This is just a prediction, it isn’t a fact, but I think the prediction is based on some pretty sound data.

I read through American Airlines’ year-end 2012 10-K filing this afternoon and learned several interesting things about the frequent flyer program:

  • In 2011 American reduced revenue by $43 million because of a decrease in the ‘breakage assumption’ of their miles — fewer expired, unused miles. This is an accounting charge that says they expect redemptions to cost them more money than they had anticipated because members weren’t letting their miles lapse.

  • In 2012 they took in less revenue for the sale of miles to third parties than in 2011. I wonder if this was related to the bankruptcy, with folks shying away from the airline’s program or from the airline itself due to operational difficulties. I wonder also if this more than just correlates with the recent increased promotional activity, bonusing the sale of miles to consumers.

  • They currently hold $1.7 billion as a liability for future travel to be provided by outstanding miles, and that’s based on their own estimates of fulfilling travel redemption (based on the incremental cost of carrying a passenger in a seat that would have gone empty). That’s 18.4% of all of the liabilities the airline has. American itself — not counting alliance and other partners — redeemed 6 million one-way awards in 2012, accounting for 8.6% of passengers.

But I was also reminded of the terms of a billion dollar deal with Citibank which is what I base my opinion on that the co-branded card issuer will be in a position to keep the franchise, and won’t lose out to Barclays. (I suppose Barclays could have a similar deal just signed with US Airways, since their last deal would have recently expired and I haven’t read the renewal, but I am presuming that the relative size of American compared to US Airways suggests that the money even in a similar deal would be far less from Barclays).

In 2009, American entered into an arrangement under which Citibank paid to American $1 billion in order to pre-purchase AAdvantage Miles (the Advance Purchase Miles) under American’s AAdvantage frequent flier loyalty program (the Advance Purchase). Approximately $890 million of the Advance Purchase proceeds was accounted for as a loan from Citibank with the remaining $110 million recorded as Deferred Revenue in Other liabilities and deferred credits.

To effect the Advance Purchase, American and Citibank entered into an Amended and Restated AAdvantage Participation (as so amended and restated, the Amended Participation Agreement). Under the Amended Participation Agreement, American agreed that it would apply in equal monthly installments, over a five year period beginning on January 1, 2012, the Advance Purchase Miles to Citibank cardholders’ AAdvantage accounts.

Pursuant to the Advance Purchase, Citibank has been granted a first-priority lien on certain of American’s AAdvantage program assets, and a second lien on the collateral that secures the Senior Secured Notes. Commencing on December 31, 2011, American has the right to repurchase, without premium or penalty, any or all of the Advance Purchase Miles that have not then been posted to Citibank cardholders’ accounts. American is also obligated, in certain circumstances (including certain specified termination events under the Amended Participation Agreement, certain cross defaults and cross acceleration events, and if any Advance Purchase Miles remain at the end of the term) to repurchase for cash all of the Advance Purchase Miles that have not then been used by Citibank.

The Amended Participation Agreement includes provisions that grant Citibank the right to use Advance Purchase Miles on an accelerated basis under specified circumstances. American also has the right under certain circumstances to release, or substitute other comparable collateral for, the Heathrow and Narita route and slot related collateral.

If American were to walk away from Citibank as its co-branded card issuer, as of now they would be on the hook for about $800 million cash back to Citi. If they did it in a year they’d still be on the hook for $600 million. And the obligation is secured by their London Heathrow and Tokyo Narita route authorities and landing slots.

That’s a huge hurdle to overcome for any interloping bank who may want to throw money at the merged airline and take over the co-branded credit card business.

  1. MileValue said,

    Link to the 10-K. The real question in my mind is whether a new product will be released a la the United Explorer Card. That would be a nice silver lining, but this merger is good for us in the short term and bad for us in the long term.

  2. MileValue said,

    Sorry, not a demand. The first punctuation mark should have been “?”

  3. RJ Brown said,

    The change in the way Million Miler is earned started in 2012 and that probably has a great deal to do with the drop off in purchased miles…….in the past you could purchase miles that would count to Million Miler…..no more………and the credit cards don’t any more unless it is the Executive Club card………that has to be a drag on purchased miles……….

