According to the new CFO of American Airlines, they will be making fewer investments over the next decade than was seen before the pandemic. They’ve built up so much debt that interest payments alone will total $2.1 billion this year.
The company is signaling a new era of budgetary restraint is a priority, against the backdrop of higher interest rates, a $12 billion capital-expenditure program through 2027 and big debt payments on the horizon in 2025.
It will also pay $2.1 billion in interest expense in 2023 using current rates and capital structure, according to an analysis by Bloomberg Intelligence. That’s up from about $1 billion in 2019.
Right now they’re flying, selling frequent flyer miles, and earning returns to pay off creditors. While Delta and Southwest have been able to pay down debt aggressively – 23% and 11%, respectively – American has reduced its debt by just 5% after borrowing aggressively during Covid.
Those interest payments are great for debt holders, at high rates of interest, as long as the carrier is able to service the borrowing. But it’s not good for shareholders, and the airline’s spending restraint will eat into “more Wifi, or more comfortable seats” that they could spend for in the words of a Bloomberg distressed debt analyst.
Former CFO Derek Kerr, still the airline’s Vice Chairman, was famously frugal – the carrier’s slow investments in IT are one indication. For years boarding passes didn’t show the correct time that flights would begin boarding, I was told by a high level executive involved, because Kerr wouldn’t sign off on budgeting that would have fixed this.
His replacement Devon May is said to be in the same mold, and indeed is steeped in the America West culture where he started in 2002. May apologizes that there will have to be some capital spending at the airline, due to some “baseline level of growth” but assures that investors “aren’t going to see the fluctuations like you saw pre-pandemic.”
A year ago as Robert Isom took the mantle as American Airlines CEO, replacing once-America West CEO Doug Parker, he implored employees not to spend a dollar they don’t have to. Isom, too, was at Bill Franke’s America West from 1995 to 2000.
At the same time, American will be taking delivery of aircraft they’ve previously ordered – such as Boeing 787s and Airbus A321XLRs. The XLRs and 787-9 variants will feature new business class suites with doors. And they’ll be reconfiguring Boeing 777-300ERs to eliminate Flagship First Class while adding more business class seats, replacing the current seating model pioneered by US Airways 15 years ago with these same business suites.
Credit: American Airlines
Meanwhile the new Admirals Club template, already on display on the E concourse at Washington National airport, is both expensive and gorgeous. It will roll out very slowly, and unsurprising under this model few clubs are currently slated to receive it.
In some sense American Airlines is a stand-in for America, although it’s taking actions on its budget challenges. According to the Congressional Budget Office, interest payments on the federal debt will climb to $739 billion next year and double by 2033 – totaling over $10 trillion in the next decade. It’s one of the biggest spending items, crowds out other investments, and there is little sign of seriously tackling the problem at the political level.
The wrong way to save money is to ‘go cheap’ – doing things like taking the cheapest seats and not investing in even mocking up a test cabin before rolling it out as the domestic standard product. Because that leads to even higher cost, when making mistakes and having to retrofit what they’ve done. This chases away frequent and premium customers.
American is seemingly at a crossroads. Its cost structure requires a revenue premium, and new labor contracts will cost it even more. Without convincing customers to spend more for its products they won’t be profitable. But their CFO is signaling that a high debt level means they need to restrain costs, which risks that revenue. New aircraft aren’t the only capital expense, so are clubs and seats – raising the question of whether Boeing 777-200 or 787-8 aircraft will ever see an improved business class product. American Airlines prepares for austerity, but also needs to spend to grow revenue.
Good point about how the company symbolizes America itself (and actually many other national and local economies). Since the early 1980s the national debt has been growing like crazy, with each party spending and then yelling at the other one to cut back when they exchange political control. (The fact that a lot of spending is on unnecessary military programs whose contractors give massive “campaign contributions” back to Congress is a whole other issue, though that definitely is more profitable than investing in national growth programs like health and education ones.) This system works fine when you can print your own money and get people to buy your bonds with it, but obviously it can not go on forever. Around it goes and where it stops nobody knows. But I think our children and grandchildren will find out.
