American Says They Won’t Sell the AAdvantage Program

American Airlines first quarter earnings fell year-over-year by about three-fifths, down to $234 million. It’s fair to say that despite disappointing credit card signups impacting revenue forecasts in Q1 the AAdvantage program really did earn the bulk of the airline’s profits.

Indeed, though they do not break out numbers this way, it’s possible that in the first quarter AAdvantage earned all of the airline’s profit and without selling miles the airline itself would have operated at a loss. And that’s even before unilaterally announcing employee raises which financial analysts grilled the airline over.

Stifel’s Joe DeNardi asked about Doug Parker’s willingness to consider spinning off and selling part of the AAdvantage program,

We’ve spoken to a couple of guys in private equity and they would use about a 15 times EBITDA multiple on it. That puts the valuation somewhere around $30 billion to $40 billion. Your market cap is half that. So two questions, would that surprise you, that valuation, and if it made sense to see what it was worth [in 2007 when you said you were open to the idea], why doesn’t it make sense to do the same thing now?

Doug Parker was, like, $40 billion for the AAdvantage program — what are you smoking?

Well, first up to your larger question, would it surprise me to learn that’s the value of the advantage program? I would have to say, yes. Because that is greater than the value of American Airlines in total as we sit here today. But I am not arguing with you. You guys are better at doing valuations than we are, and the market will decide.

I find it odd that simply separating something that is inside the airline today and putting it into a separate entity with the exact same cash flows would somehow generate that much incremental value, but again, that’s something that you guys can figure out better than we can.

Parker then says that the AAdvantage program is great, a reason the airline is undervalued, “a really important part of the airline and one that we’re happy with the way it’s being managed and the value it’s producing.”

DeNardi wonders why Parker doesn’t tout the financials of the AAdvantage program more, suggesting “it seems like the first rule of having an airline cobrand card is you don’t talk about the airline cobrand card?”

New accounting rules that American (along with Delta and United) will be adopting as of January 1, 2018 are expected to increase the liabilities booked for outstanding awards, to defer revenue, and potentially require increased disclosures about the loyalty program. American was historically strong revealing financial details of the AAdvantage program until their most recent 10-K filing.

The airline says they will be talking up the contribution of AAdvantage to airline revenue as a source of steady cash flow they believe is more stable than the airline business as a whole.

More stable, anyway, as long as they don’t allow this asset that the Stifel analyst suggests is worth $40 billion to die on the vine.

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, 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. Nice to see AA’s earnings down. That is the consequence of their short-sighted greed. Perhaps they will change their behavior (doubt it).

  2. If it really is worth 40bln I think they are really doing themselves a disservice by all but eliminating the saver awards in favor of today’s higher revenue. Sure, most of us in the points and miles game can still extract value out of AA miles. But I would say it’s gotten exponentially harder. If that’s how we feel, imagine how the “kettles” feel who use their cards to get their family to Disneyworld once every few years. They have basically no shot. At some point the masses will just move on from AA and use a 2% card or MR/Ultimate Rewards.

    I think instead of looking five years or ten years down the line, AA management looks only as far down the road as their next bonus check. The care more about extracting $0.25 more per seat by continually ruining the customer experience than they do about cultivating value from their 40bln golden goose.

  3. I no longer credit any of my flights to AAdvantage. If the clowns who run AAdvantage would actually make seats available, that would be a different story. But for the most part I’ve DUMPED American Airlines. They are almost as bad as Delta. 95% of my flights, are now on Jet Blue and Alaska/Virgin.

  4. Those who think that the breakup value of American or its AAdvantage program exceeds its current valuation need to look at the lesson derived from Cerberus Capital Management’s takeover of Chrysler from Daimler in the mid 2000’s. The same thinking was rampant — that there were assets in the company (Jeep, for example) that if spun off or sold, would exceed the purchase price.

    Cerberus found this simply wasn’t true; that the synergies of a company’s assets can sometimes not be apparent; and that many “assets” have little or no value except as part of the larger enterprise. As a result, Chrysler went bankrupt in 2008, and Cerberus was left holding a large, smelly $7 billion or so bag.

  5. I’m unclear what the value of the AAdvantage program is to the traveler now. They eviscerated the opportunity to earn awards by flying, and they don’t make Saver seats available. I guess it takes the public quite a while to catch on that this currency is losing value day by day. I used to value an AAdvantage mile at 1.9 cents. My standard valuation is now 1.2 cents; i.e., I am willing to spend the miles if I can get 1.2 cents of value out of them. Even that is often hard to do.

  6. Parker is absolutely right here. While the PE guys probably had reasons behind their numbers, that multiple is crazy when you consider the value of the AAdvantage program is still entirely dependent on a functional airline operation.

  7. I have shifted all of my spend to UR and MR based products. I have the choice to transfer points where and when I want and for the value I seek (stopover perk, lower point value, choice of airline).

    I haven’t spent a dime on my AA cc card and the only reason I keep it is for the free bag benefit.

    IF everyone did the same, things would change rather quickly with AAdvantage.

  8. @chester – hence the problems with the cobrand cards too. AA is in a bad way and, if they’re not careful, they’ll kill off the only thing that’s keeping them afloat these days. And that sounds really really bad, what will they do when fuel prices rise again?

  9. I have 2m AA miles which are extremely hard to use if not impossible. Every summer I try to book a trip to Europe on points and I always strike out. I was an EXP for YEARS. Every time I try to use my AA miles for anything there are no seats.

    JFK-LHR in J. Nothing. Heck – not much in Y
    JFK-LAX in any class. Nothing.
    Even BOS-JFK. Yeah. Not much out there.

    I’ve gone cold turkey on AA. I fly JB and VS whenever possible. Their hard product is good.

  10. A paucity of sAAver awards, no way to fully mitigate EQD via credit card spend, fewer SWUs, lifetime status tops out at rung 4 (below CK, EXP, PP)…

    AA, you’re fired.

    -A 15+ year EXP

  11. Just wait till they add more seats in the back of the narrow body planes and take a row out of first. Also, take into account that front of the cabin fares are priced somewhat reasonably these days. What do you think your chances of getting an award seat? Slim to none.

    OH, lets not forget PEY isn’t even redeemable yet with AAdvantage miles. Once they re-jig that chart, you’re going to see another devaluation.

  12. @Retired Lawyer
    Sooooooo….because Chrysler wasn’t undervalued, that means American isn’t undervalued? Someone made a bad bet on Chrysler so now all assets aren’t undervalued anymore?

  13. They’re advertising on flights now for the Aviator card… You only have to spend $1 and pay the $95 fee to get your 40K mile bonus… so $96 for 40,000 miles. You think the program is devalued now, wait until all these Aviator card bonuses start coming through.

    Apart from the temporary inconvenience in Dallas while other airlines buy up the gates, I’d be perfectly happy if American Airlines crumbled to dust at this point. I know they’re probably “Too Big To Fail” at this point, but as a customer that has been either Platinum or Executive Platinum for the past 12 years, I’ve got zero interest in flying them anymore.

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