AA to sell FF program to Citi
 

Probably good for AA's balance sheet, as they get a lot of $ for their FF program., and therefore cash to fund operations and equipment purchases. Curious to see if it means any changes down the road for the FF.

http://dealbook.blogs.nytimes.com/20...er=rss&emc=rss

some interesting details about aircraft and destinations at the end of the article too.

Intersting -- has something like this ever happened before? Airlines merge etc, but I dont recall hearing about selling the program to a compnay like that.

They're not selling the frequent flyer programme.

They're getting $1 billion as a loan from Citibank against future sales of miles - presumably as part of credit card schemes etc.

They're keeping silent (apparently) about whether this will lead to inflationary "miles printing" - which, were it to happen, would make miles even more difficult to redeem.

Interesting distinction - selling the miles, not the program. I didn't pick that up. I guess I'm not quite sure what Citi gets for this. Miles yes, but to what end?

It's the inflation that I'm worried about. I've been able to take advantage of several AAFF tickets each year, accumulating 1+bonus miles for every flight mile, 1mi/$ on my Citibank MC, etc.

If it changes to a "points" approach (i.e. 1pt = $1 fare, so a $600 ticket costs 60,000 points) you'd have a lot of unhappy AAFF.

Citi isn't getting anything, except business (it's a bank. Banks lend money). It's just lending AA $1 bn, against the security of future sales of miles.

Apparently, the New York Times got confused, printed a wholly incorrect story about AA selling the FF programme (which sounds a weird thing to do). So a nonsense has got an internet life of its own, all because the NYT is useless.

Air Canada sold its Aeroplan FFP several years ago when it was going through bankruptcy, and the buzz was that the value of the FFP was greater than the remainder of AC. They are huge cash cows for the airlines. Most of the talk about airlines selling their FFPs seems to come from investment bankers engaging in wishful thinking.

flanner: Did you actually read the linked article? The OP may have incorrectly read the story, but it was pretty darn clear. You don't get more clear than this:

<i>AMR will get a $1 billion cash advance from Citi on the anticipated sale of miles under its AAdvantage frequent-flyer program, which will be treated as a loan for accounting purposes</i>

Cash advance. Loan. Sale of miles. Nothing about selling the program.

And there is nothing crazy about selling the mileage program. As noted above, Air Canada did it and the reality is that Aeroplan is a profitable company, while Air Canada continues to struggle. There simply is a lot more value in the FF programs than in the airlines themselves. The airlines, of course, would never sell them because someone like AA would have to make up the several millions in profits that their FF program generates. They can't.

This more limited arrangement of pre-selling miles is actually pretty common. Delta has done it at least twice (with Amex) and Continental has done it with Chase.

OK, I've got the part about selling the miles, not the program. Sorry if this is obvious to everyone else, but how is a FF program in and of itself profitable? I understand how the FF program brings repeat / captive business to an airline, but what is the revenue stream for a FF program as a stand alone business?

Anyone have a pointer to FF business model 101 example? Maybe I'm being dense here.

The simple answer is that FF miles can be bought and sold. All of these vendors (credit cards, stores, cereal companies) that give you FF miles pay the airline cash to buy the miles. This is what is going on here and provides significant cash flow.

The route to revenue and profits is a bit more tricky. FF miles are treated just like a rebate or volume discount. Basically, when you book a ticket, a portion of the ticket price (around $0.005 per mile) is held back as deferred revenue. In other words, if you spend $250 for a ticket that earns 5k miles, then the airline only records revenue of $225. The additional $25 is held on the balance sheet as a liability. Only when you redeem the 5k miles (or they expire), does the airline recognize the revenue.

This is why the pre-purchase by Citi is treated as a loan. Since the miles have a future value, the airline can't recognize the revenue until those miles are gone. In other words, while this deal is good for cash flow (and cash flow is what keeps you out of bankruptcy), it does very little in the immediate-term to help the airline's profitability.