Unlike the federal government, American cannot print money – and neither can any other private business. AA is doing the right thing IN PRINCIPLE. Of course you can go too far but they have a solid fleet.
The real question for AA is the future of the Northeast Alliance with the expectation that the DOJ and DOT will take on the Spirit/JetBlue merger and w/ a decision on the NEA still pending. AA’s northeast strategy has been erratic and they could be facing another strategic whiplash.
And the good news for AA is that they are moving financially in the right direction but UA is about ready to step in their place; UA has ordered even larger numbers of aircraft delivered over an even shorter period of time. Even with UA’s higher margins than AA at the time of AA’s massive deliveries, UA’s debt and interest expense will soar on top of higher lease costs. AA will look financially competitively better than UA for quite some time.
Uh oh, “…a new era of budgetary restraint is a priority…” sounds like airline executive speak for “Don’t expect much from us.” Has AA’s race to the bottom just begun to accelerate?
Aah, even worse service in the offing then, AA
Note to AA mgmt – allow Gold, PL and PL pro members to get upgraded on award tickets. I’m not pursuing loyalty pts this year without this change.
20+ years later, it’s still just America West in shiny skin.
AA is in a little bit of a pickle. It’s not quite certain what it wants to be when it grows up. In spite of AA’s employee town hall meetings, employees don’t have a sense of where AA is going as a company. Its network strategy decisions are curious. Flight crews don’t have a sense of where AA is going (quite literally) as an airline. And, its ramping down of customer service has left a growing number of its CKs (who account for about 24 percent of airfare revenues) feeling somewhat disaffected. Tim Dunn – in spite of dissatisfied shareholders (who rarely take action), management will simply do what it wants . . . right or wrong.
The AA dumpster fire rages one. One has to wonder if Parker new he was leveraging the hell out of AA and also knew the chicken would not come home to roost until after he was out so it became someone else’s problem.
Agree with @Jim_F that this is AA-speak for expect nothing in the way of improvements and gird your loins for more “enhancements.”
Im not sure why everyone complains about AA onboard service. Ive flown Cathay, Singapore, British Airways (THE worst!)……. AA does a very good job- IMHO.
Their Lounges are plentiful and empty all the time – which seems better than Delta.
I always thank American execs at DFW when I can.
I think its a great product…… amazing schedules, pricing, and service.
Ugh; was just ready to send an email about the lack of meals on flights 700+ miles. Guess those are never coming back.
The AA Clowns who run the show should focus on delivering a solid product. Get people from point A to point B on time with no drama. If they do that people just might trust them enough to buy a ticket.
Guess AA would like to have the $12 billion in wasted stock buybacks from 2014-19 (incredibly, years with negative FCF).
Total debt today would have been a much more manageable ~$20B and not the current ~$30B+ while the annual debt service would be at least $700M lower than the current ~$2B+ annual rate.
The government BETTER NOT bail them out this time.
The re-fleeting of AA as a dangerous risk and now the new AA has to pay for it. I believe however, the improvements in food and operational service, plus the investments coming to the premium product (Flagship Lounges still above what UA has and DL yet to provided) will pay off. Their domestic and SA networks are still the best and they have great OW partners (BA is way better then AF/KLM sorry). UA is going down the same route AA took 15 years ago so they will have a huge debt in the coming years to deal with; DL is going to have to pay to get ride of the 757/767 and old A319/320 fleets so more investment coming from them too, but DL runs a tight ship. Hopefully AA continues with saving; paydown debt and investment in premium product, that can be a winning combination.
Flying is expensive…let us cheapen the experience.
