Airline rewards are suitable for all players. Consumers love them because they can enable free travel, credit card issuers find loyal customers, and airlines get to fill passenger seats (at least until COVID-19).
Add one more item to the list. Airlines can back loans with credit card points and collateralize their customer relationships to stay out of bankruptcy court.
Nasdaq reported yesterday:
- It’s official: Delta Air Lines (NYSE: DAL) is following key rival United Airlines (NASDAQ: UAL) in raising debt backed by its loyalty program.
- On Monday, Delta announced that it had formed a new subsidiary to hold the SkyMiles program and its intellectual property in order to facilitate a $6.5 billion secured debt issuance.
- As part of the debt issuance, the airline revealed never-before-seen details about the SkyMiles program’s performance, which could have major implications for long-term shareholders.
Or, in simpler terms, American Express to the rescue.
- Delta describes SkyMiles as having “a broadly diversified stream of cash flows.” That may be stretching the truth a bit. Only 32% of SkyMiles’ 2019 cash sales came from the airline itself — i.e., from the reward miles, travelers receive from Delta after completing flights.
- The vast majority of the remaining 68% of SkyMiles sales came from just one of Delta’s various non-airline partners: American Express
- Delta’s co-branded credit card program with American Express launched in 1996, but it has only really taken off over the past decade.
- Last year, Delta revealed that the revenue contribution from AmEx doubled from $1.7 billion to $3.4 billion between 2012 and 2018
- The presentation released on Monday showed that the AmEx contribution jumped to $4.1 billion in 2019. Cash sales to AmEx totaled $3.9 billion, accounting for 64% of SkyMiles’ cash inflows.
This is not the first time for Delta to come hat-in-hand, and for American Express to save the day. In 2004, the WSJ reported a “$600 million cash infusion” to save its co-branded partner, ten percent of the current relationship.
As for me, I will keep my three airline reward cards in the family safe until COVID-19 comes to an end. For now, cashback rewards are the way to go!
Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group
