COVID-19

Delta’s putting its frequent flyer program up as collateral for a loan

Justin Ho Sep 14, 2020
Heard on:
HTML EMBED:
COPY
A Delta Air Lines employee waits for passengers at an empty check-in counter at Ronald Reagan Washington National Airport in Arlington, Virginia. Andrew Caballero-Reynolds/AFP via Getty Images
COVID-19

Delta’s putting its frequent flyer program up as collateral for a loan

Justin Ho Sep 14, 2020
Heard on:
A Delta Air Lines employee waits for passengers at an empty check-in counter at Ronald Reagan Washington National Airport in Arlington, Virginia. Andrew Caballero-Reynolds/AFP via Getty Images
HTML EMBED:
COPY

Delta Air Lines will be borrowing $6.5 billion.

That’s not super surprising, given the state of the big air carriers in this pandemic economy. A Delta executive recently said the airline’s losing $27 million a day. But the interesting part of this deal is the asset that Delta’s putting up as collateral: its frequent flyer program.

Frequent flyer miles aren’t only meant to build customer loyalty. They’re also a product that airlines sell.

Samuel Engel, senior vice president with the consulting firm ICF, said the buyers are credit card companies.

“And the credit card companies in turn give those miles to consumers as a reward for using their credit cards,” he said.

Engel says miles are a money-making machine for airlines.

“At the beginning of this year, the programs of the four largest U.S. airlines together had been valued at $77 billion, if they were standalone businesses,” he said. 

Airlines can tap these programs to raise cash. One common method is to presell miles to banks to get cash upfront.

Henry Harteveldt, president of Atmosphere Research Group, said an airline can also spin off the entire program, as Air Canada did in 2005.

“No airline, though, until recently has leveraged its frequent flyer program as collateral against a loan,” Harteveldt said.

Earlier this year, United put up its loyalty program as collateral for a government loan. Harteveldt said it’s a creative way to raise cash “at a time when air travel demand, especially by their more profitable business flyers, has fallen off the cliff.”

Airlines have other creative ways to raise money. Scott Hamilton, managing director at the aviation consultancy Leeham Co., said it’s common for airlines to pledge their planes, and even their headquarters and airport gates, as collateral for loans.

“But the frequent flyer program is to me the most creative and the most visible sign of the desperation that the airlines are in,” Hamilton said.

The risk for airlines, Hamilton said, is taking on too much debt. That could make it harder for them to recover from the current slump.

COVID-19 Economy FAQs

Millions of Americans are unemployed, but businesses say they are having trouble hiring. Why?

This economic crisis is unusual compared to traditional recessions, according to Daniel Zhao, senior economist with Glassdoor. “Many workers are still sitting out of the labor force because of health concerns or child care needs, and that makes it tough to find workers regardless of what you’re doing with wages or benefits,” Zhao said. “An extra dollar an hour isn’t going to make a cashier with preexisting conditions feel that it’s safe to return to work.” This can be seen in the restaurant industry: Some workers have quit or are reluctant to apply because of COVID-19 concerns, low pay, meager benefits and the stress that comes with a fast-paced, demanding job. Restaurants have been willing to offer signing bonuses and temporary wage increases. One McDonald’s is even paying people $50 just to interview.

Could waiving patents increase the global supply of COVID-19 vaccines?

India and South Africa have introduced a proposal to temporarily suspend patents on COVID-19 vaccines. Backers of the plan say it would increase the supply of vaccines around the world by allowing more countries to produce them. Skeptics say it’s not that simple. There’s now enough supply in the U.S that any adult who wants a shot should be able to get one soon. That reality is years away for most other countries. More than 100 countries have backed the proposal to temporarily waive COVID-19 vaccine patents. The U.S isn’t one of them, but the White House has said it’s considering the idea.

Can businesses deny you entry if you don’t have a vaccine passport?

As more Americans get vaccinated against COVID-19 and the economy begins reopening, some businesses are requiring proof of vaccination to enter their premises. The concept of a vaccine passport has raised ethical questions about data privacy and potential discrimination against the unvaccinated. However, legal experts say businesses have the right to deny entrance to those who can’t show proof.

Read More

Collapse

We’re here to help you navigate this changed world and economy.

Our mission at Marketplace is to raise the economic intelligence of the country. It’s a tough task, but it’s never been more important.

In the past year, we’ve seen record unemployment, stimulus bills, and reddit users influencing the stock market. Marketplace helps you understand it all, will fact-based, approachable, and unbiased reporting.

Generous support from listeners and readers is what powers our nonprofit news—and your donation today will help provide this essential service. For just $5/month, you can sustain independent journalism that keeps you and thousands of others informed.