Warning For American Airlines Debtholders And Credit Card Partners

The golden goose at American Airlines is its AAdvantage program, which generates the vast majority of its profits (and sometimes all of its profits) by selling miles to banks. And since a piece of American’s bread-and-butter flying is selling domestic connections, in markets where there are other options, the AAdvantage program is crucial to making that work too – encouraging customers to fly American over competitors.

But there’s a strong possibility that American’s plans for 2023 involve making the AAdvantage program less lucrative, and therefore less useful, to drive returns to banks issuing their cards (so those banks shouldn’t be willing to pay as much) and to allow American to service its substantial debt, including debt backed by the AAdvantage program.

American has said to expect ‘dynamic pricing’ of awards, which likely means making the currency less attractive to consumers – less attractive to collect for flights, and earning their miles less of a reason to spend on their credit cards. Here’s what we know:

  • American will eliminate MilesAAver and AAnytime awards in 2023. It’s not clear when in 2023 these changes will go into effect.
  • Partner awards will continue price based on an award chart ‘at this point’
  • American “will maintain an award chart moving forward. What that looks like will be discussed further in 2023” according to the Managing Director of AAdvantage.
  • American has not suggested these changes will make their miles more valuable

When American and United have devalued their miles that has held back spend on co-brand credit cards. Delta has been able to avoid that fate, but they’ve had a more aspirational brand and faced less competition, a position that they’ve managed to erode somewhat (it’s an open question how continued SkyMiles devaluations will fare).

  • Remember that banks pay the travel brand for their name and access to customers, not just miles. The bank takes a portion of the rebate, whereas the most lucrative cards without a airline or hotel brand on it are rebating the full value of interchange to the customer.

  • An American card is mostly earning one mile per dollar spent, which isn’t competitive. When that mile is worth only about a penny, that’s a low value redemption.

  • Why would you spend money on the card, aside from status, when you can get a 2% cash rebate or better and use that to buy the tickets you want or other things?

American earns a 52% margin on its miles. That implies a cost to produce a mile of around $0.0070 – $0.0075. (The book a penny per point in liability for transportation for miles earned from flying, but sell miles to partners for more than that, about 6 years ago they were generating an average of 1.3 cents per mile but did a credit card deal that increased revenue.)

It appears they’re looking to reduce their cost to produce a mile, charging more miles for awards, as they’ve continually done by making little saver award space available on international flights and especially for their most motivating awards for big spenders like business class to Europe. That would increase their margin, but may reduce total revenue and profit. At best these changes would lead to members receiving more of an average value for miles, fewer chances at outsized value, even though it’s that outsized value which can make their miles better than using a 2% cash back card.

They want credit card partners and others to pay them more per mile, while spending less per mile.

  • That will cost credit card partners charge volume, making the co-brand deal worth less
  • And reduce funds available for American to service debt backed by the AAdvantage program

American has had a better loyalty program than Delta, and they have needed to. American hasn’t historically been a better airline to fly, nor have they operated in captive markets to the same extent. So the value of their marketing program matters more.

While there was much talk in 2021 about AAdvantage devaluations, they committed not to change their award chart as they rolled out Loyalty Points as a new way to earn elite status. Now the deferred chickens may come home to roost – risking the value of the AAdvantage program, the revenue streams for co-brand partners, and the quality of AAdvantage-backed debt.

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