American Airlines filed its second quarter financials with the SEC, and while their 10-K is dense at 156 pages, it contains a lot of fascinating and underreported data.
The top line message from the American Airlines second quarter was record revenue and a return to profitability. But their financial statements actually show that flying planes from one place to another, and selling tickets, doesn’t generate profit for American Airlines. Instead, the AAdvantage loyalty program is responsible for all of American’s profits.
This can be seen most simply by looking at American’s costs and their revenue from passengers.
- Cost per available seat mile is reported at 18.75 cents (up from 12.9 cents the year before)
- Revenue per available seat mile is reported at 18.47 cents (up from 12 cents the year before)
Despite record high airfares, ticket prices and fees for checked bags, seat assignments and the like are not covering the cost of flying planes.
Instead, American CEO Robert Isom noted in his opening remarks that “spend on cobrand cards is growing at a greater rate than ever before.”
American generated $1 billion in cash from selling miles for the second quarter alone. Of that, they recognized $740 million as immediate revenue, and deferred $260 million as liability for future travel.
When the carrier borrowed $10 billion against the future income stream of the program they had to share more of the program’s economics than ever before and reported a 52% margin for AAdvantage. On a billion in revenue, a 52% margin represents more than the net profit of the airline for the quarter.
It’s also worth noting that passenger revenue actually includes AAdvantage redemptions since $823 million in award redemptions were recognized as revenue during the quarter, and $1.4 billion so far this year. That’s where the cost side of the program (mostly) goes. Without those redemptions passenger revenue would actually be lower.
Total outstanding mileage liability totals $9.3 billion, up $119 million so far this year, and they expect $3.1 billion to be redeemed in the next 12 months.
Despite the way the tail (AAdvantage) wags the dog (American) none of the financial analysts on this quarter’s earnings call asked a single question about the loyalty program. Since Joe DeNardi left coverage of airlines it’s likely that the rest of the group, outside of J.P. Morgan’s Jamie Baker, even understands the program.
To be clear I am not suggesting that American should stop flying and just concentrating on the underlying loyalty business. They wouldn’t sell credit cards without flights (to offer as redemptions, and on board which to pitch applications).
Indeed it’s the changing focus of the airline network that is helping to drive loyalty program uptake and credit card spend. With their JetBlue Northeast Alliance and increased aggressiveness in New York, they’re able to become more relevant in the New York market and to capture more New York consumer spend. With their Alaska Airlines partnership they’ve grown their relevance in Silicon Valley and the Pacific Northwest.
Basing airline routes/partnerships on potential credit card users feels a whole lot like the Big Ten basing its member-schools on potential cable subscribers.
Why do you care? Your revenge porn/posts on AA gets exhausting. But then, you promote the hell out of their credit card products.
@k – why do you care that I find this relatively unknown truth interesting? You may be exhausted yet you keep reading, while I’m invigorated sharing the things I find. By the way I love American Airlines.
This has been the case for years. Not sure why this is “news”. AA, except for it’s best years in the mid 2010’s, has always made the bulk/all of its profit from their credit card program.
My question is here is the airline that invented the frequent flyer program. Yet here is the airline that is so far behind involving credit cards/loyalty/miles into the mix. Seems Delta and American Express are light years ahead of the game. And the proof is Delta is much more profitable. Go figure.
2018 – Old news.
@I love dan – it’s not the first time this has been the case, no.
@Harry – I wouldn’t actually say American is behind “involving credit cards/loyalty/miles”
* They’ve historically had greater charge volume than Delta (by a little) and United (by a lot)
* Their miles are more valuable than Delta’s
* To be sure their products are less innovative, which may be a function of their partners, but the last deal they did with dual issuers was pretty innovative and revenue-enhancing
* They’ve gotten creative juicing the card products and selling miles through the introduction of Loyalty Points
@Not news worthy – most people don’t know this. most financial analysts don’t seem to know it. most american airlines employees don’t know it. i covered it 3-4 years ago, but many readers of this site likely don’t know it. So ‘not news worthy’ to you but that doesn’t make it not worth covering. Sorry!
@Gary: Still no transfer game for AA. Except a few months last Fall, basically zero. Bilt (whatever their name is?) in my world does not count. And offers, AA/credit cards are next to nothing compared to DL/Amex. The one last Fall on SimplyMiles was a fluke as in probably never see that or even close again. And mile value is purely subjective as in this flight might be AA, next DL. Vegas has better odds on predicting the value from really moment to moment. Only when you actually book a flight, can one say what a mile (point) is worth.
This isn’t as uncommon as you might think – gas stations don’t make money selling gas when you count the fixed costs of the gas station into it – rather, they make their money on selling you a soda and a hot dog when you get your gas, and maybe a car wash. I’m pretty sure most grocery stores don’t make much money selling groceries, rather, they make money selling product manufacturers shelf space. This in turn limits competition, which allows manufacturers to jack up prices. (See if you can find the famous “60 Minutes” segment on Calendar Marketing Agreements.) Fast food joints make money selling you soda, not sandwiches. In all these cases, it’s selling the package that makes the company money, not the base product – but without the base product to attract customers, there’s no one to sell the package to. Google charges you nothing for it’s main products, yet makes a ton of money of selling your data. Etc. Etc.
Back in the old days, airlines didn’t make much money flying passengers either – profit came from airmail contracts. There was an old saying in business school that all airlines eventually go bankrupt – perhaps Southwest is the only one that never has, and they’re legendary for mainly making money through fuel hedging contracts. FedEx makes money because on a per pound basis, it’s much more profitable to fly packages rather than people.
They may be losing money on people, but that excludes their cargo revenue. I didn’t look at American, but for United, they got about an additionally 10% revenue from freight above their passenger revenue.
