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Mileage programs are big business for airlines. Prior to the coronavirus pandemic, some airline analysts speculated that the value of major U.S. airline programs could run into the tens of billions of dollars. However, it was not until after the liquidity crisis caused by the pandemic that the the true value of loyalty programs has been revealed.
To secure a loan of nearly $ 5 billion through the CARES Act, American Airlines obtained a third-party assessment that found its AAdvantage program to be worth up to $ 31.5 billion. Today, American Airlines is going back to the same well to raise even more money.
On March 8, 2021, American Airlines announced that it would issue $ 7.5 billion in new financing supported solely by its AAdvantage mileage program. Days later, AA announced it was increasing its bid to $ 10 billion due to high initial interest.
Since this funding is only secured by the AAdvantage program, American Airlines had to disclose to potential lenders exactly how the AAdvantage program is making its money. And that opened the window to some fascinating aspects of the AAdvantage mileage program, many of which haven’t been revealed before.
Here are 12 of the most interesting facts revealed about the AAdvantage mileage program.
1. AAdvantage generates approximately $ 2.9 billion in cash each year
The AAdvantage program is a huge cash cow for American Airlines. In 2018 and 2019, AAdvantage generated a total of over $ 5.8 billion in cash for the airline. That’s an average of about $ 2.9 billion each year.
To put that into perspective, AAdvantage alone generates more than the airline’s combined $ 5.7 billion in operating revenue for those two years. As Bloomberg put it a few years ago, “Airlines make more money selling miles than seats.” And that is certainly the case with American Airlines.
It’s easy to assume that Advantage took a hit during the pandemic. But, surprisingly, it wasn’t. Even during the pandemic, AAdvantage generated more than $ 2.8 billion in cash for American Airlines.
2. Banks and non-airline partners buy billions of dollars in miles every year
Where does all this money come from? Mainly non-airline third parties. AAdvantage generated a combined total of $ 0.4 billion in 2018 and 2019 mileage sales at credit card companies and other non-airline partners, such as Hyatt and Avis. Even in 2020, AAdvantage generated more than $ 2.9 billion in mileage sales to banks and non-airline partners.
These mile sales accounted for over 68% of total AAdvantage mile sales from 2018 to 2020. Meanwhile, only 23% of AAdvantage cash flow was generated by flight activity on American Airlines and its partners over the course of these three years.
Unfortunately, American Airlines did not disclose the number of miles paid by banks and non-airline partners or the purchase price per mile. AA simply notes “the purchase price per mile negotiated at the partner level”.
3. A lot of expenses are spent on AAdvantage credit cards
There’s a reason banks buy so many AAdvantage miles: Cardholders spend a lot of money on American Airlines credit cards. Again, AA hasn’t revealed exactly how much, but AA’s credit card wallet is clearly essential for AA’s two credit card issuers: Citi and Barclays.
In 2019, 24% of Citi’s total credit card spending was allocated to an American Airlines card. For Barclays, that figure was 28% of credit card spending in 2019. In total, 12% of all Mastercard spending in 2019 was billed to an American Airlines card.
4. AAdvantage members buy tens of billions of miles
Besides banks, airlines and other non-airline partners, there is another source of selling AAdvantage miles: selling miles directly to AAdvantage members. From 2018 to 2020, American Airlines raised more than $ 1.3 billion in mile sales directly to members.
American Airlines sells miles directly to members at a base rate of 3.2 cents per mile. However, AA almost always offers a promotion to offer a mileage discount or bonus for the purchase of miles. The cheapest rate that we have ever seen AA selling miles is 1.6 cents per mile, but members have to purchase thousands of dollars of miles to get that rate.
If we assume a combined purchase rate of 2 cents per mile, AAdvantage members purchased over 65 billion miles from American Airlines from 2018 to 2020. This represents an average of nearly 22 billion miles sold directly to members each year.
5. AAdvantage is very profitable
After reading all of the above, it’s no surprise to learn that Advantage is extremely profitable. It certainly is. But that’s true even when comparing AAdvantage with United’s MileagePlus and Delta’s SkyMiles programs.
In 2019, the AAdvantage program brought in $ 5.9 billion in cash. After paying all the costs, from reimbursing airlines to operating expenses, AAdvantage generated $ 3.1 billion in cash flow. That’s an incredible 53% cash profit margin.
According to American Airlines analysis, it’s better than United or Delta. In 2019, United raised $ 6.1 billion and made $ 2.4 billion for a 39% cash profit margin. Meanwhile, Delta grossed $ 5.3 billion and raked in $ 2.3 billion for a 44% cash profit margin.