  4. Harold said,

    Isn’t AA in bankruptcy and doesn’t that mean that contracts are, or can be, renegotiated?

    Of course that doesn’t guaranty that it will happen.

  5. seth said,

    The entire filing (including exhibits) is here:

    http://www.sec.gov/Archives/edgar/data/6201/000000620113000023/0000006201-13-000023-index.htm

    The citation above is on page 84 of the 10-K itself.

  6. leftpinky said,

    Harold–they are in bankruptcy and yes, contracts can be wiped off. But I’d imagine since the contract is guaranteed with the Heathrow slots, it might not be so easy. Regardless, Citi is a much bigger player in the US than Barclays, so hard to see how Citi would lose.

  7. leftpinky said,

    Also, Citi might be a preferred creditor in the bankruptcy and US airways negotiated with them already. Parker would sell his mom and dog for AA, so I think he would give Citi whatever they ask.

    Of course, for Citi to get on par with Chase or AMEX, they need to step up their offerings, maybe a Shappire like card where you can transfer points to AA, Hilton and 2-3 other programs (which they currently don’t have, but might be able to add like Korean or Air Candida)

  8. Jay said,

    What an amateur posting. The title is so misleading. Not sure why people think they can trick people and get away with it. I know I won’t be using your links in the future.

  9. Riposte said,

    Here’s the link to the 10-k:

    http://www.sec.gov/Archives/edgar/data/6201/000000620113000023/amr-10kx20121231.htm

  10. jimL said,

    Given that AA is probably the biggest piece of Citi’s card portfolio, on a relative basis, it only makes sense that Citi did everything they could to tie AA long term with as many covenants as possible. I don’t know if Barclays has the same vested interest in US airways. That said, I am sure Doug will be squeezing Citi in whatever way he can. One possibility is since we have just seen thank you points became transferable to Hilton, I don’t think it is a large stretch to see them next become transferable to AA. The question I have is at what ratio.

  11. Zz said,

    Why can’t AA be affiliated with two banks?
    Both AmEx and Citi have HH cards.

  12. Jim L said,

    Hey Gary, nice write up. Thanks for the synopsis.

  13. Josh said,

    @Scott/MileValue:

    2012 10K here:
    http://phx.corporate-ir.net/phoenix.zhtml?c=117098&p=irol-SECText&TEXT=aHR0cDovL2FwaS50ZW5rd2l6YXJkLmNvbS9maWxpbmcueG1sP2lwYWdlPTg3NDA1NDImRFNFUT0wJlNFUT0wJlNRREVTQz1TRUNUSU9OX0VOVElSRSZzdWJzaWQ9NTc%3d

    – Josh

  14. Tim said,

    Feel free to analyze it all you want. There is almost no chance that AA won’t remain the issuer of AA’s credit cards.

  15. Matt said,

    Citi will undoubtedly issue the new AA’s cards, but this agreement does not tie AA to Citi or otherwise increase the probability that AA will remain with Citi.

    As you point out: “American has the right to repurchase, without premium or penalty, any or all of the Advance Purchase Miles that have not then been posted to Citibank cardholders’ accounts.” In other words, if another bank offered AA a better deal, and loaned them money in the same way, they could easily pay Citi off and be done with them.

    The LHR and NRT routes are collateral in the event of default, not in the event one of the two parties elects to exercise their legal rights under the agreement. Citi cannot take the LHR or NRT routes if AA tenders full payment of the loan.

  16. Tom // Sit in first said,

    @zz…most airline card contracts have geographic exclusivity clauses in them. The card issuer demands it so they get the most bang for their effort. Hilton is by far the exception and not the rule.

  17. Len said,

    Gary,

    Thanks for this. In your experience, what can existing Barclays US Airways cardholders expect if Citi does, in fact, take the business? Will accounts be transferred, or closed and forced to re-apply?

  18. autolycus said,

    @Len, the most likely solution is that Barclays will convert current US Airways cards to some other product within the Barclays portfolio. That would probably be FlexPerks. If you want an AA card, you would have to apply for a new account with Citi, assuming you don’t already have one.