I’ve made this comment before and it bears truth again. Years ago, Dougie Parker and AA management TOLD the employees (basically), “you do what we tell you to do and we’ll make money.” Well, how’s that workin’ out, huh? Management doesn’t trust the employee and the employee doesn’t trust management. The unions play a big part in the downfall as the “…that’s not my job” mentality is widely prevalent at AA. No flexibility in “getting the job done”. I know of one airline that gives EVERY employee an extra $25 per DOT metric met or exceeded. That could be an extra $100 per paycheck. While it might not be much to some, it means a lot to lower paid employees BUT…it gets people motivated to do better. One airline tells employees (basically), do your job within “the box” but if you have to go outside the box…do what’s right. If you have a better way to do your job, let us know. If we adopt your method we’ll pay you a bonus for the savings. With American going downhill fast, it gives better airlines more customers. The vortex is tightening as AA goes down the drain. Buh bye!
You can take the airline out of Tempe, but you can’t take the Tempe out of the airline.
Ah but Captain Freedom, with stock buybacks you can give your top executives options and then make sure they are worth far more than their contractual compensations. This is typical of many corporations and was in fact illegal until Mr. Reagan and his cronies showed up in the early 1980s. Under him and his successors (both parties) plenty of rules that hard experience had created were abandoned, like the Depression Era ones against banks becoming investment houses or seriously enforcing anti-trust legislation. The game has been rigged ever since. Why should AA be any better?
They could shrink seats further
Cut catering costs to one dollar per person in premium cabins
Close lounges
Triple the price of tickets revenue and award
Cut salaries
Make lavatories smaller
Close customer relations as passengers are always wanting something for their failures
Only award miles on the most expensive tickets
American could have locked in low interest rates when they borrowed but they didn’t.
There are certain sectors that are not meant to be profitable companies with shareholders. Airlines should be run as not for profit organizations with only bond holders. One way to encourage bond purchases would be tying a certain purchase amount to free business class travel round trip somewhere.
Smaller airlines have a chance at a profit long term and not to go bankrupt. Same with charter airlines and freight airlines. Over the long run there is no way for shareholders to extract anything of value from big airlines. The fleet costs and constant labor blackmail makes it impossible. These companies are really run for the benefit of management and not shareholders.
Tim Dunn,
Thanks for saying that! It saved me a lot of time.
Just had a couple of first class domestic flights on AA with excellent food, drinks and service. To me, the constant complaints about service on the blogs seen exaggerated. Pricing is my chief concern about AA and I see from the article that this may be a strategy to cope with the high debt. I am ExPlat this year but going free agent for the near future bc of better value for upcoming long haul business class flights on other airlines, e.g booked flights on Air Canada to Taipei and United (!) to Auckland. Also planning to fly AA Prem Economy to Paris and hope for upgrades – business class prices are not competitive with other choices …
borrowing to buy back stock seems to have been an utter disaster. no shock there. shortimer syndrome took over. DP and his clowns won’t be around when the company has to file for bankruptcy yet again.
@ Captain Freedom – totally agree. Borrowing Billions because Debt was cheap will simultaneously buying back Stock completely wrecked their Balance Sheet….before Covid! AA’s Board was asleep at the wheel on that. AA always said for a company their size (Revenue) they could handle it But Revenue does pay done Debt…profit/cash flow does and their Margins were the worst of the Big 4. Now their hands are tied for the next few years…at least. Complete financial mismanagement imho.
It’s already happening.As an EP, I never get acknowledged with a snack or alcoholic beverage. Flew LAX to MIA on Thursday, frenetic flight attendants who didn’t know how to handle buy on board or drinks. Flying back from MIA to LAX now on a 787, marketed as Flagship. There is no food, buy on board or otherwise. #austerity
Heres two that costs them nothing but builds loyalty:
once you achieve Million Miller status give the same gold status ot platinum status to the spouse. United does but American doesn’t
Also if you really want that Loyalty offer lifetime Executive Platinum at 3 Million miles, there is no change in staus once you fly 2 million lifetime miles
a couple of the comments about AA’s financial situation are dated and not accurate based on current financial reports.