It could be that they are just about breaking even on flying when including freight, but paying back their loans and any profit is only coming from loyalty revenue. That wouldn’t be a terrible outcome, but should still raise investors eyebrows
@John H – i’ve run the numbers with cargo in past quarters when i’ve covered this phenomenon and they were still losing money including that revenue … but it’s a marginal effect in any case, loyalty revenue is the key to making this profitable, and that is something still not well understood.
Shy are you hoping American gets liquidated?
It doesn’t appear to be as simple as it’s stated here. If you wish to extract the revenue, you also have to extract the costs, and it appears that you haven’t done so. (And it probably can’t be done unless you’re sitting in Funkytown looking at the spreadsheets.)
keep hope alive for the next time around 🙂
“Only when you actually book a flight, can one say what a mile (point) is worth.”
Sure, the redemption value is only determined upon redemption from the viewpoint of the customer. The concept of an AA “mile” having more or less value than another currency mile is not as simple as some (like @ Gary) would have you believe.
That said, those miles do have known cash values to the selling loyalty program, the buying loyalty partner and the buying loyalty program when the customer redeems.
And, yes, the interesting question is whether there is scope for improvement in the performance of AAdvantage.
“If you wish to extract the revenue, you also have to extract the costs, and it appears that you haven’t done so. (And it probably can’t be done unless you’re sitting in Funkytown looking at the spreadsheets.)”
Yes, but a net margin has been quoted of 52% from previous data (@ Gary can confirm whether this allows for costs of the loyalty program).
The airline needs to follow certain accountancy rules to report its loyalty program financials – revenue, yes in simple terms is divided three ways (costs (marketing etc), future liability for delivery of reward and the remaining profit).
I would be curious to learn to what extent an airline can “massage” those loyalty financials into non loyalty cost centres (?).
This is nothing new. AA has been losing money on flying and making it up on the credit card side since 2018 if not longer.
2nd article on AA in 2 days that seem to try out bad PR on AA. First one talking about debt. Did you write about United’s 32B debt? Which is 5B less than AA. Or Delta 25B which they have 230+ old airframe they’ll need to replace when AA has already done so that will add debt to the other airlines? Seems weird…
@The truth – on what planet does United hold more debt than American?
This is a basic question I suppose… but assuminh miles programs essentially amount to a discount coupon intended to entice actual travel spending, how are they “recognized as revenue”, when they don’t actually represent any cash value to AA when redeemed?
(You wrote) It’s also worth noting that passenger revenue actually includes AAdvantage redemptions since $823 million in award redemptions were recognized as revenue during the quarter, and $1.4 billion so far this year. That’s where the cost side of the program (mostly) goes.
I’m trying to understand that – is AA double booking the “value” of mileage redemptions both when they are accrued to the traveler (as potential future revenue based on a redemption rate), and then also booked as “sales” when they are redeemed for an actual ticket? Or are they booked as a liability based on estimates future costs of ticket redemption when flown?
It’s hard to understand because in no case does the discount coupon generate cash flow for the company.
Perhaps you can just point my to a basic primer on how this works. Thanks for your expertise!
@A.flyer – when an airline sells a ticket to a loyalty program member part of the fare is for current transportation and part of it is deferred revenue for the miles that will eventually be claimed as transportation (see asc 606 revenue recognition). Assume that the airline defers at a value of 1 cent per mile and recognizes revenue (mostly) upon redemption.
now, airlines sell a lot more miles to banks. there it’s a little more complicated. they’re recognizing a majority of the revenue up front using the argument that the money is paying substantially for marketing – use of the airline’s brand, access to its customers, and also for some ancillary services. however they also defer a smaller percentage of revenue (since they’re not obligated to asc 606 standards for selling miles to third parties) …
When those miles earned from credit card spend are redeemed, the airline recognizes some of that deferred revenue.
In each of these cases, award travel shows up as passenger revenue at the time of travel, rather than as mileage sale revenue when the miles are earned.
Would Delta make money without their refinery?
Delta 2nd Quarter 2022, from SEC Filings.
CASM 20.89 (Costs)
PRASM 18.60. (Revenue from passengers)
Awaiting for your “article” claiming that Delta makes money from their refinery and credit card businesses, not from flying passengers.
@Tom – historically the refinery has been a dog, but recently it’s been better with $100 oil
Also historically Delta has made money flying – unclear whether this is a one-off, but Delta’s second quarter financial performance was considered a disappointment (despite earning more than AAL) while American was crowing over theirs.
The big story right now on Delta is how their once-vaulted operation has failed, how that tarnishes the brand halo, and potential affects cobrand revenue as well.
Am positive Hal Brierley will have something to say here since he along with the CEO at the time invented the concept of frequent flyers and points – still one of the most amazing marketing events I have ever witnessed – copied by many.
Same with dozens of other airlines including DL. The horse is dead, now stop beating it.
@Christopher Geiger – incredible, at most companies marketing is a cost center not a profit center! Unfortunately Tom Plaskett and Rolfe Shellenberger passed away during the pandemic but Brierley is still with us.
Thanks for this interesting article Gary. I heard about it on a youtube post by Frequent Flyer University. Unlike others here I was not aware of the phenomena. You’d have to think that AA is in trouble if it is operating like that. I wonder how the accounting of the miles sales is treated. It would be wrong to recognise it as revenue before the redemptions have been transacted. BTW I’m shocked at how rude some of the commenters are on your very useful site. The points world seems to attract some very obnoxious alpha types.
Keep up the good work. Your articles are very insightful.
I’m so sick of whiny internet trolls complaining about everything they read…get over yourselves. Maybe just let a guy write a blog post if he finds it interesting. Lots of sad boomer Karens out there who have nothing better to do I guess :/