American Airlines Seeks To Leverage AAdvantage To Raise $7.5bn

American Airlines has announced plans today to leverage its AAdvantage frequent flier program to raise $7.5 billion. After initially utilizing the program as collateral for government-backed financing, American is turning to the private market to raise cash after its largest competitors did the same last year.

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American Airlines wants to use its loyalty program to raise $7.5 billion. Photo: Vincenzo Pace | Simple Flying

American Airlines seeks to raise $7.5 billion backed by AAdvantage

American Airlines announced this morning that it was using its AAdvantage loyalty program as collateral for private financing. The airline set up AAdvantage as a newly formed Cayman Islands exempted company incorporated with limited liability.

The airline intends to raise funding through this program in three different manners. There is a private offering to eligible purchasers of $2.5 billion in senior secured notes due in 2026. Another $2.5 billion in senior secured notes is due in 2029, taking the running total to $5 billion. The last $2.5 billion will come from a senior secured term loan credit facility, bringing American to the sum of $7.5 billion.

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American Airlines hopes to get $7.5 billion, but it would not be unprecedented for the airline to raise more than that. Photo: Getty Images

Note that this could change. If demand is high, American could leverage the program for additional financing. There is some precedent for airlines raising more money than anticipated through their loyalty programs.

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What will American do with the money?

The money will be raised under the AAdvantage Loyalty IP Ltd. company. That company will loan the money back to American to repay the term loan facility with the US Department of Treasury.

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American wants to pay off the $550 million government loan. Photo: Getty Images

In 2020, American Airlines entered into a $7.5 billion secured term loan facility with the US Department of Treasury. The airline borrowed $550 million under that facility before the close of the year. The remainder of the loan will be used for general corporate purposes and may include the repayment of other debts American has.

The Treasury term loan

On September 25th, American Airlines entered into a loan agreement with the Treasury Department for over $5 billion in funds. This was grown to $7.5 billion in October, after other airlines pulled out of the term loan offering, making more money available for carriers who entered into agreements.

The term loan is due and payable in a single installment back to the Treasury on June 30th, 2025. This is only around four years away, and American already had total contractual obligations for over $15 billion in payments of debt in 2025 across both the airline and its parent company.

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The private offering has some advantages over the government loan. Photo: Getty Images

The new financing is the same amount, currently, as the available funds through the Treasury term loan. American could end up getting even more than that amount from this offering if there is enough demand for investors. This would be a win-win for the airline as not only would it raise the same amount as the term loan, but it would be payable after 2025. At that point, American will hopefully be back to record profitability with plenty of excess cash to pay off debts.

Other airlines have used loyalty programs to raise financing

United Airlines led the way with using its MileagePlus loyalty program, with over $6 billion raised against the program. Later, in the fall, Delta Air Lines announced a private offering through its SkyMiles loyalty program, first at $6.5 billion but later upsized to a whopping $9 billion.

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Delta raised $9 billion from its program, but American could end up raising more than Delta did from its if there is high demand. Photo: Getty Images

At this point, American is bolstering its liquidity and working with its debt to allow it to be successful in the future. The airline is hopeful that some pent-up demand will be released this summer, and the airline will be able to fly enough people at high enough prices to break even, if not turn a profit.

This loyalty-backed financing is one way for American to bolster itself for the future. Airlines are starting to move beyond an immediate cash crunch to a slightly longer outlook on cash guidance and fixing up balance sheets after a ruthless 2020.

Do you think American Airlines is making the right decision? Let us know in the comments!