Bad Credit Credit Cards – 12 Fascinating Facts Revealed About American Airlines AAdvantage Program
Mileage programs are big business for airlines. Before the coronavirus pandemic, some airline analysts speculated that the value of major U.S. airline programs could be in the tens of billions of dollars. However, it wasn’t until the cash flow crunch caused by the pandemic that the true value of loyalty programs was revealed.
To get a nearly $5 billion loan through the CARES Act, American Airlines got a third-party valuation that concluded its AAdvantage program is worth up to $31.5 billion. Now, American Airlines is returning to the same well to raise even more cash.
On March 8, 2021, American Airlines announced that it would issue $7.5 billion in new financing backed solely by its AAdvantage mileage program. Just a few days later, AA announced that it was increasing the offering to $10 billion due to high initial interest.
As this financing is only secured by the AAdvantage program, American Airlines needed to disclose to potential lenders exactly how the AAdvantage program makes its money. And this opened the window to some fascinating aspects of the AAdvantage mileage program — many of which haven’t been revealed before now.
Here are 12 of the most interesting facts revealed about the AAdvantage mileage program.
1. AAdvantage Generates Around $2.9 Billion in Cash Each Year
The AAdvantage program is a massive cash cow for American Airlines. In 2018 and 2019, AAdvantage generated a total of over $5.8 billion in cash for the airline. That’s an average of around $2.9 billion each year.
To put that in perspective, AAdvantage alone generates more than the airline’s combined $5.7 billion in operating income for those two years. As Bloomberg put it a few years back, “airlines make more money selling miles than seats.” And that’s definitely the case for American Airlines.
It’s easy to assume that AAdvantage took a hit during the pandemic. But, surprisingly, this wasn’t the case. Even during the pandemic, AAdvantage generated more than $2.8 billion in cash for American Airlines.
2. Banks and Non-Air Partners Buy Billions of Dollars of Miles Each Year
Where does all of that cash come from? Mostly non-airline third parties. AAdvantage generated a combined .4 billion in 2018 and 2019 from mileage sales to credit card companies and other non-air partners, such as Hyatt and Avis. Even in 2020, AAdvantage generated over $2.9 billion in mileage sales to banks and non-air partners.
These mileage sales accounted for over 68% of total AAdvantage mileage sales from 2018 to 2020. Meanwhile, only 23% of AAdvantage cash flows were generated through flight activity on American Airlines and its partners in these three years.
Unfortunately, American Airlines didn’t disclose how many miles banks and non-air partners paid or the purchase price per mile. AA simply notes “purchase price per mile negotiated at the partner level.”
3. A Lot of Spending is Put on AAdvantage Credit Cards
There’s a reason that banks buy so many AAdvantage miles: Cardholders spend a lot of money on American Airlines credit cards. Again, AA didn’t disclose exactly how much, but the AA credit card portfolio is clearly critical to AA’s two credit card issuers: Citi and Barclays.
In 2019, 24% of Citi’s total credit card spending was put on an American Airlines card. For Barclays, that figure was 28% of 2019 credit card spend. In total, 12% of all Mastercard spending in 2019 was charged to an American Airlines card.
4. AAdvantage Members Buy Tens of Billions of Miles
There’s one more source of AAdvantage mileage sales besides banks, airlines and other non-air partners: mileage sales directly to AAdvantage members. From 2018 to 2020, American Airlines collected more than $1.3 billion from mileage sales directly to members.
American Airlines sells miles directly to members at a base rate of 3.2 cents per mile. However, AA almost always runs a promotion to discount or provide a mileage bonus for buying miles. The cheapest rate we’ve ever seen AA sell miles is 1.6 cents per mile, but members have to buy thousands of dollars of miles to get this rate.
If we assume a blended purchase rate of 2 cents per mile, AAdvantage members have bought over 65 billion miles from American Airlines from 2018 to 2020. That’s an average of almost 22 billion miles sold directly to members each year.
5. AAdvantage is Highly Profitable
After reading all of the above, it’s not surprising to learn that AAdvantage is wildly profitable. That’s certainly the case. But, that’s true even when comparing AAdvantage with United’s MileagePlus and Delta’s SkyMiles programs.
In 2019, the AAdvantage program brought in $5.9 billion in cash collections. After paying all costs — from reimbursing airlines to operating expenses — AAdvantage netted $3.1 billion of cash flows. That’s an incredible 53% cash profit margin.