In the 4th quarter, AAL reported a double digit operating margin and a 6% net income margin, both some of the highest for AA in a very long time. The fact that AA did that in the 4th quarter which is traditionally not as strong as the summer is remarkable – and an indication that they are reallocating their resources from low-profit to high-profit routes is precisely why AA has finally figured out what it needs to do to turn things around.
I strongly suspect that the reason why AA is making these changes is because there has been enough of an executive reshuffle take place that the assumptions about what AA should do has been thrown out. Some of those same “new” executives do not have high regard for high quality customer service – but let’s be honest that the airline industry is so consolidated that any of the big 4 can do alot in its strength markets that is anti-consumer and get by with it. AA has the most hubs in the strong and growing southern US and also has a strong market share position in those same hubs.
AA simply does not have to be the best at customer service and there will be plenty of people that will pay the prices AA wants.
AA is doing a very good job of paying down debt; the only reason it will take longer is because they started from a place of more debt than other airlines like Delta but also because, while they are generating solid levels of cash in order to pay off debt, it isn’t at the level of Delta or Southwest.
The notion that AA is a weak financial cripple is dated and inaccurate
Austerity will result in cost cutting and higher executive bonuses offsetting austerity
I’m not sure the people commenting read the article (linked) or understand cost of debt and what they’re implying in the article. Specific of their austerity are not mentioned but they do mention the cost of new planes as an exceptional driver of their debt. For those that don’t know they just spent 9 figures on campus upgrades and private hotel; perhaps they’re cutting back on spend unrelated to flyer benefits, this would be a wise approach and then after deleveraging allow them to borrow money again at lower costs.
Good article, taken out of context it could mean many different things.
OH GARY…
MORE GLOOM AND DOOM FROM.
DISCUSS DELTAS OLD,ANCIENT FLEET.
DELTA PICKED UP USAIR ORDERS ON THE A350’S
WHEN THEY MERGED WITH AA. THEY KEPT AA’S 787 ORDER.
GOOD CHOICE.
AA NEGOTIATED VERY GOOD TERMS FOR THOSE LOANS.
WHICH GAVE AA THE YOUNGEST FLEET, NEW STATE OF THE ART TRAINING FACILITIES, THE BEST IN THE INDUSTRY!
NOT TO MENTION AA COMPLETELY UPDATING WIDEBODY FLEET.
NOW DELTA AND UNITED WILL HAVE HIGHER DEBT AND LESS FAVORABLE TRRMS.
DELTA BETTER PUT THE PECAN PIE BACK ON THOSE PLANES!
JOHN LUFFRED,
you do realize that United actually has the oldest fleet among US airlines, don’t you?
Do you also realize that Delta spends less on aircraft fuel and maintenance than American or United and has higher fuel efficiency than both? Tell us what you think American’s newer fleet has gotten it other than a lot more debt.
American has NEVER demonstrated to investors that its young fleet actually saves it money – because it doesn’t.
And AA can refurbish the cabins of its 777s but the AA 777-200ER fleet is still the oldest at 22 years of age, the oldest among any AA fleet type, and also the least fuel efficient in the US carrier fleet. The only advantage that AA has is that its 777-200ER fleet is a fraction of the size of United’s.
And the reason why American is in a position to dramatically cut its fleet spending is because it has such a young fleet. AA is planning to take delivery of just 23 new aircraft this year and 39 next year, by far the lowest numbers of the big 4 and also some of the lowest the largest US airlines have ever taken.
Gary gave actually very few details about AA’s austerity plan but the largest piece is that it is simply cutting its spending on fleet to ridiculously low levels – and using the cash it saves to pay down debt.
Gary also did not tell you that United spent $1.8 billion on interest expense in 2022, not a whole lot behind American. Given that United is going to take over 140 new aircraft (assuming that Boeing gets its act together), it doesn’t take rocket science to realize that United will far surpass what American is spending now on interest expense.
so, no, let’s talk about what matters which is American’s austerity plan. Regardless of the discussion that has taken place, no one yet has said what it entails, including Gary.
