American To Use Credit Card Revenue As Collateral For Loan

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American Airlines is working with the federal government to access $4.75 billion in loans through the economic support package passed earlier this year. CEO Doug Parker stated in today’s shareholder meeting viewed by Simple Flying that the airline anticipates using AAdvantage credit card revenues as collateral for that loan.

American Airlines
American Airlines is negotiating for over $4 billion in loans. Photo: Getty Images

American is seeking additional loans

Earlier this year, American Airlines received just under $6 billion in federal aid. This aid came in the form of a grant and a low-interest loan. However, alongside this money, the Dallas-based airline also had access to up to $4.75 billion in loans from the United States Treasury. The airline has continued to negotiate the terms of this loan.

Doug Parker stated that the conversations with the Treasury Department are continuing. He believes that the government is “looking out for taxpayers and also ensuring the airline industry has the liquidity it needs to be here for customers as they return.Doug Parker remains confident that American will close on that loan this month.

Doug Parker
Doug Parker greeting American Airlines employees in Chicago. Photo: Getty Images

However, for collateral, the airline needed to put up a fair bit as security in case of default. American has previously indicated that part of the highly lucrative AAdvantage frequent-flier program would be part of that collateral. Now, Doug Parker has confirmed that revenues from the AAdvantage credit card program will be used.

AAdvantage is very valuable

Airline frequent flier programs are very valuable. While airlines are mum about the official value of each program, the sum total is usually in the billions. Comments made earlier by CFO Derek Kerr at the 2020 Wolfe Research Conference indicated AAdvantage itself was appraised to be worth between $18 and 30 billion.

American Airlines Boeing 737
The AAdvantage program was appraised earlier this year. Photo: Getty Images

A lot of American’s profits come from credit card programs. American partners with a credit card company to offer credit card holders miles for spending. The sale of those miles to credit card companies are worth billions of dollars and make a big profit for American and plenty of other airlines.

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Supporting the airline

While load factors are up, the airline is still burning plenty of cash– about $40 million per day. These $4.75 billion will go a long way in terms of securing the airline’s future.

Official federal funding that American has already received will end on September 30th. After that, American is working to help people decide to take voluntary leaves or else early retirements. Around 30% of the airline’s administration and management staff is expected to be reduced. About 39,000 employees have taken leaves and early retirement this spring, according to Doug Parker.

American Airlines getty images
American is going to be a smaller airline come 2021. Photo: Getty Images

Going into 2021, American will be a smaller airline. Doug Parker wants to avoid “the old airline playbook of furloughs for the excess.” The airline does need to be “right-sized.” However, American would prefer to do so without any furloughs at all.

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The challenge for American is to get through the winter months, which are, traditionally, less profitable for airlines with fewer people traveling. The airline is not planning to be right-sized for the winter. Instead, it is thinking ahead into summer 2021– which might be the airline’s first highly profitable season if demand continues to return slowly. Further details on how American right-sizes, however, will not be available until the fall. The situation remains incredibly fluid.

Are you surprised to see American put up credit card revenue for collateral? Do you think AA will be able to avoid furloughs this fall? Let us know in the comments!

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