American Airlines has an increased likelihood of filing for bankruptcy due to market conditions and management decisions; One more risk for those who hold shares of American Airlines.
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American Airlines’ risk of bankruptcy increases
Despite sky-high prices, fewer flights, and seemingly no sense of customer retribution for poor service, airlines in the United States may be providing poor service, but should be making money. Yes, there are record fuel prices and nosebleed inflation, but using the government-stated rate of 9.1%, airfares that register at 38% more than the levels of before the pandemic should definitely mean airlines making more money, right?
But they are not.
Make no mistake, American Airlines earned half a billion dollars in Q2 2022 and continued to pay down debt. But that’s just not enough.
The alarming statistic that has everyone from financial insiders to casual travelers questioning the future of business is one particular line. The airline reports assets of $65 billion and liabilities of $75 billion. It is – by definition – insolvent today, at this time. American Airlines Group, a holding company that handles the management and operations of the network carrier, may be able to make enough money to offset this lopsided balance sheet, but on paper it is currently insolvent.
The Fort Worth-based carrier could catch up on debt and grow its assets, but there are several reasons why that seems increasingly unlikely.
Huge debt load
To give context and magnitude to the airline’s indebtedness ($75 billion), we can focus just on how the carrier is upside down (more liabilities than assets). No other US carrier is upside down right now, not by a billion, not by a million, not by $1. American Airlines is upside down at $10 billion.
How much is it? Here’s a fun scaling exercise: if Frontier and Spirit were to combine, they would form the fifth largest carrier in the United States, which is the largest airline market in the world. But for the amount that American Airlines is upside, not only could you have Frontier and Spirit Airlines, but you could also add JetBlue and Allegiant. Or it could be Alaska, JetBlue and Spirit altogether. The only upside debt would be the 1300th largest company in the world by market capitalization or the entire InterContinental Hotels Group (IHG.)
The real problem with this mountain of debt is that refinancing is going to be a problem and interest rates are going up. Instead of decreasing payments, they will increase and it will hurt even if the company pays off the existing debt, their income has not increased enough to overcome this.
Turned most of his levers
A problem for American that other carriers don’t face is that American Airlines has already activated most of the levers possible to shore up its liquidity and reduce the risk of default on its loans. He mortgaged the loyalty program all the way, he already took all the money the government is going to give (or so we can hope), he retired less fuel efficient planes, canceled (therefore consolidated ) flights, and has not made payments on their 787 order because Boeing remains unable to deliver.
Labor costs are increasing (more on this shortly), the airline does not cover fuel, so even in a situation where fuel was to increase significantly, there is no strategic advantage over other carriers and competition (United and Delta) do not cover either.
The carrier has no new co-brand deal coming up with Barclays or Citi, and even if they struck a deal selling miles at low prices to add cash to the balance sheet, that wouldn’t be enough. Delta struck a billion dollar deal with American Express for its co-branded card, but even if American was able to close it and raise it, the banks would spread it over time and it wouldn’t come close. a level that covers new inflated costs. .
American offered a 17% raise for pilots and if we know anything about American’s sordid history with its group of flight attendants, those frontline workers won’t continue to work under current conditions. Labor relations are constantly strained, but labor costs are expected to rise, further exacerbating America’s dire financial situation.
Pick a problem, any problem. Let’s assume for a moment that the market does not enter a recession when the Q2 2022 figures are released and assume that the economy has grown slightly. Business travelers have yet to return in droves to ferry the airline through the traditionally slower fall months ahead. Vacationers will fall off a cliff after Labor Day. So even assuming the economy grows the way it didn’t in the first quarter of 2022, there will be fewer travelers, lower airfares, and higher interest rates.
American Airlines not only ran up the most debt of any airline in the United States before the pandemic, but it leaned directly into that position throughout the pandemic and did little to address it. the problem after the money started flowing into the airline. JetBlue, for its sins, repaid its loan as soon as possible.
A market analyst regularly assesses the probability of stockouts. Here are the other bankruptcy risk probabilities among US carriers:
- Delta Airlines – 38%
- JetBlue – 48%
- South West Airlines – 27%
- Alaska Airlines – 40%
- Spirit Airlines – 43%*
- United Airlines – 52%
Wait, United have a higher risk? Why is this article not about United? Thank you for this rhetorical question, here is the answer. United still have levers to pull, their debt percentage is lower and labor relations are generally better. JetBlue would be another valid concern, especially given its latest quarterly revenue, but there’s a chance they’ll be able to grab pilots and gear where no other carrier can, and they have very little debt and owe the taxpayers of the COVID loans nothing because they paid them. return.
Spirit is also a misleading stat as they don’t have one but two viable options on the table right now, both of which would strengthen his position.
American Airlines management has straddled one of the world’s largest carriers with bloated debt for the better part of a decade. The airline was in a much better financial position when it filed for bankruptcy just over a decade ago. While bankruptcy protections in the United States will prevent American Airlines from truly failing, these deplorable decisions and management strategies have already disappointed customers, employees and shareholders.