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.