Delta takes a 'mortgage' out on frequent flier SkyMiles for $6.5B

Delta Airlines fighting to stay afloat during the decrease 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 flier programs are lucrative assets for airlines making billions per year by selling frequent-flyer miles to credit-card partners who offer the miles as rewards for spending. American Express, for example, paid Delta $4.1 billion for miles in 2019, according to filings with the Securities and Exchanges Commission.

The private financing deal comes as the Atlanta-based carrier continues to lose as much as $27 million a day in cash amid an unprecedented drop in air travel due to COVID-19. Proceeds will be used to bolster the $15.7 billion in cash and short-term investments that Delta had at the end of June.

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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 be passing up a new loan from the federal government's CARES Act.

The move will provide immediate and much-needed relief as the airline continues to burn through $27 million in cash per day as travel demand remains weak due to the coronavirus pandemic.

In an 8-K filing on Monday, Delta reported a 78% decline in miles redeemed in the first half of the year, resulting in a 60% drop in passenger revenue. However, frequent fliers continued to use their Delta SkyMiles credit cards, and cash from sales to American Express declined only 5% year-over-year to $1.9 billion.

Ticker	Security	Last	Change	Change %
DAL	DELTA AIR LINES INC.	63.34	-0.28	-0.45%
AXP	AMERICAN EXPRESS CO.	292.93	+5.28	+1.84%

According to an investor presentation, Delta will buy miles from the new SkyMiles subsidiary to issue to frequent fliers, and the subsidiary will buy seats from Delta when frequent fliers use miles to book their seats. Meanwhile, American Express and other SkyMiles partners will buy miles from the subsidiary to issue to credit cardholders.

Delta received $5.4 billion through the CARES Act payroll support program, which was paid back in installments through July. The airline also signed a letter of intent giving the option for an additional $4.6 billion loan through the federal aid program.

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Delta is not alone in tapping into its frequent flier program. In June, United Airlines was first with a mortgage of its MileagePlus program for up to $5 billion in debt.

While the move should provide a boost for Delta, it should not impact members of Sky Miles or their redemption of mileage for flights.

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