In February I made a bold prediction that Citibank will remain the issuer of the American Airlines co-branded credit cards once American merges with US Airways.

Some would say the prediction was not so bold, that the conclusion is obvious, but in any case I stand by that assertion.

At the time I read through American Airlines’ year-end 2012 10-K filing (I was on the beach in the Maldives, so that makes me a very strange man) and was reminded,

In 2009, American entered into an arrangement under which Citibank paid to American $1 billion in order to pre-purchase AAdvantage Miles (the Advance Purchase Miles) under American’s AAdvantage frequent flier loyalty program (the Advance Purchase). Approximately $890 million of the Advance Purchase proceeds was accounted for as a loan from Citibank with the remaining $110 million recorded as Deferred Revenue in Other liabilities and deferred credits.

To effect the Advance Purchase, American and Citibank entered into an Amended and Restated AAdvantage Participation (as so amended and restated, the Amended Participation Agreement). Under the Amended Participation Agreement, American agreed that it would apply in equal monthly installments, over a five year period beginning on January 1, 2012, the Advance Purchase Miles to Citibank cardholders’ AAdvantage accounts.

Pursuant to the Advance Purchase, Citibank has been granted a first-priority lien on certain of American’s AAdvantage program assets, and a second lien on the collateral that secures the Senior Secured Notes. Commencing on December 31, 2011, American has the right to repurchase, without premium or penalty, any or all of the Advance Purchase Miles that have not then been posted to Citibank cardholders’ accounts. American is also obligated, in certain circumstances (including certain specified termination events under the Amended Participation Agreement, certain cross defaults and cross acceleration events, and if any Advance Purchase Miles remain at the end of the term) to repurchase for cash all of the Advance Purchase Miles that have not then been used by Citibank.

The Amended Participation Agreement includes provisions that grant Citibank the right to use Advance Purchase Miles on an accelerated basis under specified circumstances. American also has the right under certain circumstances to release, or substitute other comparable collateral for, the Heathrow and Narita route and slot related collateral.

If American were to walk away from Citibank as its co-branded card issuer, they’d likely be on the hook for $600 million come the end of 2013.

And Citibank has gone to bankruptcy court to remind them of that fact.

Citigroup Inc. asked the judge overseeing American Airlines’ bankruptcy to force the carrier to decide by July 2 whether to retain the bank’s partnership in its loyalty credit-card and mileage program or risk a multibillion- dollar claim.

American and its parent, AMR Corp., have had enough time to decide on maintaining the agreement, which can be rejected as part of the bankruptcy,

The move is purely posturing. Both Citi and American are quick to downplay the significance of the move. Both assure that it’s business as usual for AAdvantage memebrs and cardholders, and it is.

Citibank is going to retain the franchise. I spoke last month to a former top United exec who managed a similar process with Chase during United’s bankruptcy. He and everyone else I’ve come across are as certain of this as I am.

The posturing, though, contains some half-true claims.

Rejecting the agreement will create a “multibillion-dollar secured damages claim” against AMR, endangering the airline’s ability to repay creditors and shareholders at the levels set in its reorganization plan and costing it “material amounts of annual revenue in the coming years that could not be fully replaced,” Citigroup said in the filing.

Creditor support for AMR’s restructuring and merger plan “might well evaporate” in such a case, Citigroup said.

That’s all strictly speaking correct, if American were to simply reject their agreement with Citi in bankruptcy with no alternative. But they wouldn’t do that, it would be silly.

The only way that they would reject the Citi agreement is if they had a better agreement in hand from another bank. And that agreement would have to include the upfront cash secured by prepurchase of miles to repay Citi the remaining balance of Citi’s billion dollar prepurchase.

So roughly speaking that means $600 million from another bank that’s simply a pass through to Citi.

Thus the ante, just to negotiate with another bank, would be something on the order of a billion dollars up front. Otherwise it makes no sense to even seriously entertain discussions.

Given that, if American were to go with another co-brand issuer (such as Barclays, the current co-brand issuer of the US Airways card, though it would be fairly rich for the Barclay’s US operations), it would only be with a commitment of such funds up front. And that would mean there would be little risk to the restructuring process.

Citi is in such a strong position because as I pointed out in February, the billion dollars they fronted is secured by tangible assets with value such as slots at London Heathrow and Tokyo Narita. They have to repay the loan, it can’t just be rejected in bankruptcy. And because it’s a huge sum of money.

It would take a bank with resources and expertise in he co-brand game in order to make a competing offer. While Barclay’s has been playing more aggressively there, they don’t have a history of putting together plays of this magnitude.

American Express and Chase do — but since a billion dollars more or less would simply be an ante, the amount involved to ply American away from Citi would be even greater than that.

(HT: Rick)