KILLING THE GOLDEN GOOSE: SEC Filing Shows AAdvantage Devaluation Hurt American Airlines Profits

Airlines thought they could devalue forever – they could offer less value – and their customers wouldn’t know the difference. American, at least, is starting to see signs that devaluations are killing the golden goose — perhaps even to the tune of $200 million so far.

Last week and several IT meltdowns notwithstanding Delta has run a good enough operation that people put up with SkyMiles even when they declare you shouldn’t use miles for travel and that upgrades are dead.

United has had enough operational problems in recent years that it’s been tough to pinpoint their problems to MileagePlus which of course was making money even when the airline wasn’t.

But American is in a unique position of timing where we can directly see an impact to the airline’s bottom line — and a brand new SEC filing makes clear the cause.

Last year American entered into a new credit card deal that was expected to drive big revenue gains for the airline. This happened mere months after American devalued its award chart and weeks before they began awarding fewer miles as part of a shift to rewarding ticket spend not flying.

Customers aren’t buying it. They aren’t willing to take and spend on the American credit card as expected when American miles aren’t worth as much and have become harder to use.

And it is costing American hundreds of millions of dollars.

Here is what their new 8-K filing says (HT: David F.):

Other revenue is now expected to be $5.24 billion, up $330 million year-over-year. The first quarter reduction versus prior guidance is primarily due to lower than expected AAdvantage credit card acquisitions as first quarter promotions were not as effective as planned.

People aren’t willing to take the AAdvantage credit card like American thought.

American is a little bit opaque about all of the moving pieces in these numbers. They projected $5.32 billion two and a half months ago, and this would be down just $80 million from that figure.

However when they announced new credit card agreements last July they said they expected:

  • $200 million more in the second half of 2016
  • $550 million more in 2017
  • $800 million more in 2018

And that this was growth beyond increases already anticipated in the old agreements.

Abstracting from other moving pieces not being detailed, they’d expect to grow this category by some amount more than $550 million in 2017 (update: relative to 2015 baseline). They now anticipate other income will be up $330 million year-over-year, a difference of more than $220 million.

While other revenue isn’t exclusively AAdvantage, the delta in other revenue was expected to be driven by AAdvantage and in particular the new credit card deal.

Much of the expected revenue growth comes from, as CEO Doug Parker said in January, “just getting a higher rate per mile” coming up short on credit card revenue is an even bigger deal than it might seem at first.

AAdvantage devaluations are coming back to bite American’s bottom-line. AAdvantage was the shining jewel in the airline’s crown. One financial analyst thinks the AAdvantage program alone is worth over $35 billion when the whole airline’s market cap is just over $20 billion.

That’s an exaggeration, but the loyalty program itself is big business and it was the one unique selling proposition for the airline over its competitors. Under the leadership of Scott Kirby they ratcheted down its value, reducing the percentage of seats flown by passengers using miles to below the levels of Delta and United, reducing the number of miles given out to flyers, and raising the cost of awards that customers have to pay.

In other words, they’ve made the program worth less to customers, and customers aren’t responding, which is a bad idea when customer response is so profitable.

As noted by the ‘update’ above I’ve clarified the comparison numbers, $550 million is not 2017 versus 2016 but against the 2016 baseline prior to the new agreement.

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. It used to be a great program, just really hard to use now:

    1. No availability
    2. Higher redemption rates
    3. No stopovers (Heck i’d happily pay $250 for a stopover)

    It’s just better for me to spend my money on other credit cards.

  2. How many millions of other customers like me – a 40-year monthly flier and miles hobbyist who used AA as my airline of choice – were driven away deliberately by these imbeciles who tried to devalue a mile by 75% and then had the gall to keep calling it a mile. Are you kidding me? You ruined a perfectly decent airline with your hideous greed and the same kind of spite that had Fat Doug Parker ripping out the wiring from the entertainment systems on US Air planes while leaving the useless controls in place. An absolute wrecking crew! We warned you and you didn’t listen any more than you ever did which is why Suzanne Rubin left the sinking ship. Idiots!

