Delta to Decline CARES Act Loan and Take SkyMiles Backed Debt | Way of life
ATLANTA – Delta Air Lines will deny a federal loan through the CARES Act and instead incur debts backed by its SkyMiles loyalty program.
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 secured $ 5.4 billion in federal aid through the CARES law passed by Congress and had signed a letter of intent giving it the option to also take out a $ 4.6 billion loan under the federal assistance program.
However, the airline said on Monday that it had no plans to take the loan from the US Treasury Department. 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.
Although obtaining a private loan means Delta mortgages its loyalty program, airlines should provide the government with warrants, equity or senior debt as a condition of accepting federal loans. . That could have given the federal government ownership of shares in Delta, which has already provided the government with warrants for about 1% of its shares over five years, tied to the $ 5.4 billion in relief funds.
Federal loan terms would also restrict the amount airlines pay executives and restrict their ability to repurchase shares and pay dividends for up to a year after the loan is repaid. The loans are intended to be available to airlines that do not otherwise have reasonably available credit, according to the CARES Act, passed 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.
Delta’s frequent flyer program has over 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 others partners. These partners distribute Delta miles to their customers as an incentive for purchases and other transactions.
Prior to entering into this SkyMiles deal, Delta had accumulated nearly $ 16 billion in cash with the help of CARES Act funding and through further indebtedness.
But the airline is still spending around $ 27 million in cash per day as demand for travel remains low. Air travel fell almost 97% in mid-April and is still down by around 67% as many Americans avoid flying during the pandemic.
With the sharp decline in travel, Delta saw a 78% drop in miles redeemed in the first half of the year, leading to a drop in 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 SkyMiles program and its partnership with American Express have become a growing contributor to Delta’s business 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.
Cox Newspapers via the New York Times