During this morning’s American Airlines earnings call, CEO Doug Parker opened by thanking the CEOs of other U.S. airlines for working together to obtain a $50 billion federal bailout. This includes payroll support funds that have already been approved, and subsidized loans that they’re currently applying for.
The U.S. Treasury requires collateral for the loans, that American expects to pay 4% interest on based on their credit rating which will yield a formula of 350 basis points over LIBOR.
As part of raising funds on the private market and from the U.S. government, the airline had its unencumbered assets appraised. Parker reported that the value of these assets came back at $10 billion “excluding the AAdvantage program.”
How Much Is The AAdvantage Appraised For?
Stifel analyst Joe DeNardi is most closely associated with the idea that loyalty programs are valuable assets that should be spun off as separate companies to unlock their value – showing both that the airline and loyalty program bundled together are massively undervalued, and also to expose badly run airlines whose results are covered up by airlines selling frequent flyer miles to banks.
DeNardi asked, since Parker raised the value of unencumbered assets excluding AAdvantage, how much is the value of AAdvantage?
Doug Parker responded that DeNardi’s estimates are pretty good and in range with what appraisers reported back to the airline.
So just what were DeNardi’s numbers? Three years ago he estimated American AAdvantage could be worth $37.6 billion.
Is AAdvantage Really Worth That Much?
There’s no question that the AAdvantage program is a valuable asset. However those sorts of valuations are just wrong. The current market cap of American Airlines, including AAdvantage, is less than $5.5 billion by the way.
Joe DeNardi has told me his model gets big valuation multiples on frequent flyer earnings based on 4% – 6% annual earnings growth. That assumes, though, that spend volume on the cards doesn’t fall (such as in recession), interchange rates do not fall, and redemption expenses don’t rise.
Three years ago when DeNardi asked Doug Parker on an earnings call about a $30 to $40 billion valuation for AAdvantage, Parker expressed great skepticism:
[W]ould it surprise me to learn that’s the value of the advantage program? I would have to say, yes. Because that is greater than the value of American Airlines in total as we sit here today. But I am not arguing with you. You guys are better at doing valuations than we are, and the market will decide.
I find it odd that simply separating something that is inside the airline today and putting it into a separate entity with the exact same cash flows would somehow generate that much incremental value, but again, that’s something that you guys can figure out better than we can.
The purpose of the appraisals is to convince lenders to loan money. I have never known appraisals to systematically undervalue assets. The appraiser needs a defensible methodology, and DeNardi has provided one. I suspect there’s not much of a coincidence that his high numbers happen to be where the appraisal report landed.