  3. I won’t put spend on a credit card to earn AA miles ever again. The only context in which I would acquire more AA miles would be:

    a) if they were giving them away (below 1 cent per mile acquisition costs)
    b) in the context of a transferable points currency (from my Citi Prestige, etc.)

  4. Or maybe changes in Citi churning rules last year now end up hurting AAs bottom line. This was not in their hands.

  5. American should go back to the old system (miles for miles) now while UA is in such hell and Delta loyalty members are also slighted.
    Do something a Lemmer wouldn’t.
    I bought AA stock on the hedge that the mileage program now has to count as currency.
    If I loose my miles and my status and my MONEY what is the point?

  6. A lot of the customers actually pay attention; not just the self-proclaimed points/mikes junkies. I’m actually a little surprised.

  7. ABC,

    I would actually argue that changes in Citi churning rules last year was partly in the hands of American Airlines. Because after all, churners typically go after high signup offers with the minimum amount of spend required. Typically, many of these offers were for airline and hotel credit cards and on occasion in house cards like Citi Prestige or Thankyou Premier. However, when American Airlines increased the cost of mileage with this deal, I am sure the bean counters at Citibank modeled what it would cost under the higher mileage costs to acquire a customer and likely also had analysis on the number of users who signed up and cancelled their card in the first year and overall product profitability on these customers and in comparison to those who did not cancel. As such, while American Airlines didn’t tell Citibank to implement a 24 month churning rule by raising the price on Aadvantage miles they increased the cost for Citibank and indirectly changed the financial analysis on the existing and future Citibank AAdvantage Credit Card portfolio. As such, they likely did influence the changes at Citibank.

  8. Wjy would anyone spend on an AA card that has no bonus spend categories? At least on SPG you.can get 1.25x and on Membership Reward or Ultimate Reward cards you can get 2-5x?

    But it’s mystifying why anyone would ever had any loyalty to airlines – that’s just dumb.

  9. I don’t travel as much anymore largely because of the devaluation. I’m not a frequent flyer junkie, but I would take some trips simply because I knew I was going to get something a little extra that was valuable. The little extra is now nothing and the value is nil. So, I don’t take trips unless absolutely necessary.

  10. @JC, surely AA must have a model or consultants that calculated the impact of devaluation on CC sign ups. There should be great estimates from Delta and United. AA was unlikely to model the impact of altered churning rules.

  11. I keep getting bonus spend offers on my Barclay card. But ironically the categories match the Freedom categories each quarter. 5 UR points vs 2 AA. The decision is clear.

    I have not spent a penny on my AA card because it has devalued so much. And I refuse to fly AA even though I live in PHL. AAdvantage was the major reason I was willing to stick with AA

  12. Changes making them tough to accrue and are as tough to redeem at fair prices as they’ve ever been…. hmmm, not exactly a real shocker.

  13. As others noted, I find it interesting that you place the blame squarely on AA (specifically AAdvantage). Perhaps the downturn in new accounts is due to the lenders and not the airline. E.g. Citi’s antichurning rules and Barclay’s Nazi credit analysts.

  14. GREAT article, Gary. Thanks for exposing Kirby and Parker for the greedy men they have become.

    I just don’t get it. What happened to these two guys? When they were at US Airways, miles were truly worth something. Miles were relatively easy to accrue and award availability was good. And redemption levels were good, too.

    OK, the economy was in bad shape then — so maybe they felt that they needed to roll out mileage promos on a regular basis. But come on!

  15. When rewards are non existent, why would you want to use their co branded cards. My oldest card is a Citi American card and it will be trashed as soon as the renewal date comes…

  16. Gary – 3 questions that perhaps could put an exclamation point on the argument:

    1) Presumably devaluing would lower the cost to AA of award travel. Do we know if this is the case, and if so how much cost dropped? If cost dropped more than revenue, the devaluation still *might* have been accretive.

    2) Have any other airlines made similar comments recently, especially airlines that have not devalued in the last ~12 months? If so, it could be a comment on the consumer credit cycle, and not specific to AA.

    3) I know little about airline accounting, but I assume they must carry some type of liability on their balance sheet for outstanding miles. If so, is that liability growing more slowly in the current quarter than in the past?

