Airlines Raised $$$-Billions via Frequent Flier Programs. Delta alone Raised $9 billion via SkyMiles as Collateral. How?

“You’re the Collateral.” Separating the assets (including you) from the liabilities (your miles), and pledging the assets.

By Wolf Richter for WOLF STREET.

Airlines, in their mad scramble to pile up enough cash to survive the ongoing collapse in air passenger travel, have resorted to every imaginable way of raising cash: issuing shares, shanghaiing taxpayers into giving them $25 billion, issuing bonds, borrowing from banks, selling their planes for cash and leasing them back, and what not. The biggest single way of raising cash has become borrowing by pledging their frequent flier programs as collateral.

And yes, dear member of a frequent flyer program, you guessed it, that collateral is you. Not you in flesh-and-blood – though airlines would resort to that too if they could figure out how – but everything around you, the huge body of personal and marketing data that frequent flier programs amass, and you as a marketing target for Corporate America, such as purveyors of credit cards for which you are a high-value target.

Airlines have been making tons of money on their loyalty programs – by marketing your data and access to you to other companies. These programs have value. At least one of these loyalty programs is publicly traded: Smiles Fidelidade SA which trades as SMLS3 on the Novo Mercado in Brazil and has been profitable for years. It houses the loyalty program of the Brazilian low-cost GOL Airlines.

Delta Air Lines, United Airlines, and American Airlines have all done multi-billion-dollar deals, using their loyalty programs as collateral. So we are going to look at Delta, and what it did to raise $9 billion by using its SkyMiles program as collateral.

To pull this off, Delta set up a complicated structure, involving new corporate entities, including a Delta subsidiary called SkyMiles IP (SMIP), incorporated in the Cayman Islands, plus Special Purpose Vehicles (SPVs), and a series of HoldCos. The cash raised from bond investors and banks got shuffled through this structure via intercompany loans. All this is spelled out in the 154-page term loan agreement.

The liabilities of the SkyMiles loyalty program.

The first thing to know about these programs is that the actual miles earned by frequent fliers are a liability – something that the airline owes its customers.

In Delta’s case, this liability is called, “Loyalty program deferred revenue.” The travel miles earned and redeemed are given a value in dollars. In Q3, this liability rose to $7.1 billion, from $6.7 billion in Q3 last year, according to Delta’s quarterly 10-Q filing. Members can redeem these miles and use them as “currency,” as Delta calls it, to buy tickets, upgrades to existing tickets, or products from marketing partners.

The liability for Q3 came about this way: Balance of the liability on January 1 ($6.73 billion), plus travel miles earned so far this year (+$1.13 billion), minus travel miles redeemed (-$731 million), minus non-travel miles redeemed (-$40 million) = new balance $7.1 billion.

But this liability is obviously not what Delta pledged as collateral.

Here’s the income.

Income generated by SkyMiles comes from marketing programs with other companies. For the first nine months of 2020, this amounted to $2.9 billion, and is recorded on the income statement, in two revenue categories:

  • Under “passenger revenue”: $731 million
  • Under “other revenue”: $2.17 billion.

American Express is Delta’s biggest partner in that program with “co-branded credit card relationships,” particularly the Delta SkyMiles American Express Card. A new credit-card customer has a high lifetime value for American Express, and it’s willing to pay to get access to SkyMiles members and their data. So that’s the money-making part of the SkyMiles program.

The $9 billion package.

When Delta started the process of raising money backed by SkyMiles as collateral, there was so much demand that Delta upsized the originally floated amount of the package ($6.5 billion) to $9 billion, according to Delta’s September 17 SEC filing. The $9 billion package is composed of three elements:

  • $3 billion term loan from a consortium of banks (we’ll get into the weeds of this in a moment);
  • $2.5 billion in senior secured five-year notes with a coupon of 4.5%;
  • $3.5 billion in senior secured eight-year notes with a coupon of 4.75%.

Delta has a credit rating of “BB” (junk). But the yields in the 4.75%-range are just so tempting amid the Fed’s yield repression – hence the huge demand. And there is always the notion that the government will not let Delta fail and file for bankruptcy.

Borrowers, guarantors, and fund flows.

The borrowers listed in the term loan agreement are these entities (IP = Intellectual Property):

  • SkyMiles IP Ltd. (SMIP, the new entity set up in the Cayman Islands
  • Delta Air Lines and Loyalty Co.

The guarantors listed in the agreement are direct and indirect subsidiaries of Delta, all created for this purpose in the Cayman Islands:

  • Skymiles Holdings Ltd.
  • Skymiles IP Holdings Ltd.
  • Skymiles IP Finance Ltd.

The lenders are a consortium of banks with Barclays Bank as administrative agent and US Bank National as the “Collateral Administrator.” They will likely package the loan into a collateralized loan obligation (CLO) and sell it to investors, or they will sell the loan itself to investors.