Based on American Airlines’ analysis, that’s better than either United or Delta. In 2019, United collected $6.1 billion and netted $2.4 billion for a 39% cash profit margin. Meanwhile, Delta brought in $5.3 billion and netted $2.3 billion for a 44% cash profit margin.
However, not everything is rosy at the AAdvantage program. 2020 definitely dealt a blow to American Airlines and its mileage program.
6. Mileage Redemptions Dropped Over 52% in 2020
American Airlines didn’t reveal juicy details such as how many miles have been redeemed or how many AAdvantage miles are in member accounts. However, AA did share an interesting stat: In 2020, AAdvantage members redeemed less than half of the number of miles as in 2019.
That’s a big drop. However, it’s not as large of a decrease as one might expect. From 2019 to 2020, American Airlines’ Revenue Passenger Miles (RPM) — a measurement of how many passengers AA flew — dropped 61.9%.
7. AAdvantage Issued Half of the Miles in 2020 as 2019
AAdvantage miles issued during 2020 were 49.5% lower than 2019. Much of this decrease was due to the reduction in members traveling in 2020. Cash received from sales of miles to American Airlines and its partners fell by more than 65% between 2019 and 2020.
Likewise, cash sales to AAdvantage members dropped by 60%. Comparatively, the 25% decrease in mileage sales to banks and non-air partners was fairly modest.
8. Only 14% of AAdvantage Members were Active in 2020
American Airlines boasts that it’s the “largest airline loyalty program” with over 115 million AAdvantage members. However, only 23 million of those members generated some sort of activity in 2019 — whether that’s taking a flight or generating any other program activity in the calendar year. So, in a typical year, it seems around 20% of AAdvantage members are active.
In 2020, the number of active members dropped to 16 million active members. That means only around 14% of AAdvantage members were active in 2020.
9. 40% of Active AAdvantage Members Make Over $100k
While only 14% of AAdvantage members are active, these active members are fairly well-off. American Airlines reports that 40% of active members have a household income of over $100,000 per year.
That’s not bad, but interestingly, it’s much lower than the percentage of United MileagePlus members that make over $100,000. In a June 2020 disclosure, United reported that a whopping 65% of its members make more than $100,000 (though United doesn’t distinguish whether or not this statistic is household income, specifically).
10. AAdvantage Incentivizes Members to Book Less-Desirable Flights
American Airlines highlighted in its filings how it uses its dynamic pricing model to get award travelers to take less-desirable flights in order to make more money. AA says “AAdvantage manages the cost of fulfilling these awards by leveraging member elasticity to steer reward demand to optimal flights based on cash displacement risk.”
In other words, AA wants you to redeem miles for undesirable flights. American Airlines used the example of four flight options from Dallas/Fort Worth (DFW) to Las Vegas (LAS):
11. Just 3% of Miles are Spent on Non-Travel Redemptions
American Airlines AAdvantage members can redeem miles for everything from Cathay Pacific First Class to newspaper subscriptions. Generally, members are going to get much higher redemption values for air travel rather than non-travel redemptions. So, it’s good news that just 3% of redeemed miles are spent on non-air travel redemptions.
But, American Airlines seems to be aggressively increasing this amount. Over the past few years, American Airlines has added new mileage redemption options that aren’t for flights. For example, members can now redeem miles to reserve seats on American Airlines flights, to reserve Five Star Service and even redeem miles for Covid-19 tests.
12. $9.3 Billion in Outstanding AAdvantage Miles
When American Airlines sells miles to American and other airline partners, that amount is deferred until the miles are redeemed by an AAdvantage member. That amount is then recorded as revenue upon redemption.
On the AAdvantage balance sheet, American Airlines lists $9.279 billion in total liabilities. As this financial statement is for an AAdvantage-only company, there’s only one major type of liability: outstanding miles in member accounts. That means AAdvantage has around $9.3 billion in miles that have been issued but not redeemed.
These filings didn’t reveal how much AAdvantage pays for travel. But, if AAdvantage is set up like United’s MileagePlan, the redemption cost is around 1 cent per mile. At this rate, there are around 930 billion outstanding AAdvantage miles. Once you factor items like expected breakage — the number of miles AAdvantage expects to expire unused — there could be over 1 trillion outstanding AAdvantage miles.
Thanks to AAdvantage publicly mortgaging its AAdvantage mileage program, we have gotten a rare look behind the curtain of the largest airline loyalty program in the world. From the billions of dollars it generates to stats about AAdvantage members, this filing revealed many fascinating facts about the program we didn’t know.
Bad Credit Credit Cards – 12 Fascinating Facts Revealed About American Airlines AAdvantage Program
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