American continues to do stupid stuff and wonder why it doesn’t work. For example, they just laid off 200 Sales team managers/ members and continue to actively recruit elsewhere instead of just giving them some training and transferring them to various vacant roles.
AA is following the former CO method. Cut all expenses till profitability returns. Look how that played out pre- Bethune @ CO.
Source of AA layoff? my roommate who signed the NDA in order to get his severance. F’ed up, right?
@Gary- go reach out to your Sales sources… they’ll confirm it.
It’s time to get rid of the olives again!
AA is doing a great job operating on time, they’ve implemented some extremely customer-friendly policies, they’re making billions, and everyone’s a critic. No one should be surprised..
Nah, I don’t think so
I feel sorry for anyone who has to fly on any airline from the United States. Asian and Middle Eastern airlines crush US carriers in every aspect of the flying experience.
This explains why our compensation package will be “under review” until we rot. Yes, it work for AA, and yes I stopped believing that AA cares for people along life’s journey long ago. I passed up an attractive buyout during Covid – believing that if I did my part to help AA weather the storm it would be worth it. Senior management (they will never deserve to be called leadership) doesn’t care about anything but profitability for themselves and shareholders and on time departures. Why they can’t see that our customers care about on time arrivals, customer service and price is beyond me. They used to preach about Elevating our customers but they don’t even bother anymore. Morale is so low we just show up and try to make it through the day. It’s heartbreaking. I don’t know how much longer I can do this. And sadly, AA has a hard time hiring people to do my job so New Hires make more than I do. But they just don’t care…. It’s mind boggling. Austerity indeed. In oh so many ways….
Mikey,
I get your frustration but it sounds like you are in a management/non-union role – otherwise your salary would not be up for review. AA has always swung from one extreme to the other with its management pay.
As for operational reliability, do you know that DOT data shows that AA is statistically right in the middle of the pack among US airlines in most metrics – below Delta but pretty close to United in most metrics – but well above the low cost and ultra low cost carriers? DO you also know that JBLU is consistently one of the worst in operational performance – and yet AA has hitched its wagon to JBLU?
AA is clearly shifting its focus to getting its frontline workers’ pay to best in class – which right now is being established by Delta – but AA is further ahead in that process than UA.
The grass is always greener somewhere else.
There goes Tim Dunn again schooling people like he knows all. I happen to not be in a management role, not union, and I interact with customers every day. My role has a huge impact on whether or not our customers choose to fly with us again. AA still doesn’t seem to give a flying fig whether I have the tools I need to give to do my job or am adequately compensated. My direct leaders are great. Senior management…. I have lost any respect I ever had, including for Parker.
Mikey,
you said your compensation package is under review. Either you are a unionized employee, work under a CBA, and your union is negotiating for you or you are 1. either a management employee or one of the fairly small number of non-union, non-mgmt employees. Feel free to let us know where you fit in that description other than for FAs w/ which the company is negotiating.
As for the tools you have, that is not necessarily negotiated but AA does deliver a product reasonably in line w/ its competitors and/or what mgmt chooses to deliver. If you have been w/ AA any length of time, then you either know what you can do with the tools you have or you are new enough that you can walk away and start over. There are very, very few employees at any company that consistently say mgmt gives them all of the tools they need to do their job.
You can like or not like your senior mgmt but your logic defies explanation at this point.
“Steeped in America West culture“ tells you everything you need to know. Over their collective heads on how to run a legacy carrier. Sad state of affairs.
Look for a bankruptcy soon. Just in time for negotiations. It’s the AA way.
Look for bankruptcy soon! Mostly around the time of negotiations! It’s the AA way!
Why is my comment not being posted???
Look towards an AA bankruptcy as soon as negations are getting finalized.
It’s the AA way!
Bankruptcy soon! Keep a watch on negations!
Typical AA
Usairways should have never merged.
Should have let AA sink!