Just for a flair of the complexity of this deal: After covering fees, transaction costs, and expenses, the remainder of the proceeds from the $3 billion loan will be deposited in the “Reserve Account” and in the “Collection Account.” From “Collection Account,” Loyalty Co will send the funds to HoldCo 3 which will send them to HoldCo 2 which will send it to Delta via a “Delta Intercompany Loan.”

You’re the collateral.

The $9 billion in SkyHigh Debt, I mean, “SkyMiles Debt,” as Delta calls it, is secured by a first-priority security interest, according to the 10-Q, in:

  • “Certain of our co-branding, partnering or similar agreements relating to the SkyMiles program (including all payments thereunder),
  • “Rights under certain intercompany agreements relating to the SkyMiles program,
  • “Certain rights under our SkyMiles program,
  • “Certain deposit accounts that receive revenue under our SkyMiles agreements,
  • “The equity of SMIP [SkyMiles IP] and substantially all other assets of SMIP and SMIF.

The term loan agreement lists what is included in the “collateral”: the assets and properties of the three Guarantors (Skymiles Holdings Ltd., Skymiles IP Holdings Ltd., and Skymiles IP Finance Ltd.).

This “IP” is the intellectual property associated with SkyMiles, including SkyMiles member profile data, such as name, mailing address, email address, phone numbers, communication and promotion opt-ins, payment-related information, customer flight-related experience, total miles balance, third party engagement history, accrual and redemption activity of travel miles, member status (Medallion, Gold Medallion, etc.), and SkyMiles account number.

The IP also includes SkyMiles co-branding and similar agreements with marketing partners to market their products to SkyMiles members, who they know well based on the data they have on them from the SkyMiles program.

And the IP includes specific proprietary source code, registered trademarks, patents and patent applications, and registered copyrights used in the SkyMiles Program.

In other words, Delta has separated the SkyMiles liabilities (the travel miles) from the SkyMiles assets, and it’s using the SkyMiles assets, including your data, as collateral to borrow $9 billion.

Stockholders are stuck with the liabilities of the program (the travel miles) plus the new $9 billion in “SkyHigh Debt,” I mean “SkyMiles Debt.” But with the other option being for Delta to run out of money and wipe out shareholders in bankruptcy court, this sounds like the better deal.

Eight months into crisis, airlines are stuck in worst recovery ever. Read… “Daily Cash Burn” to Continue till Further Notice: US Air Travelers Still -65%, Ticket Prices -25%, a Toxic Mix. Delta Q3 Passenger Revenues -83%

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  81 comments for “Airlines Raised $$$-Billions via Frequent Flier Programs. Delta alone Raised $9 billion via SkyMiles as Collateral. How?

  1. 2banana says:

    Bankruptcy also wipes out frequent flier programs.

    Use or lose.

    • Wolf Richter says:


      Interestingly, bankruptcy may wipe out (but didn’t last time) the liabilities of frequent flier miles you have accumulated (asset to you). But it transfers the assets of the programs — see above — to the creditors, and they continue to have value, but are now owned by the creditors, and the shareholders got wiped out.

    • Drater says:

      I used to have a Citi AAdvantage card but got tired of booking trips around their blackout dates. As a traveler and taxpayer I loathe American Airlines in every way.

      Now I just use the Citi Costco cashback card and earn enough each year to purchase a ticket on an airline of my choosing – usually EVA.

      • AF Kay says:

        I second. I no longer have any AAdvantage credit card. Once in a while I shop through AA eshopping to earn a few miles to forestall the expiration of my existing AA miles (assuming, perhaps foolishly, that they are worth salvaging).

        BTW, I am a life-time Gold member who has sworn off the AA program. Lenders beware: there must be a lot of other people out there who have become disillusioned with frequent flyer programs like AA or UA.

        I use my Costco VISA for Costco purchases. Otherwise, I collect Chase UR points.

    • M says:

      I predict that a lot of companies will be ultimately bailed out by the government after the election, including the airlines, so I do not see many of those (certainly not the large, billionaire-controlled) companies like the airlines actually going into bankruptcy. Remember that both, major parties have too many candidates who get unsettling amounts of funding from the ultra-rich, who control so many of the larger, American companies.

      I just worry what will happen to the oncoming, estimated $211 trillion in federal liabilities, aside from the known, publicized, federal debt, ignoring the trillions that will be necessarily paid by the federal government to bail out states, cities, public pensions, larger, private pensions, etc. I think that the only way that the government can bailout as many companies as the economy would ideally need is if it takes an equity stake in all bailed out companies:
      e.g., convertible bonds for most of the value of each company to be bailed out as a condition to giving it a bailout, since so many were over-leveraged and are now legally insolvent.