  19. tassojunior said,

    If AmericaWest/US is any indication, the AA/US merger will be drawn out. I don’t expect US to stay at Barclays very long at all. I’m sure as a major creditor and banker Citi got a quick migration to itself.

    When WN/FL was announced the FL card left Barclays for Chase almost immediately. Expect the same for the US card quickly going to Citi.

  20. Cathleenn said,

    I’m a researcher, and use 10-K’s for a living – shows you how exciting my job is that I got a thrill to see the SEC filings discussed in a travel blog. If you’d like other interesting reading, head over to Berkshire Hathaway – we wait anxiously every year for Warren Buffet’s letter to investors…

  21. Jason said,

    Just something to note: There are some RSS readers out there that only display the headlines of articles. If you’re just perusing the headlines (which sometimes I do because there are a lot of different things to read) this would have showed up looking like an established fact: “Citibank will remain the issuer of…” That’s certainly misleading since it is you making a prediction. Anyone just reading their newsreader headlines this morning and not clicking the article might have taken away the incorrect notion that this was already decided. I might suggest clarifying in the headline that this is just a prediction.

  22. AJK said,

    Bad news. Was kind of hoping AMEX (which sorely needs to shore up its partners in light of the CO departure among other issues like YQ-partners, etc) would swoop in and steal the business. Hey, a man can dream.

    And, if @matt is correct, it seems its still a possibility :)

  23. Gary said,

    @Jason if you’re using Google Reader, the 1 and 2 buttons on your keyboard toggle between showing titles only and full posts.

    There was never any intent to mislead — I was staking out a bold claim — putting down my prediction and explaining my reasons for it.

  24. American and US Airways Make Their Merger Case: What Will Change in a Combined Airline? - View from the Wing said,

    [...] isn’t willing to say who their co-branded credit card partner will be after the merger. I’ve predicted it will be Citibank because changing partners would requiring repaying Citi about $600 million in [...]

  25. Time for American to Decide Which Bank Will Issue its Credit Card Post-Merger - View from the Wing said,

    [...] February I made a bold prediction that Citibank will remain the issuer of the American Airlines co-branded credit cards once American merges with US [...]

  26. Man Bites Dog: American Won’t Reject its Citibank Co-Branded Contract in Bankruptcy - View from the Wing said,

    [...] surprise for readers of this blog, but American has filed with the bankruptcy court to “assume on a final and irrevocable [...]

  27. US and AA announce merger - MASTER DISCUSSION THREAD/incl 'when will US leave STAR' - Page 163 - FlyerTalk Forums said,

    […] will stick around, and it seems there's not room for both. http://boardingarea.com/viewfromthew…irways-merger/ http://thepointsguy.com/2013/06/amer…-plan-to-vote/ __________________ This space […]

  28. Citi & Barclays Cards with the New AA? US Benefits Dropped? - Point Me To The Plane said,

    […] I think most in the travel community simply assume that some time in the future Citibank will become the sole credit card issuer for the “New” American. It seems the most likely scenario given the long established AA/Citi relationship, Citi’s larger US consumer credit card market presence, and most importantly American’s billion dollar bankruptcy deal with Citibank. As Gary pointed out all the way back in February: […]

  29. Add A Comment

home | top

View from the Wing is a project of Miles and Points Consulting, LLC. This site is for entertainment purpose only. The owner of this site is not an investment advisor, financial planner, nor legal or tax professional and articles here are of an opinion and general nature and should not be relied upon for individual circumstances.

Advertiser Disclosure: Many (but not all) of the credit card offers on the site are from banks from which we receive compensation if you are approved. Compensation does not impact the placement of cards other than in banner advertising (we do not currently control the banner advertising on this blog). We don’t include all US credit card offers available on this site. Instead, I write primarily about cards which earn airline miles, hotel points, and some cash back (or have points that can be converted into the same).

Editorial Note: The opinions, analyses, and evaluations here are mine and not provided by any bank including (but not limited to) American Express, Chase, Citibank, US Bank, Barclaycard or any other company. They have not reviewed, approved or endorsed what I have to say.