After 40 Years, American Airways Simply Revealed a Stunning Growth
This is a $ 10 billion story about American Airlines, and a lesson for any business executive.
I describe something like that in my free e-book. Flying Business Class: 12 rules for executives of US airlineswhich you can download here.
In short, you’d like to believe that you understand what business you’re in, don’t you? Well, developments over the past 12 months have shown that American Airlines (and United and a few others too) actually have a very lucrative business besides just flying people from point A to point B.
It’s something that outsiders may not have understood and that airlines didn’t necessarily want to discuss in depth until recently.
40 years in the making
I suppose the story begins in 1981 when American Airlines launched the second frequent flyer program: AAdvantage.
The airline itself was more than 50 years old at the time, and you can thank the deregulation of the 1970s and increased competition between airlines for developing the program. AAdvantage has grown with the possibilities over the decades that followed.
Then several years ago, an analyst named Joseph DeNardi tried to price AAdvantage along with all of the other airlines’ frequent flyer programs, arguing that they were so valuable that airlines should consider them as separate entities.
In fact, DeNardi calculated that the airlines were likely to generate billions of “marketing revenues” from selling frequent flyer points to banks so that those banks could use them to trick customers into using credit cards.
He calculated that American Airlines could have made $ 1.15 billion from these programs in the first half of 2018, leading the industry. United Airlines made $ 962 million in the same period, he suspected. Delta: $ 805 million. And so on by the smaller airlines.
Face brutal truths
This came from profit calls with executives at the airline, including Doug Parker, American Airlines CEO. Let’s just say the airlines didn’t agree with the premise.
But then came the pandemic and global air travel slowdown, the most challenging time in the industry remembered, and the opportunity to face some brutal truths.
This week, we learned more about one of them when American Airlines actually set an implicit price for AAdvantage: it announced plans to close $ 7.5 billion in funding in bonds and leveraged loans through the Loyalty program supported.
A few days later, there was apparently so much demand that American Airlines revised its filing with the Securities and Exchange Commission to take into account that the transaction had grown to $ 10 billion.
- First, American Airlines’ total market cap on Friday was less than $ 15 billion.
- Second, as part of that deal, American Airlines formed a “newly formed Cayman Islands exempt company,” AAdvantage Loyalty IP Ltd.
- Third, the Americans’ AAdvantage investor presentation, which it was required to file with the SEC, shows the airline had a pro forma cash sale of nearly $ 6 billion in 2019 as a result of AAdvantage.
I say again: study the airlines
I asked American Airlines for more context on all of this. They declined to share anything more, citing the fact that the deal has not yet been closed, noting that Parker will be presenting at the JP Morgan Industrials Conference on Monday.
Regardless, this is not really about assessing whether American Airlines has correctly rated its loyalty program after 40 years. Instead, as always, it’s about learning the lessons for executives in all industries that you can learn by studying airlines.
Here I think the lesson is existential. I suspect that many business owners might realize, if thought provoked, that they have actually developed more lucrative sideline jobs than originally planned.
It’s really good news: what is the asset you created or the business model you came up with that actually surpasses what you even got into business with?
If you answer that, you may find some valuable asset that you didn’t even realize you had.
As a reminder, the e-book is free Flying Business Class: 12 rules for executives of US airlines.
The opinions expressed here by Inc.com columnists are their own, not those of Inc.com.