      Otherwise, if the federal government just bails out a few of its cronies or even the most essential companies, without leveraging its resources by getting equity stakes, there will come a time at which the endless dollar printing causes hyperinflation. We are inflating and inflating not just the US taxpayers’ but the world’s legal tender and at some point the world’s investors will lose patience with the US dollar: they just cannot right now because so many debts are in US dollars, etc.

      However, the reckoning may come in a couple of years or less. At a minimum, the increasing interest payments on the federal debt will result in the US government’s budget being strictly limited or else, on sharp tax increases. Since so many of the wealthy in the US have used tax schemes to avoid paying taxes, like foreign investments whose income is not returned to the US, and have seen their wealth increase and increase thereby the burden of those new taxes may be directed mostly against them.

    • Wilbur Right says:

      Lie Miles

    • c1ue says:

      Bankruptcy could, but in practice it is highly unlikely.
      The entire value of these programs is the accumulated miles and ongoing loyalty these engender.
      Destroying people’s accumulated miles is the one guaranteed way to make all of them angry and not use your frequent flier program (and associated airline/credit card) again.
      The same thing was talked about when Caesar’s declared bankruptcy: that accumulated gambling rewards would be zeroed out. Didn’t happen.

  2. VintageVNvet says:

    Truly amazing Wolf; thanks so much for your investigative report.
    Now contemplating lowering my estimates for coming bottoms for Dow and S&P, based on this report and the other shenanigans now becoming more clear.
    Nice to be able to sit it out while we wait, eh

  3. Cas127 says:


    Thanks for that deep dive into the abyss…the complete loan documentation for billion dollar loans/bonds typically runs to one to two thousand single spaced, insanely cross referenced pages. (There are typically more docs involved than the single one you mentioned…some for purely technical reasons).

    While I hear you on the “IP/customer data as collateral” front, I still suspect that the dead eyed distress lender types are really looking at the apparently massive cashflow to the airlines as part of their “credit card partnership” with the card issuers.

    My guess is that the airlines struck amazing deals with the CC issuers decades ago, using the tin-plated appeal of their FreqFlyer miles to CC customers, and **have in essence become mini-credit card companies of a sort themselves** (ie, they get a healthy chunk of the ungodly revenues from their “branded” cards…without being on the hook for CC customer defaults).

    That massive cashflow (routed through the subsidiary/affiliate thicket you bravely ventured into) is likely the true cornerstone collateral here.

    I hadn’t appreciated the fact that those “branded cards” from decades ago likely gave the airlines enough leverage to de facto acquire a decent chunk of the credit card companies’ Luciferian revenue streams.

    Even if the airlines ceased to exist utterly (leaving trillions in unsecured FreqFlyer miles…) the cashflow proceeds from those decades old Credit Card Alliance/branding deals would live on for a number of years (there are likely tens of billions in accumulated debt on those longstanding cards…throwing off fee and interest income year after year).

    Anything throwing off unsecured cashflow can serve as collateral.

    I guess the trick is tracking down every single corporate cashflow.

    Good job, Wolf.

  4. Stuart says:

    Potential revenue is now collateral ? What’s next ? Theoretical
    revenue ? It’s revenue because I say it is ? Well, if you think Capitalism is not a medieval, anachronistic and insane manner in which to order your society, I guess anything goes.

    • Cas127 says:

      Well, if there is *existing* debt owed on those branded cards, part of which is legally owned by the airlines (per their deal with the CC companies) and which has now been further hived off into airline SPVs…then it actually does make sense that it is pretty good collateral…the same way *any debt owed to anybody* can be good collateral for the party to whom the debt is owned.

      And not *just* for the future fee/interest stream, like I initially said.

      I didn’t think about it enough (I still didn’t appreciate just how fully the airlines might be the *full owners* of a portion of those branded cards’ accumulated debt as per their legal branding deal)…the airlines might not just get a cut of the revenue stream from the CC owed…but the *principal* owed).

      That is why I said the airlines are sorta like mini-credit card companies without being on the hook for customer defaults (although…).

      If you paid for your groceries in 2015 on an airline branded card and never paid off…you owe some of that debt to Delta apparently…

      In aggregate, across millions of branded cards, that would be a big honking piece of change, justifying its use as collateral for multi billion dollar loans.

    • joe2 says:

      Capitalism has come a long way from cash based accounting, free market based value, level playing field taxation and regulation, and handshake deals.
      I don’t think anyone calls what we have capitalism anymore. Crony fascism is a better term. Look at twitter political censorship.

      Used to be you had to keep your wits about you, but now your wits are illegal and you are required to believe what you are told.

      • C says:


        Was going to post the same thoughts. What we have today is not Capitalism and to label it as such is purposeful deception.


      • Sierra7 says:

        My description of the activity of “free market” capitalism is this:
        “From the moment of the first handshake between two participating individuals making a monied “deal”, the transaction immediately delved into “protectionism”……..into the control of total political power wherever the game of capitalism is played out.”
        The “commons” is not included.

