American Airlines is considering selling debt to the public backed by its frequent flyer program as soon as March. You’ll be able to own a piece of the income flow from AAdvantage. They’d do this in order to refinance their government CARES Act loan against which they’d pledged the loyalty program.
Goldman is in talks with investors for a $7 billion to $9 billion refinancing in the coming months for the Fort Worth, Texas-based company, the people said. Discussions included the potential for a yield of 6% to 7%.
The three largest U.S. airlines all mortgaged their frequent flyer programs for a combined $23 billion. Frequent flyer miles are literally the only reason United and American haven’t filed for bankruptcy.
- American Airlines 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.)
- United raised $6.5 billion against Mileage plus valuing the program at $21.9 billion.
- Delta raised $9 billion backed by the SkyMiles program at an average rate of 4.75%.
Southwest Airlines didn’t mortgage its Rapid Rewards program, but did get Chase to frontload the purchase of points for 2021 to the tune of $600 million.
American Airlines is alone is pledging their frequent flyer program to the federal government. The Treasury Department 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…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.
Would you buy American Airlines debt backed by AAdvantage?
Could you summarize the negatives to a AA membership?
What could go wrong?
Say, a prolonged pandemic due to variants.
Travel back in the tank.
Could we loose our miles?
I would consider an option of owning American Airlines debt if can use my American Airlines AAvantage miles to pay for the risk of purchasing this security.
I’d loan them money if they gave me 100 miles every year for every $1,000 I had on deposit. Perhaps a minimum deposit period and other such stuff.
I would consider an option of owning American Airlines debt if can use my American Airlines AAdvantage miles to pay for the risk of purchasing this security.
A 7% yield would be in line with the current average yield of CCC bonds which are defined as “An issuer rated ‘CCC’ is currently vulnerable and is dependent upon favorable business, financial, and economic conditions to meet its financial commitment” What’s really interesting here, if the Bloomberg report is accurate, is that despite using the AAdvantage program as collateral, they believe they’d be paying the same interest rate as unsecured CCC borrowers.
Airfarer, have I got a deal for you. Just what you propose with an immediate payout. I’ll give you 200k miles now and you loan me 400k at zero interest for 5 years. I repay you from a 400k A rated or better annunity. You get 200k AA miles and your money back in 5 years and I earn about 50k in taxable interest after 5 years.
You clearly value AA miles more than me or our Government.
Is there any example of a business that sold off its future revenue stream in advance and came out ahead in the end?
Has any business sold off its future revenue stream, then devalued its product so as to diminish that revenue stream, and still thrived long term?
All this “creative financing” is nothing more than an offshoot of a Ponzi scheme and it’s just a matter of time before it blows up on one of them and the whole industry craters. The only thing that is precluding that from happening – and finally exposing the terrible management of these airlines – is the what now appear to be seemingly endless bailouts. Sooner or later, Congress is going have to belly up to the bar and stop it. Then…adios!
Congress wont ‘bellly up to the bar ‘while one party controls both branches of government. But if the Republicans take control of either the House or Senate then ‘belly up to the bar’ starts hard and fast in January 2023. The Pandemic should be well under control by then, even with a booster vaccine shot needed for the South African variant towards the end of 2021 and into early 2022.
Since I am no spring chicken and have no plans for using my huge number of miles for an Around the World months long travel splurge, I would seriously consider leveraging my points into a form of long term debt that pays a good interest. But don’t my remaining miles expire upon my death!! And when they do expire, I assume that means there is no payment of interest to my heirs??
Thinking about this some more, here is how leveraging AAdvantage miles might work. Assume I have over 2,000,000 miles and am Platimum for life. I decide to surrender 1,500,000 miles to some quasi-government entity in exchange for $15,000 of debt with 3% interest for say 20 years. Thats $450 of simple interest per year for 20 years. Assume I get to keep my AA Platimum status for life and my heirs continue to be paid the $450 interest if I do not survice for 20 years (a real possibility, unfortunately). With that deal I am all in and still have over 500,000 miles remaining in my AAdvantage account to use while I am alive. Taking an offer like this assumes, of course, that AA does not file for bankruptcy for 20 years! Is this a reasonable scenario, or am I off my rocker about how this might work??
@Gary – How does further mortgaging loyalty programs affect devaluations? I would have thought that the debt instrument holders would have had some form of ironclad guarantee that the airline wouldn’t simply water down the value of the program as Delta just did. Doing so erodes the value of the investment.