American Airlines parent company AMR Corp. intends to continue its affinity credit card relationship with Citibank, according to its revised plan to emerge from bankruptcy and merge with US Airways.
The decision comes three weeks after Citibank filed a motion in the federal bankruptcy court in Manhattan that challenged AMR's reorganization plan. Citi also requested an order to force the Dallas-based airline to make a final decision on whether it would permanently accept or reject its contract with the New York-based Citigroup to operate the Citibank AAdvantage Program.
The judge overseeing the airline's bankruptcy case granted a joint proposal filed by Dallas-based AMR and Citi to permanently honor their agreement to operate the Citibank AAdvantage Program.
"For the avoidance of doubt, the Debtors irrevocably and as of the date hereof waive any right to seek to reject the Citibank Agreements," the June 4 order reads, adding later that "Citibank will not object to confirmation of the Plan."
As part of the bankruptcy process, a company must decide to assume or reject its outstanding contracts. The American/Citi agreement had been approved on an interim basis since AMR filed for bankruptcy in November 2011, but in its initial reorganization plans, the airline said it had not made a final decision on whether it would honor the contract.
Citi claims its 2008 agreement with AMR requires it to assume the agreement in the event of a bankruptcy filing and told the court if the contract were rejected, it would be entitled to a multibillion dollar claim that's backed by the assets of American's AAdvantage frequent flier program and other collateral potentially causing the reorganization and merger plans to derail.
"If the Agreements were rejected, the Citibank AAdvantage Program revenues from the Agreements would be lost. These revenues cannot easily be replaced because American currently benefits from a mature, stable and high-quality portfolio of Citibank cardholders," Citi says in its May 24 filing. "The quality and performance of the Citibank AAdvantage Program portfolio is unlikely to be replicated by any replacement credit card issuer for many years, if ever."
In conjunction with the judge's order, AMR submitted a revised reorganization plan that would continue to honor the Citi contract. However, the impact of a decision to make the provisional acceptance of the contract permanent would largely be limited to AMR's emergence from bankruptcy and would not bring resolution to the question of which bank will issue the AAdvantage program-branded affinity credit card after the airline merges with US AirwaysCiti, which has issued the American Airlines card since 1987, or Barclays, the issuer of US Airways' Dividend Miles affinity card. Or perhaps another issuer altogether.
On June 10, American and US Airways announced the executive leadership team of the combined airline, with five of the eight C-level executives coming from US Airways.
The AAdvantage program is the oldest and largest frequent flier program in the U.S. It has 69 million members and issued 167 billion miles in 2011, according to regulatory filings. In 2009, Citibank paid AMR $1 billion to prepurchase AAdvantage miles it awards to its card holders.
After the American/US Airways merger, the combined affinity program will be the largest in the country, with 101 million members, not accounting for overlap between the two current programs, according to American and US Airways estimates.
With such a large base of potential frequent-flier cardholders, the combined airline may choose to maintain affinity card relationships with multiple issuers. While it's an uncommon practice for U.S.-based airlines, Australian-based Qantas Airways has affinity partnerships with 17 different card products and is an oft-cited example of such an arrangement.