  5. cocomaan says:

    This might be the dumbest thing I’ve ever seen in my entire life.

  6. Tmd says:

    looks like a form of receivable factoring to me – the last resort source of cash for companies running out of options.

    • Cas127 says:

      Factoring, yes.

      Except the airlines turned the trick decades ago of wedging themselves into the role of marketers of the means of debt-financed payment…so they own not only the receivables for their own product (flight) but part of the receivables for *anything* paid for on those cards.

      Sorta amazing.

  7. DawnsEarlyLight says:

    You mean my 200,000 skymiles is being used as collateral for another ‘banked’ debt?

    • Cas127 says:

      Actually, if I’m right, it is sorta “worse”…a big chunk of the fee/interest from your airline branded credit card (and tens of millions like you) is contractually committed to be paid through to the *airlines*.

      Billions/tens of billions in accumulated customer credit card debt (and the fee/interest flowing from it) has now been segregated out to that thicket of SPVs that Wolf cited.

      Those subsidiaries/SPVs are the hardcore collateral (I think).

      Basically, for decades, the airlines via contractual branding alliances with the CC companies have been getting a surprisingly big chunk of CC revenues.

      To get emergency loans, the airlines have now hived off those big balls of credit card debt (their share of it per contract with CC companies) and set up “independent” entities that will survive even if the airlines’ equity goes to zero in bankruptcy.

      CC customers aren’t really being screwed (well, beyond their historic CC screwing) but it is kinda a shock to realize that Visa isn’t so much Visa as it is Visa/Delta, Visa/Southwest, Visa/United, Visa/Anybody With a Branded Card Trading on Phoney Baloney Beanie Baby Bonus Points…

      Visa is basically making less from credit card servitude than thought, and the branded service providers are making more.

      • Cas127 says:

        Basically, the next time an airline (or anybody else) offers you a branded card “featuring” miles/points/geegaws/etc picture…

        A grubby man in a raincoat, driving a beat up van, who wants to show you a puppy…

        • BuySome says:

          In simple view, the airlines are telling anyone who will listen to their spiel that something special is coming their way. But what they really get is no more than “another crummy commecial” to use their product, being services. De-facto improvement of the Little Orphan Annie De-coder Ring. Then it’s all just enjoy your Ovaltine so long as it remains available, which may not be long, but you got stuck with paying the postage. A scam is a scam no matter how cute that pig looks in a kimono.

    • Wolf Richter says:


      No, not at all. The miles are a liability, as the article explains. And the article further explains in detail what actually forms the collateral. But I’m not going to repeat the article here. You can read it above.

      • DawnsEarlyLight says:

        Pretty sneaky, separating the liabilities to the stockholders, and projecting assets based on member data! This approach sounds familiar! Smoke and mirrors, the american way.

  8. A says:

    Use your frequent flyer miles as soon as you can. At any moment airlines can double the cost of receptions or just zero-out your account. You have no legal protections. Use your miles, don’t trust the airlines.

    • Wolf Richter says:

      Last time Delta and AA went bankruptcy, my miles survived without a scratch. I’m not sure this will be the case this time though.

      • wkevinw says:

        Right, they can wipe the miles out, but like so many items this is not required.

        I like the miles programs, but only for pleasure trips where I have a lot of date flexibility.

        Where they really come in handy is if you have business travel, especially international. You can use them for lounge access, seat upgrades, etc. This was by far the most useful for me, anyway.

  9. Wes says:

    Thanks for the deep dive Mr. Richter. It’s interesting that Delta is using European banks and doing the transactions through the Caymans. There must be an angle here to get around taxes and U.S. bankruptcy with respect to the collateral being pledged. If I had to guess they don’t want any creditors attaching to these assets if they were to go through chapter 11 again. The transaction through tax haven shell corporations, oops, I meant holding corporations.

  10. Anthony A. says:

    Thanks Wolf, this info is unbelievable. And we thought they were our friends all these years (LOL).

    I have been flying on business since 1981. I have been a member of all the airline FF programs since then. Those included, but were not limited to, United, American, Delta, Northwestern, Eastern, US Air, Air Canada, and many predecessor airlines and commuters. I have amassed millions of FF miles, but, luckily have used or given most of them away over the years.

    I’ve had all the branded CC’s too, but those are all gone now. I’m retired and hope to never fly another commercial aircraft again. They can’t market my stuff anymore……..well maybe United can on a limited basis.

    My work email that was used on all these programs is now gone. All that’s left is the United account with 150,000 unused miles in it. And they may expire due to non use.

    I have used up most of my hotel points too! (and I had a bunch of them)

    I suspect Marriott and others are pulling the same thing with their “favored” customers and their branded CC’s.

    • Cas127 says:

      “And we thought they were our friends all these years (LOL).”

      Well…I knew the airlines weren’t my friends…but I didn’t know they *were* my banker/loan shark…

      • Anthony A. says:

        Well, in my early years of business travel, the airlines were more accomodating and customer oriented. Not now though! ANd not so much ANY banker in ANY time period.

