American Airlines has an increased likelihood of filing for bankruptcy due to market conditions and management decisions; One more risk for those who hold American Airlines stock.
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American Airlines Bankruptcy Risk Growing
Despite sky-high prices, fewer flights, and seemingly no sense of customer retribution for poor service, airlines in the United States may be delivering bad service but should be raking in the cash. Yes there are record-high fuel prices and nosebleed inflation, but using the government-reported rate of 9.1%, certainly airfare that registers at 38% higher than pre-pandemic levels should mean airlines are making more money, right?
But they are not.
Make no mistake, American Airlines made half a billion dollars in the second quarter of 2022, and continued to pay down debt. But it’s simply not enough.
The alarming stat that has everyone from financial insiders to casual travelers questioning the future of the business is one particular line. The airline reports assets of $65 billion and liabilities of $75 billion. It is – by definition – insolvent today, right now. American Airlines Group, a holding company which engages in the management and operations of the network carrier may be able to make enough money to offset that lopsided balance sheet but on paper, it’s currently insolvent.
The Fort Worth-based carrier could catch up to its debt and grow its assets but there are a few reasons why that seems less and less likely.
Huge Debt Load
To give some context and scale to the airline’s debt load ($75 billion), we can focus just on how upside down the carrier is (more liability than assets.) No other US carrier is upside down at the moment, not by a billion, not by a million, not by $1. American Airlines is upside down by $10 billion.
Just how much is that? Here’s a fun scaling exercise: If Frontier and Spirit were to combine they would make the fifth largest carrier in the US which is the largest air market in the world. But for just the amount that American Airlines is upside down by, not only could you have Frontier and Spirit Airlines, but you could throw in JetBlue and Allegiant too. Or it could be Alaska, JetBlue, and Spirit altogether. Just the upside-down debt would be the 1300th largest company in the world by market cap or all of InterContinental Hotels Group (IHG.)
The real problem with that mountain of debt is that refinancing is going to be a problem and interest rates are rising. Instead of payments decreasing, they will rise and that is going to hurt even as the company pays existing debt down, their revenue has not risen enough to overcome this.
Turned Most Of Its Levers
A problem for American that other carriers don’t face is that American Airlines has already turned most of the levers it can to shore up cash, and lower the risk of default on its loans. It’s mortgaged the loyalty program to the hilt, it’s already taken all the money the government is going to give (or at least we can hope), it’s retired less fuel-efficient aircraft, cancelled (thus consolidated) flights, and doesn’t have to make payments on their order of 787s because Boeing remains unable to deliver.
Labor costs are going up (more on that shortly), the airline doesn’t hedge fuel so even in a situation where fuel were to dramatically rise, there’s no strategic advantage over other carriers and the competition (United and Delta) don’t hedge either.
The carrier doesn’t have a new co-brand deal coming up any time soon with either Barclays nor Citi, and even if they moved up a deal selling miles cheap to add some money to the balance sheet, it wouldn’t be enough. Delta closed a $1 billion deal with American Express for its co-brand card, but even if American was able to close that and move it up, the banks would distribute that over time and it wouldn’t approach a level that covers new inflated costs.
American has proposed a 17% raise for pilots and if we know anything about American’s sordid history with its flight attendant group, those battlefront employees won’t continue to march on under the current conditions. Labor relations are constantly strained, but labor costs are set to rise, further compounding American’s dire financial position.
Pick a problem, any problem. Let’s assume for a moment that the market does not enter a recession when Q2 2022 numbers are released and let’s assume the economy grew a little. Business travelers have not returned en masse yet to carry the airline through the traditionally slower fall months coming soon. Leisure travelers will fall off a cliff after Labor Day. So even assuming the economy grows as it did not in Q1 2022, there will be fewer travelers, lower airfares, and higher interest rates.
Avalanche of Hubris
American Airlines not only amassed the most debt of all airlines in the US before the pandemic, but it leaned right into that position throughout the pandemic and did little to address the problem after cash started to flow into the airline. JetBlue, for its sins, paid back its loan at its earliest convenience.
One market analyst regularly assesses stock failure probability. Here are the other probabilities for bankruptcy risk among US carriers:
- Delta Air Lines – 38%
- JetBlue – 48%
- Southwest Airlines – 27%
- Alaska Airlines – 40%
- Spirit Airlines – 43%*
- United Airlines – 52%
Wait, United has a higher risk? Why isn’t this article about United? Thank you for that rhetorical question, here’s the answer. United still has levers to turn, its debt is lower as a percentage, and labor relations are generally better. JetBlue would be another valid concern especially given its last quarterly earnings, but there’s a chance they are able to grab pilots and equipment when no other carrier can, and they hold very little debt and owe the taxpayers nothing from COVID loans as they have paid them back.
Spirit is also a misleading stat because they have not one but two viable options on the table currently, both of which would strengthen its position.
American Airlines management has been straddling one of the world’s largest carriers with oversized debt obligations for the better part of a decade. The airline was in a far better financial position when it actually filed for bankruptcy a little more than a decade ago. While bankruptcy protections in the United States will prevent American Airlines from truly failing, these deplorable management decisions and strategies have failed the customers, the employees, and stock holders already.
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