On September 14, Delta Air Lines (Delta) announced that it will borrow $6.5 billion by spinning off its frequent-flyer program into a wholly owned subsidiary,  SkyMiles IP Ltd. (SMIP), and using that subsidiary to back an offering of senior secured notes and a new senior secured term loan facility.  Delta and SMIP will be co-issuers of the notes and co-borrowers under the new credit facility.

Delta is at least the fourth U.S. airline to resort to its loyalty program for relief from cash-flow problems caused by the Covid-19 pandemic.  Delta said last week that it had about $16 billion in cash at the end of June and that it was currently burning around $27 million a day.

Despite a slight uptick in summer traffic, air travel demand has hovered at around 30% of last year’s levels, forcing airlines to trim flights, reduce staff through voluntary means, and after September 30 when CARES Act protections expire, institute involuntary layoffs.

Delta A350-900 Delta One Suites (business class)

Delta expects its overall capacity to be down 60% in September compered to the same month last year.  International Delta flights are off by 80%.  Domestic flying is down 50%.  Delta has parked about 40% of its mainline fleet and has accelerated plans for aircraft retirements.  The venerable 777-200 will be retired at the end of the year.

Frequent Flyer Programs Generate Huge  Airline Revenues And Profits

Airlines make billions each year by selling frequent-flyer miles to credit card partners.  American Express, which issues co-branded credit cards with Delta, purchases Delta miles and issues them to customers as a reward for spending, typically at a rate of 1-2 miles per dollar spent on the relevant credit card.

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Delta A220-100 flight deck

While the pandemic decimated air travel in the first half of 2020, sales of miles to American Express declined only 5 percent during the same period.

Delta’s Form 8K Reveals Some of the Intimate Details of the SkyMiles Program

That Delta is using its loyalty program to raise money is nice, but the really interesting part is the information about the Delta SkyMiles program that can be gleaned from the Securities and Exchange Commission Form 8K that Delta filed in connection with issuing the new debt.

Delta One dessert – my favorite part of Delta meals.

To understand the mechanics of the SkyMiles program and the way it generates cash-flow, take a look at the 8K.

Here are a few of the statistical highlights about the SkyMiles program and its members that I found in Form 8K.

  • American Express paid Delta $4.1 billion for miles in 2019.
  • Delta grossed $6.1 billion last year from all mileage sales.
  • Delta represents 8% of American Express billings, and 22% of its loans.
  • SkyMiles launched in 1981 and has over 100 million members.
  • The average member has been with the program for 16 years.
  • SkyMiles has 25 airline partners and more than 40 other partners.
  • SkyMiles members contributed 60% of Delta ticket revenue, elites pay a 1.5x premium versus non-members.
  • Only 3% of redemptions are for things other than air travel (smart because using miles for things like champagne in a Skyclub is not a good value).
  • 97% of redeemed miles for flights were on Delta (last year I redeemed miles for flights on Garuda Indonesia, China Southern, and in an unusual twist Thai Airways but none on Delta).
  • About 30% of members are younger than 34 while 37% are between 35 and 54 and 36% are older than 54.
  • Almost half of all members earn more than $100,000 per year.
  • About 68 percent of SkyMiles members live outside Delta’s hubs.  Among those who live in Delta hubs, 8% come from the New York Area, while Atlanta 6% is second and Los Angeles 5% is third.

Final Thoughts

Spinning off the frequent-flyer program is an easy way for airlines to raise money because it allows them to use the program as collateral without exposing the rest of the business to creditors while still maintaining full control over the program.  The neat thing for members of the program is the spin off and financing scheme requires filing a SEC Form 8K that gives outsiders a peek behind the curtain about the way frequent-flyer programs operate.