Delta Air Lines announced today that it is using its SkyMiles frequent flier program to raise $6.5 billion. Split in the form of senior secured notes and a senior secured term loan facility, Delta and SkyMiles will be co-issuers and co-borrowers in the notes and credit facility, respectively.
Delta raising $6.5 billion using SkyMiles
Using the SkyMiles loyalty program, Delta Air Lines is raising additional funds. SkyMiles IP Ltd., a newly formed Cayman Islands company, is Delta’s wholly-owned subsidiary and encompasses the airline loyalty program. The airline is raising $6.5 billion against this loyalty program.
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SkyMiles will lend the net proceeds from its end of the notes offering and credit facility to Delta, with some portion remaining in a reserve account. Delta Air Lines, in turn, expects to use the funding for “general corporate purposes” and to “bolster its liquidity position.”
Details on SkyMiles
The SkyMiles program is one tool that Delta uses to drive customer loyalty and build on the airline’s financial performance. According to the airline, if SkyMiles were set up as a subsidiary last year instead of part of the airline, it would have generated almost $6.1 billion in cash sales, in the form of miles, and, minus redemptions, would have generated $2.4 billion of net cash. Essentially, this is a very profitable and lucrative part of the airline.
SkyMiles operates like most other frequent flier programs. Passengers sign up, earn miles through either flying the airline itself or partner airlines, or earn miles through non-airline partners like stores through a shopping portal, hotel partners, or spending on co-branded credit cards. Then, after a passenger has accumulated enough miles, they can redeem it for a flight experience, an upgrade, or in several other ways as Delta allows.
Based on the company structure with SkyMiles set up separately from the main airline, Delta purchases those miles from SkyMiles and gives them to customers who earn them. Then, when it comes time to redeeming seats through SkyMiles, Delta Air Lines sells a certain number of seats to the program while SkyMiles then charges a certain number of miles for each seat on an “exchange rate.” Delta uses a dynamic pricing scale, so the number of miles for each seat is not set based on things like class and number of miles the flight will cover.
For credit card earners, SkyMiles sells the miles to a third party credit card issuer, like American Express, which offers co-branded Delta cards. American Express then deposits miles in a customer’s account whenever their spending qualifies the earning of such miles. American Express is SkyMiles’ largest partner, with the airline earning over $4 billion in contributions from the credit card issuer. The remuneration amount from American Express to Delta has grown over recent years.
These mileage sales to Delta and third-party programs like American Express or non-airline partners account for the $6.1 billion in cash from sales. Redemptions, meanwhile, cost SkyMiles $3.6 billion.
Other airlines have also leveraged their loyalty programs
American and United have also leveraged their loyalty programs to earn cash. United Airlines was one of the pioneers, raising $5 billion through its loyalty program to help bolster its liquidity position.
Delta Air Lines is now using SkyMiles as a way to help earn cash while the airline navigates through one of the worst crises in its history. System capacity for the third quarter is expected to be down about 60% year-over-year with international capacity down by 80% while domestic capacity remains at 50% of 2019 levels in the same time period. About 40% of Delta’s fleet remains parked with some models heading out to retirement.
What do you think of Delta raising liquidity through its SkyMiles loyalty program? Let us know in the comments!