    I love the argument of course; perhaps there’s an airtight case to be made that the devaluation was harmful.

  17. No availability of premium awards is the big issue in my view. Domestic F is hard to get on key routes to connect to an international flight.

  18. Raising the price of awards by absurd amounts. Who knew this would drive people away from the program and make their credit cards not very good to spend on. I don’t feel any pity for these airlines that lure customers in and people invest their time and money being a loyal customer of an airline only to get the shaft later on. Their greed is catching up with them and god help them when oil prices spike or the economy hits a downturn.

  19. Between their bad policies and TSA I just don’t want to fly anymore for leisure unless it’s on a foreign carrier that actually has customer service………What American Airlines (United and Delta included) has done is make the employee more important than the customer and that’s not the case on Gulf and Far East top carriers……….customers vote with their feet and Tesla keeps selling more great vacation sedans………….

  20. AA increased the prices and reduced premium cabin availability.

    On some routes, seems AA prefers to fill the premium cabin with non revs. On a recent long haul flight business class showed C7 and the cabin went full with non revs without ever showing award business availability.

    AA business model is screwed up, no need to build any mileage balances here. Maybe they think we won’t notice.

  21. AAdvantage used to be my program of choice, by far. It’s sad Parker is so myopic that he ruined it. Not sure it can ever come back without a serious reversal in several areas.

  22. Wife and I had over 300,000 AAdvantage miles 15 months ago. Burned them all for Qantas A380 First. That will surely never happen again, but twas fun while it lasted.

  23. @Playalaguna
    Filling with nonrevs? An award seat is the definition of non-rev. Upgrading a pax with a paid coach seat is still revenue. Plus by presumably waiting so close to departure to upgrade the pax they maximized their window that a full fare pad might be willing to pay for the F seat.

  24. From my perspective AAdvantage has 3 major problems.
    1. Following the massive devaluation it is bad value for international partner awards.
    Solution: offer better bonus sales of miles; go 100+% like LifeMiles, or United sometimes.
    2. Endless lists of awards offered on the site which disappeared like 2 minutes after they were released, maybe months and months ago. If the cupboard’s bare then so be it, but stacks of (now) window dressing is a massive waste of my time sifting through what is not there for redemption.
    Get real, and get your IT people to keep it up-to-date and relevant.
    3. With the now more expensive product, how about releasing many more seats domestically, and lean on your partners to do the same.

    Six years ago AAdvantage was my first go-to site to see if what I wanted was available (it mainly was) and I had a stack of purchased miles to use. Now it’s last on my search list, and I keep a miserly stash of miles for fear of further devaluations or more tinkering with the program.

    The goose that previously laid the golden eggs is clearly constipated!

  25. @Playalaguna
    Sorry. You can disregard the previous comment I totally misread your point.

  26. Gary is to Boarding Area what the New York Times or the WSJ is to the National Enquirer. Thoughtful and intelligent postings as opposed to Lucky and others fluff pieces.

  27. @Ben – airlines share relatively detail on their frequent flyer program accounting, though 10Ks have allowed me to piece together some modeling (which I’ve shared with clients). Airlines carry liability on their books for awards to be redeemed, American’s is about $2.5b, Delta’s $4b and United $5b. New accounting rules will be adopted by all the airlines January 1, and American should boost theirs the most.

    The cost of award travel is unrelated to the number of miles American charges for seats, however if they’re able to burn more miles for the same seats they should be able to reduce their outstanding liability more quickly, similarly if customers don’t have the purchasing power for as many seats they can keep their liability down.

    United and Delta have historically shared even less detail about their mileage program accounting than American has.

    Some recent posts of note:

  28. I wonder if the credit cards that offer more transferable points (UR, MR,CT) took away some applicants form the AA cards? I really like my new Sapphire Reserve card for getting 3X points for travel. Why would I waste my spend on an AA card, when it takes more miles to fly CX with AA miles? With previous points from Sapphire Preferred, I have almost enough for 2 rt in J, on SQ. I can’t be the only person who thinks like this. All you bloggers do.

