AA borrows $1.0 billion from Citi secured by AA miles

[FWAAA]

AA joins the other airlines in borrowing money from their award program partner banks:

Amending an existing agreement under which AMR will receive $1 billion in cash from the advance sale of AAdvantage frequent flyer miles to Citi, American's long-standing credit card partner. The advance sale of AAdvantage miles largely will be treated as a loan for accounting purposes. Citibank has the right to use the miles in equal monthly installments over the 2012-2016 timeframe. The transaction provides other benefits for Citi, including an extension of the co-branded credit card program.

http://finance.yahoo.com/news/AMR-Corporat...ml?x=0&.v=1

Other amounts discussed in the press release are primarily financing for new 738s to be delivered in the next couple of years.

 

[whatkindoffreshhell]

Why didn't they used their heralded $3.5bil of unencumbered cash??

 

[FA Mikey]

I assume you were referring to unencumbered assets. (3.7 billion) Simply put, because this is a much better deal.

 

[BigBangTheory]

Because this is a much better deal.

And the AA executives will get a great cut in the cash too. Its always a win/win deal for the executives.

 

[FA Mikey]

They dont get a cut of that. But you should watch how the jump in the stock price will work towards their bonus's.

 

[L1011Ret]

They dont get a cut of that. But you should watch how the jump in the stock price will work towards their bonus's.

Very true. The stock has doubled and trippled for those willing to buy when is was under $5.00

 

[goodgirl37]

Very true. The stock has doubled and trippled for those willing to buy when is was under $5.00

Hopefully your workers get a cut through their negotiations.

 

[frontline]

I want a raise as much as anyone, especially after the 2003 concessions. But is it wise to pursue that from what is essentially debt financing? That will just put as deeper in the hole in the long run. Pay increases should be come from operating profits so that they will be sustainable. This money will be there to get through a dark winter.

 

[eolesen]

I don't see it as debt financing as much as it foregoing cash that Citibank would have paid out to AA for the miles in the 2012-2016 timeframe.

This form of transaction has worked out fairly well for UA and DL in the past. It's a good deal for Citibank -- they know they'll pay for the miles on the affinity cards eventually.

 

[FWAAA]

Why didn't they used their heralded $3.5bil of unencumbered cash??

The number was $3.7 billion of unencumbered assets, not $3.5 billion (I assume you meant "assets" when you wrote "cash").

And AA did use some of their $3.7 billion of unencumbered assets in securing the various financing last week, as the number after last week's financing activity is now just $2 billion:

AMR and American believe that, as of the date of this report, they have approximately $2 billion of assets that could be used as possible financing sources. However, many of these assets may be difficult to finance, and the availability and level of the financing sources described above cannot be assured.

http://phx.corporate-ir.net/phoenix.zhtml?...1hCUkw9MQ%3d%3d

I agree with eolesen - this financing is a great deal for both AA and Citi. If you have a customer (Citi) who buys billions of dollars of your stuff over time (AAdvantage miles), borrowing the cash upfront from the customer looks like a good way to borrow money. The loan was figured at an interest rate of only 8.3%, significantly less than UA's recent loan against its spare parts, which I remember as being at 17% or so. Presumably the collateral risk (and repayment risk) is small, given that Citi will want the miles (unlike hard-to-sell aircraft or parts) and AA doesn't have to "repay" the loan with real cash.

 

[FrequentFlierCA]

Not to mention that traditional sources of finance are still very conservative in lending standards. Airlines are not exactly strong borrowers at the moment, and judging by the interest rate UAL is paying on some recently-issues debt it makes this look like a very good deal for AMR.

 

[JFK Fleet Service]

Airlines are not exactly strong borrowers at the moment, and judging by the interest rate UAL is paying on some recently-issues debt it makes this look like a very good deal for AMR.

“The market for airline debt is extremely strong right now,â€￾ Runte said in an interview. “Airlines like American and Delta are taking advantage of strong investor demand and rising prices to both raise liquidity and refinance existing debt.â€￾


Bloomberg

 

[Deleted member 14439]

Let me first say that I am ignorant to the world of high finance. However, if they can borrow that kind of money coupled with what they have saved off our backs since the ammendable date. Why ,I stupidly ask, can not we be restored? I know corporate greed. It is my feverent hope they and all their corporate bootlicker burn in hell for all eternity.
:angry:

 

[FWAAA]

Let me first say that I am ignorant to the world of high finance. However, if they can borrow that kind of money coupled with what they have saved off our backs since the ammendable date. Why ,I stupidly ask, can not we be restored? I know corporate greed.

AA didn't borrow that money so it could increase your pay. AA borrowed that money to avoid defaulting on its loan covenants and so that it might make it thru the upcoming winter without running out of cash.

Say AA did borrow enough money to restore everyone's pay for the upcoming year; restoration might easily cost a billion dollars or more each year. With what money would they pay those raises the following year? And the year after that? Is your ignorance of high finance so complete that you don't see the problem with borrowing money to make payroll? Do you really think lenders will keep loaning billions of dollars to AA year after year so that AA can increase rates of pay?

Restore (let alone "Restore and more") ain't gonna happen until AA shows a surplus of money from operations, either because oil drops to $25 or $30/bbl and stays there or the economy shows a tremendous recovery. And I doubt either one happens in the short run.

It is my feverent hope they and all their corporate bootlicker burn in hell for all eternity.
:angry:

I'm certain the feeling isn't mutual.

 

[Deleted member 14439]

My point being FWAAA is this company is NOT hurting anywhere near as bad as they would like for us to believe.