Unresolved issues surrounding American Airlines' contract with Citibank to issue its co-branded frequent flier mileage credit card threaten to derail the bankrupt airline's efforts to reorganize and merge with US Airways, according to court documents Citi filed on May 24.
Since American Airlines parent company AMR Corp. filed for bankruptcy in November 2011, the contract with Citibank to operate the Citibank AAdvantage Program has remained in effect on an interim basis. In a motion filed with a federal bankruptcy court in New York, Citibank requested that the judge overseeing the case require American to make a final decision to continue to honor the contract.
"Were the Agreements to be rejected, Citibank would have a multibillion dollar claim secured by some of the Debtors' most valuable assets, including virtually the entirety of the AAdvantage Program itself," Citibank says in its filing.
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 Airways—Citi, 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.
"It is also possible that the Debtors and Citibank could agree to modifications of the existing Agreements that the Debtors would then assume under the provisions of the Bankruptcy Code," reads the reorganization proposal that AMR has submitted to the court for approval.
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 that are awarded to its card holders.
After the American/US Airways merger, the AAdvantage program stands to grow larger with the addition of US Airways' approximately 30 million Dividend Miles members, though consumers who have accounts with both programs will create some overlap.
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.
AMR said in its legal filings that it has not made a final decision on whether it will continue to honor the Citi contract. But it acknowledges that rejecting the Citi contract would require it to address financial claims tied to the agreement. Assuming the contract would continue the agreement under its existing terms, it said.
As part of the bankruptcy process, a company must decide to assume or reject its outstanding contracts. Citi claims its 2008 agreement with AMR requires it to assume the contract in the event of a bankruptcy filing.
The contract is secured by American's frequent flier program, which in 2007 was valued at $4 billion by FL Group, an institutional investor that, at the time, held an 8.25% stake in AMR. The contract is also secured by American's rights to operate at certain airports and certain routes, valued at $2.58 billion, according to court documents.
If the card contract is rejected, Citi claims it would have the rights to those assets, which would limit AMR's ability to pay other creditors and affect its future operations.
"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 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."
Citi also warned that if AMR does not assume the agreement, its claims to the AAdvantage program and flight operating rights could preclude those assets from being transferred to the entity produced by the proposed US Airways merger.
"In short, Citibank is secured by collateral and licenses worth billions of dollars and without which American cannot operate its business in its current form," its filing reads.
"Furthermore, if previous airline mergers are any indication, it will be vital for American to maintain the loyalty and goodwill of its customers during the potentially turbulent time as it seeks to effectuate the Merger Agreement," the Citi filing adds. "Disruption to the AAdvantage Program could imperil the viability of the reorganized Debtors to the detriment of all parties in interest."
In an emailed statement, Citi spokeswoman Emily Collins downplayed the filing as a procedural requirement.
"Today's filings are simply a necessary step required by the current status of the bankruptcy case. Our partners are aware of the filings. Our relationship with American Airlines has been a source of great value and pride to Citi for over 25 years," the statement reads.
"We continue to negotiate the terms of our relationship and we expect to continue working with American to service our shared customers," it continues. "Most importantly, there is absolutely no impact to Citi/AAdvantage cardmembers as a result of today's filing."
In a separate emailed statement, American Airlines communications director Stacey Frantz echoed the sentiment.
"There is no impact to Citi/AAdvantage card members as a result of today's filing, which is nothing more than another step in the restructuring process," the statement reads.