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

Justin Ho Sep 14, 2020
Heard on: Marketplace
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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
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
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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

What are the details of President Joe Biden’s coronavirus relief plan?

The $1.9 trillion plan would aim to speed up the vaccine rollout and provide financial help to individuals, states and local governments and businesses. Called the “American Rescue Plan,” the legislative proposal would meet Biden’s goal of administering 100 million vaccines by the 100th day of his administration, while advancing his objective of reopening most schools by the spring. It would also include $1,400 checks for most Americans. Get the rest of the specifics here.

What kind of help can small businesses get right now?

A new round of Paycheck Protection Program loans recently became available for pandemic-ravaged businesses. These loans don’t have to be paid back if rules are met. Right now, loans are open for first-time applicants. And the application has to go through community banking organizations — no big banks, for now, at least. This rollout is designed to help business owners who couldn’t get a PPP loan before.

What does the hiring situation in the U.S. look like as we enter the new year?

New data on job openings and postings provide a glimpse of what to expect in the job market in the coming weeks and months. This time of year typically sees a spike in hiring and job-search activity, says Jill Chapman with Insperity, a recruiting services firm. But that kind of optimistic planning for the future isn’t really the vibe these days. Job postings have been lagging on the job search site Indeed. Listings were down about 11% in December compared to a year earlier.

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