However, all is not well with the AAdvantage program. 2020 has definitely been a blow to American Airlines and its mileage program.
6. Mileage redemptions fell by more than 52% in 2020
American Airlines did not reveal juicy details such as the number of miles redeemed or the number of AAdvantage miles on members’ accounts. However, AA shared an interesting statistic: In 2020, AAdvantage members redeemed less than half the number of miles as in 2019.
It’s a big drop. However, this is not as big a drop as you might expect. From 2019 to 2020, American Airlines’ Paid Passenger Miles (RPMs), a measure of AA passenger count, fell 61.9%.
7. AAdvantage issued half of the miles in 2020 like 2019
AAdvantage miles issued in 2020 were 49.5% lower than in 2019. Much of this decrease was due to the reduction in the number of members traveling in 2020. Cash received from the sale of miles to American Airlines and its partners fell by more than 65% between 2019 and 2020.
Likewise, cash sales to AAdvantage members fell by 60%. By comparison, the 25% drop in mileage sales to banks and non-airline partners was quite modest.
8. Only 14% of AAdvantage members were active in 2020
American Airlines boasts of being the “largest airline loyalty program” with over 115 million AAdvantage members. However, only 23 million of those members generated some kind of activity in 2019, whether it was taking a flight or generating any other program activity in the calendar year. So in a typical year, it appears that around 20% of AAdvantage members are active.
In 2020, the number of active members fell to 16 million active members. This means that only around 14% of AAdvantage members were active in 2020.
9. 40% of active AAdvantage members earn more than $ 100,000
While only 14% of AAdvantage members are active, these active members are quite affluent. American Airlines reports that 40% of active members have a family income of more than $ 100,000 per year.
That’s not bad, but interestingly, it’s far lower than the percentage of United MileagePlus members who earn over $ 100,000. In a June 2020 disclosure, United reported that 65% of its members earn more than $ 100,000 (although United does not distinguish whether or not this statistic is household income, in particular).
10. AAdvantage encourages members to book less desirable flights
American Airlines has outlined in its documents how it uses its dynamic pricing model to trick award travelers into less desirable flights in order to earn more money. AA says, “AAdvantage manages the cost of obtaining these rewards by leveraging membership elasticity to steer rewards demand towards optimal flights based on the risk of cash displacement. “
In other words, AA wants you to redeem miles for unwanted flights. American Airlines used the example of four flight options from Dallas / Fort Worth (DFW) to Las Vegas (LAS):
- 6h00 with a low risk of displacement = 10,000 miles
- 9:00 am with a moderate risk of travel = 12,000 miles
- 5:00 p.m. with a high risk of travel = 18,000 miles
- 11:00 p.m. with a low risk of travel = 11,000 miles
11. Only 3% of Miles are spent in exchange for non-travel
American Airlines AAdvantage members can redeem miles for everything from Cathay Pacific First Class to newspaper subscriptions. Typically, members will get much higher trade-in values for air travel rather than non-travel trade-ins. So it’s good news that only 3% of miles redeemed are spent on non-air travel redemptions.
But, American Airlines appears to be aggressively increasing this amount. In recent years, American Airlines has added new options to redeem miles that are not for flights. For example, members can now redeem miles for seats on American Airlines flights, to book five-star service and even redeem miles for Covid-19 tests.
12. $ 9.3 billion in exceptional AAdvantage miles
When American Airlines sells miles to American and other airline partners, that amount is deferred until the miles are redeemed by an AAdvantage member. This amount is then recorded as income upon repayment.
On AAdvantage’s balance sheet, American Airlines lists total liabilities of $ 9.279 billion. As this financial statement is for an AAdvantage business only, there is only one major type of liability: miles circulating on member accounts. This means that Advantage has approximately $ 9.3 billion in miles that have been issued but not redeemed.
These documents did not reveal how much AAdvantage pays for travel. But, if AAdvantage is configured as United’s MileagePlan, the trade-in cost is approximately 1 cent per mile. At this rate, there are approximately 930 billion AAdvantage miles in circulation. After you factor in things like expected breakage (the number of AAdvantage miles expected to expire unused), there could be over 1,000 billion AAdvantage miles in circulation.
Thanks to AAdvantage publicly mortgaging its AAdvantage miles program, we got a rare peek behind the curtain of the world’s largest airline loyalty program. From the billions of dollars it generates to AAdvantage member statistics, this file revealed many fascinating facts about the program that we didn’t know about.