  11. kevin says:

    Yet another great article from Wolf. The intentional Freudian slip where he says “The $9 billion in SkyHigh Debt, I mean, “SkyMiles Debt,” as Delta calls it…” made it worth the time walking through the complexities (although I don’t fully grasp wtf these airlines are doing now :)

    Even a supremely patient investor like Warren Buffet gave up on airlines after he saw the pandemic writing on the wall.

    Additionally, we now have the supreme stupidity of some airlines doing Trips-to-Nowhere (i.e. flying in circles and landing in the same airport) and/or converting aircraft into restaurants just for customers who miss the feeling of that in-flight “ambience” and each other’s flatulence in the enclosed fuselage. lol.

  12. MonkeyBusiness says:

    Airlines should just start a new program called : “Use your miles to purchase a plane”. It would allow multiple people to combine their miles to purchase a plane or two or three of their choice!!!

    Sure there won’t be any new cash coming in, but hei they get to move the liabilities off the books. That has to count for something!!! Buyers are responsible for storage though.

    Once travel starts to recover, airlines can lease or buy back those planes.

    • GotCollateral says:

      > they get to move the liabilities off the books

      About time they learned something from the banks… lol

      • Nik says:

        How true..however no one can in anyway match the ‘Leger-domain’ of the privately OWNED FED by simply creating its Funds ‘Ex-nihilo’ and Stiffing the American public with the tragic ‘Bill of fare’ aloha amigos

        • Cas127 says:

          “no one can in anyway match the ‘Leger-domain’ of the privately OWNED FED”

          True, but corporations did *learn* from the Fed Fiat Follies.

          Any business that can get its customers’ eye off the ball of lowest price, by waving around shiny “loyalty program bonus points/miles/etc” has bamboozled its customers into exchanging their universally fungible/usable USD into a “currency” that can usually only be used *at that business*

          And the value of which that business can dilute at will.

          Just like the Fed can…with its own Frequent Sucker program (see USD, see ZIRP)

    • MonkeyBusiness says:

      Another advantage of this program is that plane buyers i.e. taxpayers can then apply for their own bailout. “Carrying cost is just too go**** high!!!”

  13. David G LA says:

    I’m still lost. But thanks!

    • Petunia says:

      The airline credit card value is split between what they owe you(miles/points), revenue they collect from you, and what they know about your spending.

      The airlines are keeping these parts, the miles they owe you because it’s a debt to you, and the revenue they make off you. They are spinning off what they know about your spending as an asset class.

      Selling data about you is a big business, there are companies that aggregate this data and sell it to insurance companies, govts, or any snoop with money. Remember that every time you swipe that card.

  14. Prof. Emeritus says:

    Couldn’t the oil industry raise money from points on customer’s loyalty cards? (Don’t take it seriously, was meant to be a joke)

  15. LeClerc says:

    None of this debt will be repaid.

    The same geniuses who created this scheme will create another to strip, securitize, disperse, obfuscate and otherwise dilute traceability of the debt until a convenient bankruptcy occurs.

    Associated fee income will continue.

  16. TimTim says:

    Mind boggling

  17. fizee says:

    thank you Wolf for your diligence. This is a paramount example of the “financialisation” of American business. When will we reach “peak financialisation”? Used to be a time when a deal was agreed and sealed with a handshake. How retro.

  18. Lance Manly says:

    Here is a fun thing to do. Lock you credit reporting on Equifax, Experian, and TransUnion. You have made selling your data in many ways worthless since no one can run a credit report on you. It also stops identity theft where someone takes out credit in your name. It is really easy to temporarily allow access to do something like buy a car and then have the block automatically restored.

    • Clete says:

      Yes — and you can stop the endless direct mail pieces too, so the nogoodniks can’t grab something out of your mailbox and hijack your credit.

    • happy_man says:


      freezing, locking, opting out of credit bureau’s does nothing

      All your personal info there is routinely and conveniently hacked and leaked into the public domain

      freezing your credit files may slow down an identity thief, a little, if they really want to steal from you they will adapt their methods

      • David says:

        I don’t believe that. Freezing your credit report is the best way to keep someone from stealing your identity & accessing your information. Having credit with a company that values your privacy & security is another. I’m not naive enough to think my information isn’t shared around, but you can minimize it as much as possible.

    • Wolf Richter says:

      Agreed. And I’ve done that over a decade ago, and I strongly recommend it.

      But… I still get co-branded credit-card promos and other promos from Delta, AA, and United because they don’t need the data from the credit bureaus. They already have the data in my frequent flier profile.

