Why Delta, United, American sold their mileage reward schemes to keep flying

They’re not the first, but in some ways they’re the most worrying. Delta is now seeing such a huge financial hole to fill that its put up its frequent flyer programme as collateral for a $6.5 billion loan.

The airline is selling what it calls Senior Secure Notes from SkyMiles, which in turn will lend Delta the money, with some going to a reserve account.

Delta has $16 billion in credit available, but is burning through a staggering net sum (thats less any income) of $27 million per day. At that rate $16 billion will last 592 days, taking it to 30th April 2022. However, theoretically, if it reached the start of March 2022 with no more money available, it would be forced into bankruptcy if it hadn’t done so far sooner than that.

Nobody is yet forecasting that the situation will be this bad by April 2022, indeed if a vaccine has proven to be effective and economic life is starting to establish a new normal by mid-2021, the daily burn rate will decline sharply and the extensive credit facilities will be scaled back.

United has used its Mileage Plus programme for a $5 billion loan and American Airlines is doing the same for a similar amount.

You may wonder why, if people aren’t flying, these mileage programmes are worth so much money?

Delta partners with American Express Credit cards – Amex buys miles for its customers, and the amount of miles Amex bought for customers to save fell just 5%, but the number of people redeeming miles fell 78%, so people are saving huge numbers up, and not spending them on flights – the result is going to be a huge pool of reward flights in the coming years.

Now the thing here is while this is providing a very handy cash stream for airlines with ho real outgoings, the amount of miles building up is going to result in a logjam of demand for reward flights in 18-36 months. Airlines won’t want to be letting people take them because they’ll need the cash. And that means either the redemption rates will increase – you’ll need far more miles for a flight than before, or the ancillary cash required to make the flight viable will be far higher, further devaluing the mileage you saved.