American Values AAdvantage Up To $31.5 Billion

American Airlines claims their frequent flyer program is valued in the billions of dollars, and could be held as collateral for a loan. The airline says an independent appraisal suggests American AAdvantage could be worth as much as $31.5 billion.

Another airline is betting on the strength of their frequent flyer program, using it to secure a loan under the CARES Act. American Airlines claims the AAdvantage program is worth up to $31.5 billion, disclosed in a filing with the U.S. Securities and Exchange Commission (SEC).

AAdvantage “Third-Party Appraisal” Estimated Between $19.5 and $31.5 Billion

After the airline opened a round of fundraising, they are now borrowing a play from United Airlines by offering their frequent flyer program up for a CARES Act loan. However, the Fort Worth-based carrier claims their loyalty program, which may include mileage sales and flyer data, holds a potential value upwards of $19 billion.

“It is our current intention to pledge our domestic AAdvantage loyalty program assets as security for this [the CARES Act] loan,” the airline claims in a prospectus supplement filed with the SEC pursuant to rule 424(b)(5).  “The most recent third-party appraisal has estimated the value of these assets to be between $19.5 billion and $31.5 billion, a significant portion of which will be pledged as collateral to support the CARES Act loan.

“Based on this appraisal, we believe there is sufficient collateral to support the CARES Act loan and potentially additional financings, subject to compliance with the ultimate terms and conditions of the CARES Act loan.”

AAdvantage Valuation Comes with Warnings

However, the airline comes short of justifying why the program could be worth upwards of $30 billion in the filing. Instead, the carrier says their loyalty program is one of their competitive factors in the marketplace, and faces “significant and increasing competition” from other carriers.

“Competition among loyalty programs is intense regarding the rewards, fees, required usage, and other terms and conditions of these programs,” the filed prospectus supplement reads. “These competitive factors affect our ability to attract and retain customers, increase usage of our loyalty program and maximize the revenue generated by our loyalty program.”

Finally, American says that changes in the AAdvantage program is one of the ways they intend to increase revenue. As is customary, the company notes: “As time goes on, we expect that it will be more difficult to identify and implement additional initiatives.” Accordingly, any attempt to drive business forward may not be successful.

“We have recently instituted, and intend to institute in the future, changes to our business model designed to increase revenues and offset costs,” the company wrote in the prospectus addendum. “These measures include further segmentation of the classes of services we offer, such as Premium Economy service and Basic Economy service, enhancements to our AAdvantage loyalty program, charging separately for services that had previously been included within the price of a ticket, increasing other pre-existing fees, reconfiguration of our aircraft cabins, and efforts to optimize our network including by focusing growth on a limited number of large hubs.”

Is AAdvantage Worth the Appraised Estimate?

Although the CARES Act requires additional loans to airlines be secured by collateral, analysts are skeptical that the frequent flyer program could be worth up to $31 billion. An article published by The Motley Fool notes that while the sale of miles through co-branded credit cards is a lucrative business, the real value sits in the user data collected by American through AAdvantage.

“As a theoretical stand-alone entity, the only asset belonging exclusively to AAdvantage is data: a list of customers’ names, contact information, flight history, and perhaps also purchase histories for credit card holders,” writer Adam Levine-Weinberg writes for The Motley Fool. “That’s certainly worth something, but nowhere near $19.5 billion, let alone $31.5 billion.”

Noting the spinoff and subsequent purchase of Air Canada’s Aeroplan program, the writer opines that there is some inherent value in the AAdvantage program. But if American were to go bankrupt and out of business, the miles issued through the program would offer zero value. Considering American lost $2.2 billion in the first quarter of 2020, Levine-Weinberg concludes that AAdvantage may not be worth the airline’s valuation.

“In short, American Airlines is not producing enough cash under steady-state conditions for the entire business to be worth anywhere near $31.5 billion,” writes Levine-Weinberg. “Moreover, it could be several years before profitability returns to pre-pandemic levels.”

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Featured photo courtesy: American Airlines