American Banks on Loyalty Program to Back Stimulus Loan to Manage Through Coronavirus - The Wall Street Journal

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American Airlines expects second quarter revenue to be down about 90%.

Photo: Tom Pennington/Getty Images

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Alison Sider

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• @alyrose
• alison.sider@wsj.com

June 12, 2020 10:48 am ET

American Airlines Group Inc. said Friday that it plans to pledge its loyalty program as collateral for a $4.75 billion government loan as it seeks to shore up capital to manage through the coronavirus pandemic.

American, which is the first to provide details of the terms it is discussing with the government, expects second quarter revenue to be down about 90%. While demand for travel has started to climb as parts of the country have reopened, with over 500,000 people passing through security checkpoints Thursday——the highest since March——traffic is still down over 80% from a year ago.

All major carriers, including American, have received federal aid to pay workers this summer to avoid mass layoffs they say would have been inevitable without government intervention. U.S. airlines are eligible for $25 billion in loans under the Cares Act, a broad stimulus package approved in March.

American’s share of that funding was $5.8 billion. On Friday, American said its loyalty program is worth between $19.5 billion and $31.5 billion and that it will pledge a “significant portion” as collateral. The Treasury Department didn’t immediately respond to a request for comment.

Other airlines have said they are still deciding whether to accept further government loans and have raised billions of dollars by selling bonds or issuing new shares.

American Chief Executive Doug Parker has said the government aid is the most efficient way for American to raise money, and that it would look at other options after securing the government loan.

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The investment community is split over the value of frequent-flier programs. Some analysts said plans provide a rich source of cash by selling miles to credit card partners. Others question whether they are worth anything unless matched by actual flying, and what their value is in the event of insolvency.

American said Friday that it still has over $11 billion in assets it could use to secure additional financing. American entered the crisis with a heavier debt load than many of its peers.

The airline said it has stemmed its daily outflow of cash, from $100 million a day in April to $40 million a day by the end of this month. That is $10 million a day less than the company’s previous forecast for June. The airline said it hopes to stop bleeding cash altogether by the end of the year as demand continues to improve and cost cutting efforts gain traction.

The government loan is expected to be five-year senior secured debt at a rate of Libor plus 3.5%. The airline said it would issue warrants for the Treasury Department to purchase 38 million shares of American at an exercise price of $12.51.

—Michael Dabaie contributed to this article.

Write to Alison Sider at alison.sider@wsj.com

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