14 things American Airlines told the Securities and Exchange Commission about itsloyalty program

Gary Leff at 10. March 2021.

American Airlines is refinancing its mortgage on the US Treasury’s frequent flyer program by raising $7.5 billion for AAdvantage in the private capital markets.

As part of that effort, they had to disclose a ton of information about AAdvantage in their 8-K filing with the SEC – much more than they shared with the SEC because the current administration has limited the amount of fairly reliable information American has always provided in its annual 10-K filing.

Here are 14 interesting things they had to share with investors and the SEC:

  1. American makes money selling miles, notaircraft. The airline acknowledged that the loyalty program’s net operating income exceeded its pre-tax operating income for 2019. For years I have written that American Airlines is a credit card marketing company that flies on airplanes. This is the biggest benefit of the new partnerships, which strengthen the airline’s profile in the financial centers of New York, Boston and the Bay Area and become increasingly attractive to travelers in these markets. They have to steal to be useful to motorists, but the theft itself didn’t make them any money.
  2. The profits of frequent travelers are enormous. They are asking for $3.1 billion in cash on revenue of $5.9 billion, with a margin of 52%. There is a strong argument that the airline is overbooking AAdvantage, that the cost of the program is even lower and so the margins are actually higher than here.
  3. They think they can devalue to keep margins high. Their business model gives them the flexibility to control costs and maintain margins (i.e., they can devalue at will, even though they have dynamic premium pricing in this area – although it’s really the same thing).
  4. The AAdvantage program is now an offshore holding company. American established 3 holding companies in the Cayman Islands for AAdvantage. The airline should offer special charter flights for frequent flyers to Grand Cayman so AAdvantage members can check their miles.

  1. If an American can’t pay you back, you won’t get your miles back. AAdvantage borrowers rank first in terms of safety for program participants. You will be paid before the program can pay out the miles.

  1. British Airways is no longer their primary airline partner… ? The airline is targeting investors with its network, bypassing joint venture partners – British Airways, Iberia, Finnair and Japan Airlines – and instead focusing on Alaska, JetBlue, Goal and Qatar. In fact, neither BA nor Heathrow is mentioned in the document.
  2. The program is huge, but most accounts don’t work. Their claim that they are the largest loyalty program is refuted because that claim was made before they removed inactive accounts from their database. When the US Airways Dividend Miles program was merged with AAdvantage, there were over 100 million unique participants between the two programs (the overlap of participants in the two programs was about 10 million). Now Americans say the number of active members is 23 million.
  3. The program continues to grow (slower than it should). They add 5 million members annually, but that number should be higher – they don’t really make it easy for a non-member to join the program during the booking process on AA.com.
  4. High spenders for Americans join theprogram. AAdvantage members account for 61% of the airline’s revenue. 40% of members have a household income of more than $100,000. And although 36% of program participants are millennials or younger, they stay in the program for a long time: The average active participant has been involved in the program for 10 years.

Annual flight revenue per AAdvantage member was $1,220 versus $408 for non-members. AAAdvantage members spend 44% more per mile than non-members.

  1. awards are travel-oriented, and that’s how people spend theirmiles. Only 3% of AAdvantage discounts apply to non-flight related items. Of course, American Airlines offers fewer non-travel fares than many other programs.

  1. Delta SkyMiles generates more revenue than AAdvantage, MileagePlus closes. American admits that Delta SkyMiles generates more revenue than AAdvantage, but claims that its costs are lower than Delta’s. And everyone knows that United’s MileagePlus program fell behind financially before the new credit card agreement with Chase, which was signed just before the pandemic. From there, the gap will be closed with United.

  1. American is a major player in the business of its partners. US co-brands account for 24% of Citi’s 2019 credit volume, 28% of Barclays’ and 12% of Mastercard’s (both Citi and Barclays are Mastercard).
  2. You buy lots of miles when American launches sales and offers bonuses. In 2019, AAdvantage earned 538 million miles sold directly to members. By 2020, it was down to $213 million, which isn’t surprising since people weren’t traveling much.
  3. During the pandemic, program revenues decreased significantly. Miles sold to third parties (primarily Citi and Barclays) decreased $950 million from $3.9 billion to $2.9 billion in 2020.

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