Delta Agrees Not To Massively Devalue SkyMiles As Part Of Mortgage

Delta recently used their SkyMiles program to raise $9 billion. As part of this mortgage they had to agree to not devalue the SkyMiles program according to this SEC filing:

Delta and SMIP are also prohibited from substantially reducing the SkyMiles program business or modifying the terms of the SkyMiles program in a manner that would reasonably be expected to materially impair repayment of the SkyMiles Financing obligations (described as a “Payment Material Adverse Effect” in the Indenture and the New Credit Facility), and Delta and its subsidiaries are prohibited from changing the policies and procedures of the SkyMiles program in a manner that would reasonably be expected to have a Payment Material Adverse Effect or operating a competing loyalty program.

The non devaluation clause is pretty vague, as long as it doesn’t materially impair repayment of SkyMiles Financing obligations then Delta can basically do as they please. There is also a non-compete clause, those backing the financing obviously don’t want to end up in a situation where Delta just creates a new mileage program (similar to what was going to happen with Aeroplan).

Hat tip to VFTW

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Matt Katakis
Matt Katakis (@guest_1064933)
September 29, 2020 23:10

My thought was…how could they devalue them anymore than what they currently are?

Parkerthon
Parkerthon (@guest_1064747)
September 29, 2020 17:37

Honestly I’m thinking this is likely good there’s now a dedicated third party with deep pockets ensuring the skymiles program is not devalued in a way that it waters down the value of what they bought. I mean sure, they could mutually negotiate to devalue, limit, and screw customers, but before it only took a wave of Delta’s hand to do just that. I think in the end the currency has to not devalue too much or it will hurt both parties involved, hence this agreement. One party uses it as a revenue stream and another uses it to build brand loyalty so they still have reason to keep some integrity. That’s not to say they won’t immediately do anything to harm the program. I’d say that’s a guarantee that the program’s value will continue to trend down faster than dollar devaluation although with some potential crazy inflation on horizon who knows.

Chaser123
Chaser123 (@guest_1064173)
September 28, 2020 19:46

I am still trying to understand how this works. Points programs are already a liability (not an asset) to the airline. it makes them money because credit card companies pay for the miles. They are borrowing from future revenue earned on their points. They are bringing future liability to the present making it a double whammy in the future. They will have to give me flights for my miles earned and pay back the lender the cash received from my credit card fees. How is this sound?

ieatdogfood
ieatdogfood (@guest_1064242)
September 28, 2020 22:13

Get money now, worry about it later. Who said we have (don’t know how to italicize) to pay back later? The American way.

tennismenace3
tennismenace3 (@guest_1064247)
September 28, 2020 22:23

Did they just sell a bunch of miles to a bank?

Billy Bob
Billy Bob (@guest_1064147)
September 28, 2020 19:24

So merely doubling mileage requirements is ok.

anonymous
anonymous (@guest_1064087)
September 28, 2020 18:06

No need to devalue. They can just disappear availability…excuse me, “enhance” availability.

Jim
Jim (@guest_1064027)
September 28, 2020 15:35

What more to devalue now then to cancel that program?

George
George (@guest_1064021)
September 28, 2020 15:26

That’s what I’ve been saying all along – mortgaged programs are not necessarily more likely to devalue, and may be less likely to do so. Devaluing miles decreases future cost per mile redeemed, but also decreases the attractiveness of the currency, leading to an eventual drop in the price they can charge per mile. Since the (im)balance is unpredictable, clauses like this are added. Most/all such agreements have the same sort of wording.

sevillada
sevillada (@guest_1064020)
September 28, 2020 15:25

Delta Lawyers “how much do you consider massive”
lender “more than 50%”
Delta “ok, we’ll do less than 50% “

Matt B
Matt B (@guest_1064006)
September 28, 2020 15:02

Wouldn’t a devaluation from a customer perspective (i.e. reducing the implied redemption value of existing points balances) actually increase the ability of the SkyMiles program to satisfy any outstanding payment obligations? It seems like over the short-term, any changes that are good for customers would be bad for lenders, and any changes that are good for lenders would be bad for customers. But maybe i’m not thinking about this right.

TheJstandsforJ
TheJstandsforJ (@guest_1064014)
September 28, 2020 15:15

Short answer: No, because the lenders know SkyMiles (as a program) is worth more alive than dead and Delta probably made this same promise to Amex already when they pre-bought a bunch of Delta miles at the beginning of the pandemic.

LegaleseRules
LegaleseRules (@guest_1063995)
September 28, 2020 14:45

Massively devalue? No way!

Selectively devalue? Absolutely!