  19. Michael Engel says:

    1) Amazon stock is flying while the airlines stocks are grounded.
    2) AMZN weekly, RSI & a cloud : the current bar prime “selling tail” up in the air will be growing if AMZN close lower today 3,402 it will form a Bearish Divergence.
    4) K, of the weekly cloud, is marked by the lagging line 26 bars behind.
    In the next few weeks K will takeoff like a rocket.
    When K fly T&K gap shrink. it increase the likelihood of T &K bearish flip, while widening the cloud front end.
    5) The cloud is thin. AMZN might fly into a cloud spitz. The nearest one is in Jan 2021. The next one is in Mar 2021.
    6) AMZN bar is about the same size of last week bar, but volume is
    growing steadily. A large selling tail on growing volume might indicate Bezus selling.
    7) AMZN daily is back inside the cloud. Investors don’t know where they are flying, but Jeff does. AMZN might glide to the other side, above a red flatbed, forming a trading range, building a cause for AMZN next strike.
    8) T&K daily gap will grow next week, because the 9 bars lows will be taken out, while K stays flat. That’s positive.

  20. Michael Engel says:

    Somebody amputated #2) and omitted #3) .

  21. Lune says:

    I think your picture is incomplete. It’s not the marketing data that Delta is selling. That’s pretty small potatoes since Amex can find high worth travelers via other means (like your credit card history).

    The vast majority of FF miles don’t come from flying anymore. They come from credit cards. Delta sells miles to eg AmEx for let’s say 1c/mile. That’s revenue they recognize today, for a liability that someone *might* redeem 2 years from now for a flight (if they don’t expire by then). And when they do redeem for that flight, they internally “charge” the FF program a very low price for the flight because it’s a seat that would have gone empty anyway.

    So on paper, the FF division in all airlines are huge money makers: sell miles for hard cash from CC companies, then redeem the liabilities for flights that are “sold” very cheaply.

    But here’s the kicker: these are not arm’s length entities. Once the FF program is separated out and Delta has no interest in whether it succeeds or not, they can up the price it charges the FF program for flights. Or it can devalue the points until they’re so worthless that no one wants the points anymore (which means Amex no longer pays 1c because the miles are no longer inducing customers to sign up and spend more). Either way, the FF program’s “value” on which these loans are collateralized can be destroyed whenever Delta feels like it. And that’s *before* Delta exercises its nuclear option: starting a brand new FF program.

    This has been done before. Air Canada spun off its mileage plan, Aeroplan in 2002, then IPO’d it in 2005 at a value of C$2bil. In 2017 they announced they were going to start a new FF program and sever ties with Aeroplan. The value of Aeroplan cratered, and then Air Canada bought it back for C$450mil.

    The notion that a FF program is some entity independent of the airline is absolutely false. It’s like buying a building in which the previous landlord still determines rent prices and pays himself whatever maintenance expenses he wants himself. Any buyer of this debt would do better to buy Delta’s debt instead because if Delta goes bankrupt, this debt will be worthless no matter what collateral 200 pages of legalese tells you it’s based on.

    • Cas127 says:

      “Any buyer of this debt would do better to buy Delta’s debt instead because if Delta goes bankrupt, this debt will be worthless no matter what collateral 200 pages of legalese tells you it’s based on.”

      Hmm, I don’t know…I think the whole point of the offshore subsidiaries/SPVs was to make them “bankruptcy remote” in case the related airline goes under (not a small risk now)…thus protecting the lenders of these loans.

      See elsewhere on this thread for my theory of what may really be the cornerstone collateral on these deals (spoiler…I think the IP is just a small part and too small/nebulous for the hard boys who specialize jn distressed lending)

    • Crush the Peasants! says:

      Well said, Lune. The market value of the FF miles is determined not by Fed machinations, but by the airlines, who would never, ever collude.

  22. DanS86 says:

    And this entity debt is not on the Delta balance sheet? Remember the outrage over Enron???

  23. Minutes says:

    Looks like the mile high club will have to wait till my miles are rehypothecated.

    • Cas127 says:

      Well, if you paid for your “mile high club” flight with a branded airline card, it isn’t only STDs that linger on…the debt does too and the airline may quietly own a chunk of it now (it possibly serving as collateral for the new loans to the Airlines).

  24. Clete says:

    Thanks for this, Wolf. The missus and I were just talking about this yesterday, and what I thought I knew was only the dust on top of the surface.

  25. Mora Aurora says:

    The legal, accounting, consulting, lobbying, financial etc. fees hiving off of all this, oh my, lots of honey money! Seems like the points passenger is just a blind drone without wings.

  26. Lisa_Hooker says:

    A 150 page validation of the viewpoint that the world has created too many lawyers.

    • Sam says:

      Addendum – “Only lawyers and painters can turn white to black.” —Japanese Proverb

  27. RON says:

    But how can any of this have any value if Delta is not flying a “normal” schedule to work off the traffic liability?

    Great job Wolf. It always comes down to “read the prospectus” as my old boss used to say.