  29. Doesn’t make sense to put spend on your AA card for only 2x, when there are cards earning 3x, and even 5x.

  30. I easily made EXP last year, and all the changes this year means it is incredibly unlikely I will requalify with the EQD requirement. What burns the most is that their s*** card with the 6K reduction in EQD for EXP would have been enough for me to requalify, but as a Canadian I’m ineligible for the card… and since AA killed their card with RBC a while back, I have no options.

    I’m enjoying my final year of EXP with AA this year, and burned my last 4 SWUs to Sydney this summer.

    If AA smartens up and offers the same 6K reduction to those of us who can’t get the cc… then I’ll stick with them. Looks like I’ll try to status match to United (God knows they’ll want my business after the past week!) and go from there.

  31. Doesn’t this set Alaska up with a competitive advantage since they’re the only remaining airline giving real mileage (not to mention courteous staff that never behave like the Big 3 employees nursing contract grudges?) How could they press this advantage and do you think they will?

  32. “…it was the one unique selling proposition for the airline [AA] over its competitors.”

    The “over its competitors” part is highly debatable. United MileagePlus has always been the company’s selling point, with availability of award seats to most places that remained — in fact, remains — tops even as every facet of the company’s operation faltered, especially after the merger and during the utterly failed and mercifully short-lived reign of $mi$ek.

  33. AA sucks. I have over 3 million miles and haven’t found a reasonable use for them in 4 years. I keep using my UA miles that have went down from 3M to under 400k in 3 years. So sad AA…

    The flyer in the mail of 2x miles on all spends doesn’t even entice me. Time to close my AA cards including one I have had for over 25 years.

  34. The AAdvantage program is now in a state of a bubble that is losing its air rather quickly. There are no reasons to acquire AA miles because in many cases they have less value than Sky Pesos.
    I have cancelled my AA Citi card last September by telling the retention rep that I am fine with Citibank but completely dissatisfied with AAdvantage program and that the changes in AAdvantage was the main reason for cancelling the card. I now pay for my air travel with Chase Sapphire earning 3 points for $ spent on AA.
    I still fly AA but only when it is convenient. So far it is 74K in EQM and $8.3K in EQD so it looks like I do not need a CC spending to help me with the EQD requirement. But AA already lost quite a bit of my $ that went to other airlines.

  35. Great subject, Gary

    Please excuse the length of this response (I did not have time to be brief).

    Citibank is very much aware of the decline in credit card use that yield AA miles to card holders.

    Unlike with Citibank, the miles deal Chase Bank got with United Airlines continues to be beneficial for Chase Bank, for United and United’s customers.

    On the other hand, with AA, Citibank and AA passengers got heavily misled and are continuing to be misled by AA. I will explain this later in this response.

    Gary, as you already pointed out in your article, AA is losing money since its infamous devaluation. I think one reason AA is losing money is because many of AA’s customers realize that AA’s frequent flier program has been so severely devalued to the point there remains very few benefits or value of AA miles.

    Some earlier comments to your article already confirmed that at least some readers (passengers) realize that AA’s devalued frequent flier program offers little incentive to use Citibank credit card for purchases. This is because the purchases will yield miles that have become virtually a fraction of their former value. I will give an example to show this later in this response.

    Let us not forget that it is not only Citibank being misled or duped with buying miles from AA to give to Citibank’s credit card customers. AA’s customers are also being misled relative to AA’s so-called “bonus” for people (not Citibank) who buy AA miles. Prior to the demotion, AA’s sales of miles with the bonus included made the purchase worthwhile for many customers.

    However, since the devaluation, if a customer accepts AA’s offer to buy miles at its “up to 80% bonus” the customer stands a high chance of not getting reasonable value for the purchased miles. One example where this “bonus” offered by AA is misleading is as follows: If a customer accepts AA’s offer and buys miles for the “up to 80% bonus” the customer will pay $4,425.00 and will receive 270,000 miles. At first glance, that seems like a lot of miles for about four thousand some dollars. But, with the devaluation, AA is currently requiring up to 195,000 miles EACH WAY for international business class tickets that, before the devaluation, were 50,000 miles. Said a different way, it is currently nearly 400% increase in required miles to get the same seat that a passenger could get prior to AA’s devaluation (195,000 miles compared to 50,000 miles). This example makes it clear that any attempt to accurately value AA miles is futile.

