the branch to issue to credit card holders.
Delta received $ 5.4 billion through the CARES Act Payroll Support Program, which was repaid in installments through July. The airline also signed a letter of intent offering the option of an additional $ 4.6 billion loan through the federal aid program.
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Delta isn’t alone in drawing on its frequent flyer program. In June, United Airlines was the first to mortgage its MileagePlus program for up to $ 5 billion in debt.
While the move should provide a boost for Delta, it shouldn’t impact Sky Miles members or their redemption of miles for flights.
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