  28. Sam says:

    “You cannot live without the lawyers, and certainly you cannot die without them.” —Joseph H. Choate

  29. Sceptic123 says:

    Instead of just buying the car (airline ticket). Let’s add to the price and call it incentives, meaning pay more than you should and then subtract from the inflated price that gets you back to the original price. Or go to the grocery store, who are the masters of charging higher prices while letting you think you got a deal. There is no honesty anywhere when it comes to determining price, just look at wall street, airlines, groceries, cars. Even as we circle the drain the only acceleration is the approach to ZERO.

  30. njbr says:

    What unique data is contained in the skymile data that can’t be gleaned from CC data ? What is that extra-special tidbit of data specific to skymile actually worth??

  31. Michael Engel says:

    1) In Dec 2019 the expected global demand for new airplanes, in the next 10 years, was 12,000 planes.
    2) After the Fed cut rates BA can charge MAX for 737.
    3) Suppose the expected return on asset is 4%, to get a dollar in 10Y, airlines pay BA : (1.00/1.04)^10 = 0.67.
    3) CV19 changed the game. It’s very risky up there flying high in the skies.
    4) To cover risk, investors will demand an annual return of 20% in the next 10Y.
    5) They will pay only : (1.00/1.20)^10 = O.16.
    6) They will wait until there will be blood in the street.
    7) NYC landlords will get similar offers.

  32. MonkeyBusiness says:

    Airlines should work with AirBnb to turn grounded planes into high end accommodations.

    “Luxury on the Ground” brought to you by AirBnb and Airline X.

  33. BuySome says:

    Ok, so the current peak of growth has passed by and the operating side must get streamlined but maintain “the franchise” of flight services. Every door out of the room is fraught with dangers and possible panics. It’s a given that the government is going to spend one way or another. Will they be looking at just buying the entire mileage liability in the hopes of letting it dwindle over time? Or can they actually stand by and watch it crater with all the secondary effects that will follow?

  34. c1ue says:

    The biggest risk with frequent flier miles is award cost inflation.
    The biggest problem with frequent flier miles is the ability to use them.
    Basically, when you really need to – you can’t with most airlines. Peak travel blackout dates and severely limited setasides for mileage fliers are only the 2 most common ways this happens.
    What is really ironic is that I consider Delta one of the least friendly airlines to redeem miles on.

  35. Jason19 says:

    How do you interpret the retail sales data today? With or without the help of stimulus, retail sales are up over 5%+ YoY. Looking good for your S&P shorts :)

  36. Christopher Peters says:

    Selling customer data sounds like an open and shut violation of GDPR and CCPA (privacy laws that apply to European Union and California customers.)

    Sounds like unless the airlines can separate out their Californian and E.U. customers from the program, it is illegal. I can’t wait for the first lawsuits to fly.

  37. EJ says:

    So, if Google or Facebook were teetering at the edge of an abyss, could they use their data hordes as collateral? Or is it not really applicable, since the data isn’t (necessarily) tied to credit cards?

    The possibility of putting up valuable user data as collateral is fascinating. It feels so… dystopian. And clever.

    • MonkeyBusiness says:

      They will never need to. Last time around when there was a shooting at the Youtube campus, the FBI was on location FASTER than the local police. Goog and Facebook are part of our National Security Infrastructure. Not to say they will never be allowed to go to pieces, because if there’s always the possibility of another behemoth doing their jobs, but surveillance of Americans through “private” companies will always be part of this nation’s DNA.

  38. Lee says:

    Here in Oz we have the big airline, Qantas, which has its FF mile program.

    People can complain about Qantas being late, poor business class lounges, and high airfares compared to other airlines (more about that later), but so far one thing that puts them above all other airlines is one aspect of their FF program.

    As long as you have one transaction of ANY kind that adds miles to your account in an 18 month period, the miles NEVER expire. It used to be be three years, but they changed that.

    They probably got rid of a huge swag of miles by revising that time period. It also shows that an airline can and will change the terms and rules for their benefit and not yours.

    You can add miles by shopping (with a grocery store, buying gasoline,etc) or through your credit card with Qantas.

    Over the years the number of miles you can earn has gone down and one of the biggest changes recently was a move by most of the big banks to get rid of the FF linked AMEX cards that gave huge numbers of miles and bonuses.

    We used to use the AMEX Black card for everything first and then the Visa Black where AMEX wasn’t accepted or when we hit the monthly limit for top tier miles on the AMEX.

    The next move was to reduce the number of miles earned per dollar spent and put caps on the number of miles you can earn per month or year on each card.

    Qantas/Woolworths also tried to revamp their partnership that cut way down on the number of miles earned by grocery shopping. What happened was people stopped buying as much there and the program was reinstituted almost in its original form. Consumers won that battle.

    They have also increased/decreased the number of miles needed for flights as well. I guess that we have been ‘lucky’ so far when using miles as we have never had any trouble getting flights with our miles. Some people complain that they can nver get the flights they want.

