American Airlines Just Mortgaged The AAdvantage Frequent Flyer Program For $5.5 Billion

The federal government offered three kinds of aid to airlines as part of the CARES Act. It suspended certain aviation taxes, provided payroll grants, and offered subsidized loans. Southwest and Delta aren’t taking the subsidized loans at all.

United and Delta used their frequent flyer programs to raise a combined $16 billion in private funds. American Airlines has now pledged AAdvantage to the federal government as collateral for a $5.5 billion loan.

They had anticipated getting a $4.75 billion subsidized loan, but with other airlines declining the funds, were able to get more from the U.S. Treasury.

  • $5.477 billion available
  • They’ve drawn $550 million so far and can continue to borrow more two times until March 26, 2021 and the total borrowing cap may be increased to $7.5 billion
  • Interest rate is variable, currently just under 4%
  • Funds come due June 30, 2025
  • The government gets warrants in proportion to the amount borrowed, up to the right to purchase 43,780,975 shares at $12.51 per share – the government is going to own more of the airline (the Treasury Department already received 13,703,876 warrants in exchange for payroll support funds. If there’s an extension of payroll support they’d presumably receive a similar amount).

American had to provide assets worth twice what they’ve borrowed as collateral, and AAdvantage was appraised to be worth between $18 billion and $30 billion.

The federal government now 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 (including rights to receive cash flows thereunder), documents, deposit accounts, securities accounts, books and records and intellectual property related to American’s AAdvantage® frequent flyer program (the “Loyalty Program”).” That means even your member data.

In exchange for the funds, American had to agree to:

  • not buy back stock or pay dividends until a year after funds are repaid

  • limits on executive compensation

This shouldn’t affect frequent flyer program members. American needs their loyalty program to generate cash. It has in the past, and they needed this already. What does affect members is the trajectory of the airline itself – how large it is, how many unsold seats it has to make available as low-priced award inventory, and how useful its partnerships are.

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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Comments

  1. It would be nice if the Feds would force AA to make business class seats to Europe available instead of letting the seats fly empty. Just wishful thinking.

  2. the AAdvantage valuation is *pre-pandemic*. that figure is thoroughly meaningless in the post-pandemic world that will take a loooooooooooooooooooooooooooooooong L type of sloth-like recovery in terms of any kind of travel.

  3. I had given up on the AAdvantage program even prior to the onset of the pandemic. Miles are vastly devalued and premium class award seats are virtually non-existent.

  4. To add…Kinda makes me think Doug is done. Leveraging the most valuable asset in the airline biz for $5.5 bln? Buffett lost that like 3x on airlines. No way this makes sense right?

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