    I could cite more examples how AA’s devaluation is misleading in its presentation to its customers.

    Yes, I know that in AA’s contract it says that AA has the right to change its program at any time.

    I have used AA for many years and hold EXP also for many years. Because of AA’s devaluation, I currently use AA only when my other current choice of airline, Air Canada and United don’t have a similar good offer. In other words, I am using AA less and my Citibank cards rarely. This will likely be my last year as EXP.

    The only additional comment I wish to make about AA’s behavior is that I find it difficult to believe someone has not filed a class action for the misleading offers accepted by many AA customers.

  36. AA has gone from first to worst. I’m fed up with their loyalty program and am looking forward to getting my balance down to zero if I can just find something of value somewhere. I’ve moved all of my flights from AA to WN and DL, except for the rare award seat. Tried to send my grandmother to other family members at Thanksgiving, and they wanted nearly 100,000 miles for a domestic coach roundtrip. Flight was $400 to buy. No thanks. Bought on another airline instead.

  37. Dont forget your credit history and credit profile. Don’t close your credit line/credit cards. PRODUCT CHANGE.

  38. While the increase in award price sucked, the bigger issue is the lack of saver level award availability which is by far the worst of any of the big 3 now. Just think how many people who don’t know any better, are now paying 3X AAnytime prices b/c they can’t get a saver level flight. In my opinion, this is the bigger devaluation.

    I’ve recently been on int’l flights on AA metal that flew with empty premium cabins, for some reason AA prefers tor let planes fly empty rather than release award space – even last minute. I’ll leave my leggings home and risk being dragged out of a plane with scorpions falling overhead – so long as I have a decent shot at getting award seats.

  39. Only idiots would pay $100/year for a credit card that gives worthless airline miles when a $0/year credit card will give you 2 cents per dollar in interest-earning cash!!!!

  40. Yes – there are several factors causing this but I think the biggest of them all is AA’s decision to split the credit card deal between two banks where one bank can only offer specific benefits while another can offer a different set.

    The very minute they made that decision the value proposition for any co-branded AA credit cards automatically became inferior to what their competitors offer. They should have went for exclusivity with Citi or Barclay, so that they could offer a cohesive and attractive set of cards that is tailored to customer segments. This will not only lead to better uptake for the credit card issuers but also lead to more bulk purchases of miles from the issuer for AA.

    But nope – AA wanted a bigger contract than UA has with Chase or DL with AMEX as they are the largest airline and probably thought they had the most valuable loyalty program out there.

    They missed the mark… Bigly…

    P.S. I know many customers are going to dump Citi Prestige, so I am sure Citi hurting too in the premium credit card arena.

  41. Put non-bonus spend on an AA card? Pay 1% in fees to build AA miles?

    You gotta be pretty green or pretty dumb.

  42. their biggest problem is not just the devaluation. but the lack of saver level awards, especially in premium cabin. you know what? I live in DFW and many times, even cannot find a decent time saver award to other hubs like LAX or ORD. Are you fxxking kidding me, AA?? Now I am just parking my miles there and hope I can use them for international travel on partners. But still… connecting to those routes through AA metal is a big issue.

  43. I was Platinum and would spend extra To insure I flew AA or toss in a personal trip to maintain my status. The devaluation has definitely driven me away. There’s such minimal benefit to the status so I now have a few airlines I’ll travel and I just price shop. I fly just as much but last year only hit gold and looking like I won’t even have that after this year.

  44. The AA credit card became a lot less interesting once they blocked Android Pay and discontinued the contactless solution. Throw in the lack of chip and pin, and card is useless in Europe. With most train stations becoming unstaffed, it’s becoming harder to use the card.

    I’ve added Chase Sapphire Reserve recently and feel like I’m back in 21st century. I’ll likely cancel the AA card next year, as once you consider the lower value, there’s little reason to stay.

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