    One problem with the Qantas FF program is how they make people pay when using their FF miles.

    They slap on a huge fuel surcharge when using the miles. Yes, even though the price of crude has plunged they still hit you with that extra cost when ‘paying’ for a flight using miles.

    It is often cheaper or almost the same cost just to buy an economy class fare than use miles and pay the special surcharge!!

    And by huge, I mean huge. For example, several years ago we had the option of using some miles on Qantas for ticket to Japan.

    After figuring out the cost in terms of miles plus the surcharges on an economy flight, we just ended up buying a Business Class ticket on Singapore Airlines.

    The fees and taxes on the Singapore Airlines business class ticket were something like $400 LESS than fuel surcharge and other fees on the Qantas economy flight (Better service and bc lounge on Singapore Airlines too)!!!!

    But in any event for people in Australia the whole system of using FF miles for international flights is pretty much a no go.

    Melbourne has had no international flights since around June. International travel to leave the country requires approval from the Federal government and people in Melbourne can’t travel more than 5 kilometers from their home without a permit either.

    The latest blurb from the government here is that international travel is more than likely not going to start until the end of 2021………………………

    • c1ue says:

      Sorry, but mileage expiration is a relatively new phenomenon.
      And US airlines are largely, if not universally, removing mileage expiration completely – at least for the duration of COVID.
      To me: what matters for frequent flier miles is the ability to use them for flights I want. I have 7 digits of miles flown and have mileage on every major program, but the one I use today literally always has flight availability (because they no longer bucket a handful of mileage seats per flight; it is purely based on seat availability), they were the first to allow one way mileage tickets, they have a fantastic online availability and booking system and their fees for booking/changing mileage tickets are very reasonable even if you are not a top tier frequent flier.
      I don’t mention names because this isn’t an ad for them – but gives an idea of just how much better choices can be.
      To be fair, all of the major airlines have different regional coverage. If you’re in the South, you’re pretty much stuck with Delta or Southwest if domestic only, for example.
      And if you only fly infrequently, the above matters less.
      But if you fly with any frequency and enjoy travel, pick a program that you can be happy with for the long haul.

      • Lee says:

        Last time I flew to the USA on United Airlines from Oz the miles had an expiration date of 18 months so I lost them all – not that there was much there anyway.

        Worthless flight both there and back:

        Melbourne to Sydney and change planes. Pick up bags and bus trip from domestic to international terminal. Fly into LA and of course the asshat immigration people with their dumb questions even though I am a US citizen.

        Then off to catch the first leg of the domestic flight with the shoes and belt off with id being shown……………………made it in time.

        Then to Denver where I managed to change to an earlier flight and of course the extra cost to do so and finally into North Dakota.

        The way back was much better with catching the early morning flight and clear all the way to LA with a huge, long wait there as limited flights out of North Dakota.

        Arrival in Sydney and off the plane into the waiting lounge and then another security check to get back onto the plane.

        Easy to tell the sheeple Americans that have never been to Oz as they were taking off belts and shoes for the security checks (WE DO NO NOT DO THAT STUPIDITY HERE IN OZ!!!!!)

        Into Melbourne with immigration all done via electronic stands even back then and customs no problems at all.

        Do you people in the USA now the electronic immigration kiosks where you just put in your passport and eveything is done automatically?

        Takes less than a minute to do that here in Oz.

        Worst immigration experiences we’ve ever had have been when entering the USA especially LA. And even Hawai’i was getting bad – at least we were able to go through as a family in the US line and the airline let the business class passengers out first. They held the economy class passengers in a longe and only let out a few at a time as the lines were huge.

        Longest time at immigration was once in Japan when we arrived really late thanks to the airline (Qantas as usual) and I ended up in a line of hundreds as they had a huge number of flights arrive at the same time…………….

        But, as I posted, given the current situation in OZ there isn’t going to be any international travel for a long time so it doesn’t matter.

        • Anthony A. says:

          Yes, we have the electronic immigration kiosks in major airports.

          And too bad about North Dakota flights. I used to go there weekly when the oil & gas boom was in heat! Now there is no reason to have a lot of flights in and out of there.

        • c1ue says:

          If you have significant stored miles, it is trivial to keep them valid. Buy a magazine subscription, get a credit card that earns miles, there are endless and cheap ways to do so.

  39. Pir8 says:

    So the airlines have completely turned into financial engineering schemes with some airplanes on the side. Just like the rest of the buyback buccaneers. They’re like a Mafia storefront basically.

  40. Georgeis10 says:

    Dear Mr. Richter and readers,

    Greetings from Brazil!

    The mentioned SMILES has a troubled relation with its parent company and shareholders (particularly the minority ones) and the pandemic made it crumble like the house of cards it actually was.
    Next chapter: it is one of the most likely stocks to become a darling of our own brazilian version of the ‘robinhooders’…

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