American Airlines Mortgages AAdvantage Program To The Tune Of $7.5B

American Airlines is following what United and Delta have already done and has decided to take a loan against the future cash flows of its AAdvantage program to the tune of $7.5B.

The airline, in the process, has issued information about its loyalty program, now being incorporated in the Cayman Islands, that it has not previously disclosed.

You can access AA here.

Here are interesting slides from AA’s presentation:

AAdvantage program

Who cares what the numbers were pre-pandemic in 2019? We are now in 2021, and it will take years for the airline sector to recover.

23 million active members in 2019, and 74% of proforma income came from third parties in 2019, Again, pre-pandemic.

American Airlines admits on the footnotes that the program participation was lower in 2020, but not how much lower. Why? Isn’t this crucial information for investors?

Remember that they earlier disclosed that 23M members were active in 2019. 80% of AAdvantage’s 115M members are effectively inactive (no transactions for a year).

Cash flow decreased 38% from 2019 to 2020. Sales to third parties decreased only 25%.

“Cash displacement”. AAdvantage tries you to get redeem for flights that you would not otherwise buy, i.e., with a long connection or with inconvenient timings.

“Intercompany Receivables” are essentially AAdvantage program “loans” to American Airlines that stand at $17.5B of total assets of $18.1B. The total liabilities (what future redemptions are assumed to cost) stand at $9.3B.

The miles sales to AAdvantage members have crashed 78% by the 4th quarter of 2020, and sales to third parties were 40% lower in the same quarter compared to 2019.

Financials

American Airlines debt, including operating leases, stands at $46B.

American will burn $30M per day in Q1 of 2021. That is a roughly $2.7B loss in the first quarter of this year.

If the cash burn continues at roughly $1B per month, the airline has liquidity for 18 or so months.

The airline sector is expected to recover to 2019 levels, perhaps by 2024/2025. It is unclear what effect there will be on business travel when more employees work remotely and there is less convention travel.

Here’s the entire SEC filing:

Download (PDF, 5.32MB)

Here’s the AA’s press release:

FORT WORTH, Texas — American Airlines Group Inc. (NASDAQ: AAL) (the “Company”) today announced that the Company’s subsidiary, American Airlines, Inc. (“American”), and AAdvantage Loyalty IP Ltd., a newly formed Cayman Islands exempted company incorporated with limited liability and an indirect wholly owned subsidiary of the Company and American, intend to commence a private offering to eligible purchasers of $2,500,000,000 senior secured notes due 2026 and $2,500,000,000 senior secured notes due 2029 (collectively, the “Notes”) and to enter into a $2,500,000,000 senior secured term loan credit facility (the “New AAdvantage Term Loan Facility”) concurrent with the closing of the offering of the Notes. American and AAdvantage Loyalty IP Ltd. will be co-issuers of the Notes and co-borrowers under the New AAdvantage Term Loan Facility. The Notes and the New AAdvantage Term Loan Facility will be guaranteed by the Company and certain of the Company’s subsidiaries. The offering of the Notes is not conditioned upon the closing of the New AAdvantage Term Loan Facility, and the closing of the New AAdvantage Term Loan Facility is not conditioned upon the closing of the offering of the Notes. The final terms and amounts of the Notes and the New AAdvantage Term Loan Facility are subject to market and other conditions and may be materially different than expectations.

The Notes and New AAdvantage Term Loan Facility will be secured on a pari passu senior basis by a first-priority security interest in American’s AAdvantage program, including American’s rights under certain related agreements, intellectual property and other collateral related to the AAdvantage program.

AAdvantage Loyalty IP Ltd. intends to lend the net proceeds from the offering of the Notes and the New AAdvantage Term Loan Facility to American, after depositing a portion of the proceeds in certain reserve accounts. American intends to use the proceeds from this intercompany loan from AAdvantage Loyalty IP Ltd. to repay all amounts outstanding under the term loan facility with the U.S. Department of the Treasury that is currently secured by collateral that will secure, in part, the Notes and the New AAdvantage Term Loan Facility and to use the remainder for general corporate purposes, which may include the repayment of other indebtedness.

The Notes will be offered and sold only to persons reasonably believed to be qualified institutional buyers, as defined in, and in reliance on Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”) and to non-U.S. persons in offshore transactions outside the United States in reliance on Regulation S under the Securities Act. The Notes will not be registered under the Securities Act or any other securities laws of any jurisdiction and will not have the benefit of any exchange offer or other registration rights. The Notes may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements.

This press release does not constitute an offer to sell or the solicitation of an offer to buy any of the Notes nor shall there be any sale of the Notes in any jurisdiction in which such offer, solicitation or sale would be unlawful. This press release is being issued pursuant to and in accordance with Rule 135c under the Securities Act.

Conclusion

American Airlines here essentially loans against future AAdvantage cash flows.

It is difficult to see how American Airlines could come through this pandemic without a bankruptcy court visit, considering the current debt load and cash burn rates.

When hotels and airline programs boast their membership numbers, you have to keep in mind that 80% to 90% of those members are inactive. It is more useful if all would disclose the number of active members who have had activity in the preceding 12 months.

I feel fatigue building among loyalty program members how valuable their miles and points really are, in terms of difficulty of use. Perhaps appreciation towards issuers providing more flexible “currency” that can be converted to cash or used with several programs is growing.