Delta to Use Frequent-Flier Program to Raise $6.5 Billion -- Update
September 14 2020 - 11:35AM
Dow Jones News
By Alison Sider
Delta Air Lines Inc. is the latest carrier to use its
frequent-flier program to secure cash to weather the coronavirus
pandemic, announcing plans to raise $6.5 billion backed by its
SkyMiles program.
Delta said on Monday that it will issue a private-notes offering
and enter a term loan facility backed by the program, its biggest
fundraising yet as it looks to build its war chest. While Delta has
raised $16.5 billion since the start of the pandemic, the carrier
is still bleeding about $27 million in cash a day, Chief Financial
Officer Paul Jacobson said last week.
U.S. carriers received $25 billion in government funds under the
Cares Act, a broad stimulus package passed in March, to help them
keep their workers employed through the summer. But that money is
due to run out at the end of this month, and negotiations for a new
pandemic relief package that could include more assistance for
airlines have stalled. Airlines have outlined plans to furlough
tens of thousands of employees at the start of October, including
over 1,900 Delta pilots.
With travel demand hovering at around 30% of last year's levels
and showing few signs of rebounding, airlines' survival depends on
their ability to raise as much cash as possible. After mortgaging
planes, slots at congested airports, and lucrative routes, airlines
have been turning to frequent-flier programs to secure loans.
United Airlines Holdings Inc., in July raised $6.8 billion
backed by its MileagePlus program. Spirit Airlines Inc. said
earlier this month it would raise $850 million backed by its
loyalty programs.
American Airlines Group Inc., meanwhile, has put its
frequent-flier program up as collateral for a nearly $4.8 billion
government loan as part of another airline aid program under the
Cares Act. Though Delta is eligible for $4.6 billion under that
program, the airline has decided not to pursue the government loan,
a spokesman said.
The International Air Transport Association has said it doesn't
expect passenger demand to recover until 2024. International travel
restrictions and minimal demand from corporate travelers have
pushed many airlines around the world to the brink.
Cathay Pacific Airways Ltd., Hong Kong's flagship carrier, said
Monday that it is burning through hundreds of millions of dollars
in cash each month and closing in on a restructuring plan as
passenger demand remains a fraction of its pre-pandemic level.
The airline said passenger volumes scarcely improved in August
and that it will continue to burn through as much as 2 billion Hong
Kong dollars (US$258 million) a month, until the market
recovers.
Airlines introduced frequent-flier programs in the 1980s as a
way to encourage repeat business among their best customers with
the lure of free trips. They exploded in popularity, and in recent
years have become major sources of airline earnings.
Carriers mainly earn money from frequent-flier programs by
selling miles to banks and retailers that then award them to
customers who sign up for credit cards and make purchases. That
means airlines stand to benefit from every swipe of a co-branded
card, whether customers are buying plane tickets or clothing.
Airlines have said those revenues have proven stable even at times
when flying has dropped off.
Delta said holders of its co-branded American Express cards kept
spending this year, even as they've largely eschewed travel.
Delta's passenger revenue fell 60% in the first half of the year,
but the airline said Monday that it still received $1.9 billion in
cash from sales to American Express -- less than a 5% drop from the
first half of 2019.
Delta's shares rose 2% to $32.33.
Airline loyalty programs can also be alluring to banks because
of their typically high-value membership. When it renewed its
co-brand partnership with American Express last year, Delta said it
expected its benefit from the relationship to double to nearly $7
billion annually by 2023, up from $4 billion in 2019. Delta
accounts for about 20% of AmEx balances world-wide, making it
AmEx's largest co-brand account.
Airlines have said for years that their frequent-flier programs
had untapped potential but that they hadn't hit on the best way to
monetize them. Mr. Jacobson said in July that United's financing
could pave the way for similar deals by other airlines.
In past downturns, airlines have sold big chunks of miles to
their credit partners, but the approach has drawbacks. Airlines
that do it sacrifice future cash flows, and the amount an airline
can raise from a single bank through such a sale is limited,
executives have said.
Some airlines around the world have sold stakes in their
frequent-flier programs, or spun them off altogether, but U.S.
carriers have been hesitant to go that route, arguing that giving
up control of the programs can result in them becoming less
beneficial.
--P.R. Venkat contributed to this article.
Write to Alison Sider at alison.sider@wsj.com
(END) Dow Jones Newswires
September 14, 2020 11:20 ET (15:20 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.
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