Delta to decline CARES Act loan and incur SkyMiles-backed debt
The move allows Atlanta-based Delta to avoid ceding more control in exchange for new federal funds. It also highlights the airline’s ability to tap capital markets and the continued popularity of credit cards offering frequent flyer miles despite a sharp decline in air travel.
Delta got $ 5.4 billion in federal aid through the CARES law adopted by Congress, and had signed a letter of intent giving it the option to also contract a loan of $ 4.6 billion through the federal assistance program.
However, the airline said on Monday it had no plans to take out the loan. from the US Department of the Treasury. Instead, it will take on an additional $ 6.5 billion in debt backed by SkyMiles, including rights, intellectual property and other guarantees in the loyalty program.
While obtaining a private loan means Delta mortgages its loyalty program, airlines would need to provide the government with warrants, stocks or senior debt securities in advance. condition of acceptance of federal loans. This could have given the federal government ownership of shares in Delta, which provided government warrants for about 1% of its stock over five years tied to the $ 5.4 billion in relief funds.
Federal loan terms would also extend restrictions on how much airlines pay executives and restrict their ability to repurchase shares and pay dividends for up to one year after loan repayment. The loans are intended to be made available to airlines that do not otherwise have reasonably available credit, according to the CARES law, adopted by Congress in March in response to the coronavirus pandemic.
In return for more than $ 5 billion in federal aid earlier this year under the same program, Delta agreed not to lay off workers until October.
The Delta loyalty program has more than 100 million members and generated $ 6.1 billion in cash from the sale of miles to its SkyMiles credit card partner American Express, SkyTeam airlines and other partners. These partners give Delta miles to their customers as an incentive for purchases and other transactions.
Before entering into this SkyMiles deal, Delta had accumulated nearly $ 16 billion in cash with the help of funding from the CARES Act and get into more debt.
But the airline is still spending around $ 27 million in cash per day as demand for travel remains low. Flight fell almost 97% in mid-April and is still down about 67% as many Americans avoid flying during the pandemic.
With the sharp drop in travel, Delta saw a 78% drop in miles redeemed in the first half of the year, which resulted in lower rewards revenue. However, frequent travelers continued to use their Delta SkyMiles credit cards and cash from sales to American Express only declined by 5%, according to Delta.
Over the years, other airlines have tried different models with their frequent flyer programs, including duplicating the programs to make them separate businesses. United and American have also recently taken out loans against their loyalty programs.
With the creation of a new SkyMiles subsidiary, Delta will purchase miles from the subsidiary for issuance to frequent flyers, and the subsidiary will purchase seats from Delta when frequent travelers reserve seats using miles. American Express and other SkyMiles partners will purchase miles from the affiliate for issuance to credit cardholders.
the The SkyMiles program and its partnership with American Express have become a growing contributor Delta’s activities in recent years, with the American Express partnership contributing more than $ 4 billion to Delta in 2019, up from $ 2 billion in 2014.
SkyMiles frequent flyer members account for more than 60% of Delta’s ticket revenue, according to Delta.
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