American Airlines Had The AAdvantage Program Appraised, And It’s Worth At Least $30 Billion

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.

About Gary Leff

Gary Leff is one of the foremost experts in the field of miles, points, and frequent business travel - a topic he has covered since 2002. Co-founder of frequent flyer community InsideFlyer.com, emcee of the Freddie Awards, and named one of the "World's Top Travel Experts" by Conde' Nast Traveler (2010-Present) Gary has been a guest on most major news media, profiled in several top print publications, and published broadly on the topic of consumer loyalty. More About Gary »

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  1. […] Unlike American they didn’t give any hints about how they’re valuing the loyalty program, but they did describe is as their “largest unencumbered asset.” They noted different ways to draw liquidity from the program, “loans against the business, prepaid miles..there’s probably an aggregate cap for that.” And they argue that a 1-3 year reduction in the size of the airline won’t reduce the value of the co-brand. […]

Comments

  1. yet Congress gave an outright gift of $4.1 billion of taxpayer funds to the shareholders and employees of American Airlines. SMH.

  2. the previous on-and-off-and-on-and-off fiasco involving Air Canada and Aeroplan should make it crystal clear there’s no such thing as “value unlocked”, despite what DeNardi has been pushing for (he just wants airlines to waste time to first decouple the program, then re-integrate it).

    AC’s case was much worse cuz the decoupling also occurred between status levels and reward redemption

    I’m more curious at 2 spaces – (1) how, or if, VA gets any rescue bailout, and (2) whether DL can mediate the ever-growing spat between AF and KL, and whether DL comes to VS’ rescue, if at all.

  3. Maybe this is a naïve question, but how is the AAdvantage program an asset and not a liability? AA owes AAdvantage members flights (or other redemptions) for all of those miles in the members’ accounts. Aren’t bank accounts “liabilities” on a bank’s balance sheet, i.e., money owed to the customers? It seems like the AAdvantage accounts would likewise be liabilities.

  4. The appraised value may be accurate as part of AA over the long run. However, I will bet in this environment, the market value of the FF program is way less. Moreover, as henry LAX points out, the Aeroplan (spinoff?) left a bad taste in everyone’s mouth. I certainly would not buy the AA FF program stock.

  5. We would like to know if ANY of the CEO’S or top VP’s are taking pay cuts .
    Any of the carrier’s but especially ones that are getting Federal money

  6. AAdvantage is only worth that much if paired with American. Look no further than what happened after Air Canada spun off Aeroplan.

    It became worthless. A spinoff only destroys value in the entity.

  7. This is not an asset. It’s a liability. When i fly JFK to MAD on a frequent flyer award it deprives AA of revenue. Are their accountants crazy, stupid or did they fail Accounting 101.

  8. @RM

    Not a naive question at all.

    Short answer:

    1/ When you fly – part of that revenue is set aside for the future liability of providing you Award transportation (or other type of redemption).
    This amount is “deferred revenue”, and is in excess of what your eventual future redemption costs the airline.

    So the “liability” that you’re thinking about is right – but the “liability” is more than the actual future cost (the rest gets recorded as “passenger revenue”)… this has actually allowed AA to double count revenue figures in recent times – but that’s a separate issue.

    2/ AAdvantage sells ~$3b worth of miles annually to banks and other partners.
    The rate they sell this at is significantly in excess of the cost of future redemptions (think ~90% margin).

    Now some of this revenue is recognized immediately as revenue (called the “marketing component”).

    The rest is deferred like in Point #1 (the “transportation component”).

    Basically – the revenue generated from selling miles far outweighs the actual costs of mileage redemptions.

    So much so – that AAdvantage contributes ~45-55% of total AA EBITDA performance.

    (Ie. During some recent reporting periods – AA lost money flying but was still profitable due to AAdvantage).

    @Bob Kaufman

    That’s not how it works.

    Two things happen:

    1/ When you redeem a mileage reward for JFK-MAD, AA actually gets to recognize passenger revenue for that redemption (it’s not $0).

    2/ Unless Revenue Management totally screws up (rare) then they didn’t lose revenue as:

    – the seat you redeemed was likely to otherwise go out empty (or free to a non-rev). #displacement

    – you weren’t likely to pay full cash rate for that seat.
    #dilution

    Very rarely – there is a small volume of displacement and dilution but it’s rare. That’s why Saver awards are hard to find.

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