Delta Is Trading Your Loyalty
For a Cool $9 Billion in Loans
THURSDAY, SEPTEMBER 17, 2020 -- How much is our loyalty to an airline worth?

If you're a Delta Air Lines flyer, the number is a stunning $9 billion. Just a few days ago, your loyalty was worth just $6.5 billion to Delta.

In case you've been doing other things--I know you're not traveling, but I assume you have a life--I'm not pulling these numbers from the Coronavirus-infected air. No fake news here.

On Monday, Delta announced it would borrow against its SkyMiles frequent flyer program. Remember frequent flyer plans? Back when we flew for a living, or flew to make our living, the programs consumed massive amounts of our time as we tried to maximize the value of travel and avoid endless devaluations foisted upon us by profit-hungry airlines.

With airline profits now literally fake news, it's cash that the carriers need and the frequency plans are the cow they hope to milk. Back in June, you may recall, American pledged its AAdvantage program as collateral for a CARES Act loan. United mortgaged MileagePlus for a $5 billion cash injection from a trio of banks.

Now it's Delta's turn. It created a subsidiary in the Cayman Islands called SMIP (SkyMiles IP Ltd) and the two will float SkyMiles for a combination of bonds and loans. On Monday, it expected the package to be worth $6.5 billion. By yesterday, it decided it could hit up the markets for $9 billion. (That sudden "up-play"--Thanks, Trump!--may say something about how much liquidity the Fed has pumped into the markets and how much is sloshing around with nowhere to go, but that is a screed for another column.)

Of course, Delta and SMIP can't have these billions without some cost besides interest. It must lift its corporate skirt and tell us a little about how SkyMiles operates. I've been plowing through Delta's Form 8-K filing and here are some highlights.

I hate to say this, but, man, if you're playing SkyMiles, you're a sheep being led to slaughter. Medallion-level elites, for example, give Delta a revenue premium 1.5 times that of non-SkyMiles members. Some of that can certainly be attributed to Medallion members flying more in premium classes, of course. But a lot of it cannot. Those of you at the elite levels are simply paying more for the privilege of flying Delta. That's not all: Delta says 97 percent of all SkyMiles redemptions are for Delta tickets. That's just crazy. Delta routinely overcharges for awards on its flight. Why aren't you using SkyMiles on partner carriers, many of which offer cheaper awards and/or better service than Delta?

Worst of all, even as the Coronavirus has grounded you, you are still charging like crazy on American Express cards tied to SkyMiles. According to Delta, charge volume on Delta/Amex cards has fallen less than 5 percent since the pandemic began. Why are you piling up SkyMiles now? You have zero idea what Delta will look like or where it will fly in the future--or what its partner carriers will look like in the future. If you must stick with Amex and Delta, at least switch to a card that offers Membership Rewards points. That would give you opportunity to move credits to other carriers--and you can always transfer them to SkyMiles on a 1:1 basis later if you wish.

It doesn't matter how much you were flying Delta before the pandemic or how frequently you may fly them again in the future. It doesn't matter what level Medallion you reach. You will never be Delta's best customer. That "honor" belongs to Amex. It purchased $4.1 billion worth of SkyMiles in 2019, more than triple its annual buying ($1.2 billion) of a decade ago. And make no mistake about it: Amex is becoming a gilded prisoner of Delta. It's not just the contract that runs until 2029. Charging on Delta's branded cards represents 8 percent of Amex's total billing and about 22 percent of its outstanding loans.

In today's world, valuing your product at $9 billion doesn't say much. Because, c'mon, do you really think Apple is worth $2 trillion? Or that Uber was ever worth more than Ford and GM combined? But it's hard not to admire how much real cash Delta is flowing through SkyMiles. It says the program, had it been a separate operation last year, would have contributed $6.1 billion of cash sales and had $2.4 billion in net cash. (That last number seems rather low, but Delta gets to set the prices SMIP would have paid to Delta for awards, so ...) It claims 100 million members.

We're just cogs in the cash-generating machine that is SkyMiles, so, really, do we matter? Probably not, but we can learn something about us by rifling through Delta's 8-K. Demographically, we are roughly equally distributed among those younger than 34 (30 percent), flyers 35 to 54 (37 percent) and flyers age 55 or more (33 percent). Almost a quarter of us earn more than $150,000 annually while another 22 percent earn between $100-$149,000. Thirty-nine percent of us have been SkyMiles members for more than 10 years and the average tenure of Medallion members is 16 years.

Surprisingly, two-thirds of SkyMiles members live somewhere other than a Delta hub. New York is now Delta's largest center of SkyMiles members (8 percent), followed by Atlanta (6 percent), Los Angeles (5 percent) and Minneapolis-St. Paul (4 percent). Detroit is 3 percent of Delta's SkyMiles base, followed by 2 percent in Salt Lake City, Boston and Seattle.