American Airlines is refinancing the mortgage it took on its frequent flyer program with the U.S. Treasury by raising $7.5 billion against AAdvantage in private financial markets.
As part of these efforts they had to make a ton of information public about AAdvantage in an SEC 8-K filing – much more than they’ve shared with the SEC since current management clamped down on the rather robust information American always used to provide in its annual 10-K filing.
Here are 14 interesting things that they had to share with investors and the SEC:
- American makes money selling miles, not flying planes. The airline acknowledged that ‘net cash from operations’ of the frequent flyer program exceeded the airline’s pre-tax income for all of American in 2019. I’ve written for years that American Airlines is a credit card marketing company that flies planes.
This is the biggest benefit to new partnerships that increase the airline’s relevance in New York, Boston, and Bay Area financial centers and becoming more attractive to cardmember spend in those markets. They need to fly in order to have relevance to cardmembers, but the flying wasn’t making them money on its own.
- Frequent flyer profit margins are huge. They claim $3.1 billion in net cash off $5.9 billion in cash sales, for a 52% margin. There’s a strong argument to be made that the airline is booking too much AAdvantage revenue off of its tickets, that the program’s costs are even lower, and so its margin is actually higher than this.
- They think they can devalue to keep margins high. Their business model gives them the “flexibility to control costs and preserve margins” (i.e. they can devalue at will, although they’d put dynamic award pricing into this bucket – though that’s really the same thing).
- The AAdvantage Program Is Now An Offshore Holding Company. American created 3 Cayman Islands holding companies for AAdvantage. The airline should make special frequent flyer charter flights to Grand Cayman available so that AAdvantage members can visit their miles.
- If American can’t repay the debt, you can’t redeem your miles. AAdvantage debt holders are in a first security position ahead of program members. They get paid before the program can pay for mileage redemptions.
- British Airways is no longer their most important air partner..? The airline is pitching its network strength to investors ignoring joint venture partners British Airways, Iberia, Finnair and Japan Airlines – and instead focusing on Alaska, JetBlue, Gol and Qatar. In fact neither BA nor Heathrow appears in the document.
- The program is huge, but most accounts are dormant. Their claim to being the largest frequent flyer program is caveated as being prior to removing inactive accounts from their database. When US Airways Dividend Miles was merged into AAdvantage, there were over 100 million unique members between the two programs (the overlap in members who were part of both programs was about 10 million). Now American says the number of ‘active’ members is 23 million.
- The program continues to grow (slower than it should). They’re adding 5 million members per year, though this number should be higher – they don’t actually make it easy for a non-member to join the program in the booking path at AA.com.
- People who spend a lot on American join the program. AAdvantage members contribute 61% of the airline’s revenue. 40% of members have household incomes over $100,000. And while 36% of members are ‘millennials or younger’ program members stay with the program a long time: the average active member has been in the program for 10 years.
In fact, the annual flight revenue per AAdvantage member was $1220 versus $408 per non-member. AAdvantage members spend 44% more per mile than non-members.
- The rewards focus is on travel, and that’s how people spend their miles. Only 3% of AAdvantage redemptions are for things other than air travel. Of course American offers fewer non-travel rewards than many programs.
- Delta SkyMiles generates more revenue than AAdvantage, MileagePlus is closing in. American acknowledges that Delta SkyMiles generates more revenue than AAdvantage, but argues they have lower costs than Delta. And everyone knows that United’s MileagePlus lagged financially before their new credit card deal with Chase which was inked just before the pandemic. The gap with United will have closed since then.
- American is a huge player in its partners’ businesses. American co-brands represent 24% of Citi’s 2019 credit volume, 28% of Barclays’, and 12% of Mastercard’s (both Citi and Barclays cards are Mastercards).
- You’re buying a lot of miles when American runs sales and bonus offers. AAdvantage generated $538 million selling miles directly to members in 2019. This dropped to $213 million in 2020, unsurprisingly as people weren’t traveling much.
- Program revenue is down significantly during the pandemic. Miles sold to third parties (mostly Citi and Barclays) dropped by $950 million in 2020, down from $3.9 billion to $2.9 billion.