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Analyst: The probability of American Airlines bankruptcy increases

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American Airlines has an increased likelihood of filing for bankruptcy due to market conditions and management decisions; Another risk for those who own shares in American Airlines.


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The risk of bankruptcy of American Airlines is growing

Despite sky-high prices, fewer flights, and seemingly no sense of customer retribution for poor service, airlines in the United States may provide poor service but must rake in the cash. Yes, there are record high fuel prices and breakneck inflation, but if you use the government-reported 9.1% rate, then surely airfare, which is registering 38% higher than before the pandemic, must mean that airlines are making more money. , right?

But it is not.

Make no mistake, American Airlines made half a billion dollars in the second quarter of 2022 and continued to pay its debts. But this is simply not enough.

The alarming statistic that has everyone from financial insiders to casual travelers wondering about the future of business is one particular line. The airline reports assets of $65 billion and liabilities of $75 billion. He is – by definition – insolvent today, right now. American Airlines Group, the holding company that manages and operates the network carrier, could make enough money to offset this uneven balance sheet, but on paper it is currently insolvent.

Leading factors

The Fort Worth carrier could pay off its debt and increase its assets, but there are several reasons why that seems less and less likely.

Huge debt load

To give some context and the scale of the airline’s debt load ($75 billion), we can only focus on how flipped the carrier is (more liabilities than assets). not a million, not a dollar. American Airlines flipped $10 billion.

Just how much is it? Here’s a fun scaling exercise: if Frontier and Spirit team up, they’ll be the fifth largest carrier in the US, which is the world’s largest air travel market. But for just the amount American Airlines is flipped over, you can not only have Frontier and Spirit Airlines, but JetBlue and Allegiant. Or it could be Alaska, JetBlue and Spirit combined. Simply reversed debt would be the 1300th largest company in the world by market capitalization, or the entire InterContinental Hotels Group (IHG).

The point is made.

The real problem with this mountain of debt is that refinancing will be a problem and interest rates are going up. Instead of shrinking payments, they will rise, and it hurts that even if the company pays off existing debt, their revenue hasn’t grown enough to overcome that.

turned most of its levers

The problem for American, which other carriers don’t face, is that American Airlines has already deployed most of the leverage it could use to strengthen cash and reduce the risk of default on its loans. He’s completely mortgaged the loyalty program, he’s already taken all the money the government is going to give (or at least we can hope), he’s written off less fuel-efficient planes, canceled (thus consolidated) flights, and doesn’t have to make payments on their order. 787s because Boeing still can’t deliver them.

Labor costs are rising (more on that in a moment), the airline does not hedge fuel, so even in a situation where fuel rises sharply, it does not have a strategic advantage over other carriers, and competitors (United and Delta) do not hedge either.

The carrier doesn’t have a new joint deal with either Barclays or Citi anytime soon, and even if they offer a cheap mileage deal to add some cash to the balance sheet, it won’t be enough. Delta did a $1 billion deal with American Express for its co-branded card, but even if American were able to close that and raise it, the banks would spread it out over time and it wouldn’t come close to a level that covers the new inflated costs. .

Labor Relations

American has offered a 17 percent raise for pilots, and if we know anything about America’s sordid history with its group of flight attendants, those frontline employees will not continue marching under the current conditions. Labor relations are constantly strained, but the cost of labor will rise, which will further exacerbate the financial plight of the American.

Market conditions

Pick a problem, any problem. Let’s assume for a moment that the market won’t go into recession when the Q2 2022 data is released and assume the economy has grown a bit. Business travelers have yet to return en masse to guide the airline through the traditionally slower autumn months that are coming soon. Vacationers will fall off the cliff after Labor Day. So even assuming the economy grows in a way that it didn’t in the first quarter of 2022, there will be fewer travelers, lower airfares and higher interest rates.

Avalanche of pride

Not only did American Airlines accumulate the largest debt of any U.S. airline before the pandemic, it stuck to that stance throughout the pandemic and did little to address the problem after the airline began to pour in cash. JetBlue returned the loan for its sins at the first opportunity.

One market analyst regularly assesses the likelihood of stocks failing. Here are other bankruptcy risk probabilities among US carriers:

  • Delta Air Lines – 38%
  • JetBlue – 48%
  • Southwest Airlines – 27%
  • Alaska Airlines – 40%
  • Spirit Airlines – 43%*
  • United Airlines – 52%

Wait, United have a higher risk? Why is this article not about United? Thanks for the rhetorical question, here’s the answer. United still has leverage, its debt percentage is lower, and labor relations are generally better. JetBlue would be another big problem, especially given its latest quarterly earnings, but there’s a chance they can grab pilots and equipment when no other carrier can, and they have very little debt and don’t owe taxpayers anything on to COVID loans as they paid them. back.

Spirit is also a misleading stat because he currently has not one, but two viable options, both of which will solidify his position.

Conclusion

American Airlines’ management has been battling one of the world’s largest carriers with prohibitively large debt obligations for the better part of a decade. The airline was in a much better financial position when it effectively filed for bankruptcy just over a decade ago. While bankruptcy protection in the United States will prevent a true collapse of American Airlines, these deplorable management decisions and strategies have already failed customers, employees, and shareholders.

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