Randy Petersen this morning at Frequent Traveler University made a point that I haven’t seen mentioned elsewhere about a potential American – US Airways merger.

American hasn’t been talking up the value of its frequent flyer program, Randy thinks it’s because they don’t want a narrative that they have valuable assets as they approach their labor negotiations.

Aeroplan, the stasndalone frequent flyer program associated with Air Canada, has a market cap of over 2 billion dollars. American AAdvantage is both orders of magnitude larger and also more profitable. On the other hand, the US market is more competitive than the Canadian market. Taking a discount for this, Randy thinks AAdvantage is worth 5 to 6 billion dollars.

And that US Airways won’t be willing or able to pay anything close to fair value for an American Airlines that includes AAdvantage.

If US Airways can acquire the airline with that program, they could presumably spin it off to unlock value and fund the merger. But if investors are savvy enough they won’t allow US Airways to get away with that coup. And if you’re making a bet you have to assume that investors and insiders are indeed that savvy.

Will it be the value of the frequent flyer program that stands in the way of US Airways acquiring American Airlines?

  1. Marshall Jackson said,

    An interesting concept for sure. While I’m neither for nor against a US AA merger, my Spidey senses tell me that the money people that finance these kinds of deals are behind it in concept so US may have less issues raising funding than many think. On the other hand, I have to wonder what those same $ people think about the term sheets US signed with AA’s unions that appear to be far more generous than AA’s current 1113c plans. My popcorn is popping. Will be interesting to watch it unfold.

  2. chitownflyer said,

    At the present time, I am not an AA flyer, but a UA flyer. I gather Parker and co. at US would gut the AAdvantage program and make the program like US Dividend Miles. If US really wanted a competitive program, they would acquire AA, make AAdvantage the program with its current benefits for the combined carrier, and consider possibly spinning it off like AC did with Aeroplan. The possibility of Dividend Miles being the future program is what makes me leery of going for AA elite status.

  3. Phil said,

    Fascinating point. I always have wondered why a) more carriers have not done what Air Canada did in monetizing their FF program (sure the cash injection runs out eventually but still) and b) why the likes of Delta claim that their generally pitiful FF program (at least from a redemption perspective) is such a liability when indeed it ought to be viewed as a huge asset.

    In terms of how it might play out, I could live with either/or in terms of how a US/AA merger might play out. I do have lifetime plat on AA and would like to keep the ability to check bags, select preferred seats and board early for whatever holds in the future. But otherwise the two programs have their fair share of pros and cons

  4. Adam said,

    Hi Gary,

    Have read precious little coverage of Randy’s Exec Travel Summit. Anything of value from the execs who manage all the airline/hotel plans? Speaker lineup did not motivate me to attend.

  5. Michael W Travels said,

    I sure hope the merger does not happen. Less competition can not be good for airfares and availability with mileage redemption options…

  6. Rob said,

    Randy provided today a great point of view, glad to have seen this.

  7. Jim L said,

    I think AA is too valuable a partner for many to let this occur. While I think we will have to watch how Doug Parker stirs the drink, ultimately it may be others who will actually decide AA’s fate. I am not sure the others can start it and I don’t think Doug Parker can finish it, but as noted above, get your popcorn!

  8. WH said,

    Very interesting coming from Randy. When AAdvantage announced the offer to match premium status with UA mileage plus last week, my initial thought was that this was a strategic move to improve the market value of AA by increasing the number of elite members and therefore impede the US Air purchase/merger. A tit for the US Air tat of forming an alliance with the AA pilots.

  9. RT said,

    I can only hope AA and USAir will never merge. We do not need another mega air carrier that does not care about its passengers. A combined AA-USAir merger will be a ruined airline for all parties.

  10. iahphx said,

    Of course, AAdvantage is worth nothing without American Airlines.

    Which is what, I think, Randy Peterson is forgetting.

  11. JetAway said,

    @chitownflyer-There’s no evidence that Parker intends to “gut” the Aadvantage program. On the contrary, he seems to understand its’ value “as is.”

  12. chitownflyer said,

    @JetAway, if there is an AA-US merger, I do hope that AAdvantage stays as the loyalty program and keeps the frequent flyer benefits currently in place. AA’s Executive Platinum level with 8 SWUs and Platinum’s 100 mileage bonus benefit are key assets to the program which US does not have. In terms of competition, the best thing would likely be for more choices with no merger between AA & US. Good travels to all.

  13. joelfreak said,

    @iahphx AAdvantage has ALOT of value without AA. Remember, miles are just a replacement for currency. If the AIRLINE was removed, and miles were usable for MULTIPLE carriers/hotels like Membership or Ultimate Rewards, you are telling me AAdvantage would have no value? I forget where I heard it, but I remember hearing that Airlines were just money loosers holding down the PROGRAMS, which were profitable by selling miles to EVERYONE…now we see banks making their own currencies…but AA Miles still have a TON of value.

  14. oliver2002 said,

    Ever since AC spun off Aeroplan, people have been rubbing their hands thinking that their FFPs are worth their weight in gold. Curiously enough, none of the major FFPs have spun off their FFPs, even when they are near or in bankruptcy. Loosing control over their loyalty program is not in their interest. AA’s FFP is a major element of their turaround plan… if it would be so easy to spin it off they would have done it ages ago.

  15. Oliver said,

    @joelfreak yes, but AAdvantage would then have to purchase award seats from airlines… with real money.

  16. Eager Traveler said,

    My opinion on AC’s Aeroplan is that AC still runs the show. News reports suggest (but don’t actually say) the AC forced Aeropan to frequently “loan” he patent company any cash that is just lying around. Should AC go under again Aeroplan will be worth just as much as the other airlines with FFP’s that have gone bust.

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