American Airlines Is Refinancing Its Mortgage On The AAdvantage Frequent Flyer Program

American Airlines is alone in pledging their frequent flyer program to the federal government as collateral for a subsidized CARES Act loan.

They had initially planned to raise $5.5 billion from the government backed by the AAdvantage program, but when several other airlines skipped tapping subsidized financing they raised it to $7.5 billion at a rate just under 4%. (The AAdvantage program was appraised at $18 – $30 billion.)

In contrast,

Since American took out a mortgage on AAdvantage with the government, the Treasury Department has a “first priority security interest on American’s rights under U.S. co-branded credit card agreements [with Citibank and Barclays] and certain other loyalty program partner participation agreements…books and records and intellectual property related to American’s AAdvantage® frequent flyer program (the “Loyalty Program”).” That means even your member data gets nationalized if American were to default.

Now, however, American Airlines – like so many other Americans – is refinancing its mortgage. They have formed a Cayman Islands company AAdvantage Loyalty IP Ltd that will:

  • Offer $2.5 billion in senior secured notes due in 2026
  • $2.5 billion in senior secured notes due in 2029
  • Take out a $2.5 billion senior secured term loan credit facility
  • Lend the $7.5 billion to American to pay back the federal government

The net effect of this will be to refinance the AAdvantage mortgage in the private mortgage. However American remains partly-nationalized, with the Treasury Department having issued loans and taken warrants as part of the CARES Act Payroll Support Program (bailout #1) and the Payroll Support Program extension (bailout #2). U.S. Airlines are expected to receive another $14 billion from the American Recovery Act which passed the Senate over the weekend (bailout #3).

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. Gary,

    Out of curiosity what assets will AAdvantage Loyalty IP Ltd have that investors would want to lend it money? Also, is this the first step in spinning off the Aadvantage Loyalty program by transferring the loyalty assets to Aadvantage Loyalty IP Ltd once the loan from the government is paid off?

  2. The note on this replacement financing was suggested to be 6-7%, or more than 200-300 basis points higher than the 3.875-ish% Treasury rate. Other than getting out of CARES Loan restrictions on compensation, dividends, buy-backs, and governance, what does the additional $150-225 million extra interest charges buy American?

  3. I’m not sure I understand how this works.

    On an accounting spreadsheet, frequent flyer miles are a liability, and would be counted against earning as a known future cost. This is much like a company ensuring you take all your vacation days… they don’t want to carry that on their books.

    So, how can they mortgage and recieve positive cash from a negative cash liability?

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