Is American Airlines Still At Risk Of Bankruptcy?

Veteran airline reporter Ted Reed writes at Forbes that now that we’ve reached the end of 2020, “American Bankruptcy Chatter Turned Out To Be Nonsense.”

He points out that their stock has fallen more than most other airlines, but they’ve avoided bankruptcy, and chalks up chatter about the risk of Chapter 11 to Boeing’s CEO publicly stating one U.S. carrier would make its way to the courthouse this year. However, he says, that since “American projects it will have more than $14 billion in liquidity at year-end” all talk of bankruptcy “came to be recognized as nonsense.”

Reed’s claim of nonsense, though, is itself nonsense. There’s still risk of a bankruptcy filing, 2020’s end doesn’t change that, and though it hasn’t happened yet discussions about the risk were never farfetched.

First, multiple rounds of government bailouts, injecting billions into the airline, makes a difference. Reed doesn’t mention subsidies even once in his piece.

  • The first payroll support program injected $5,814,516,440 into American Airlines, covering most of their payroll for the year (not just employees who were at risk of layoff or furlough).

  • The CARES Act subsidized loan program made $7.5 billion available to American, backed by the AAdvantage program.

  • The CARES Act also suspended airline ticket taxes for the year.

  • Now a second payroll support program will make an additional $3.5 billion available to American, and all they’ll have to do is pay about 18,000 for four months (most of whom won’t be asked to work).

Second, the argument was never that American would enter bankruptcy in 2020. Credit default swaps for the airline’s unsecured debt were pricing in 80%+ likelihood of default within 5 years.

With American’s debt load approaching $50 billion they’re still a bankruptcy risk. It won’t come right away, they have $14 billion in pro forma liquidity and will be getting more from this most recent bailout. Travel should recover in the back half of 2021.

The argument wasn’t that American would run out of cash during the pandemic. It was that American, which already financially underperformed the industry, was in an even worse place going forward relative to competitors.

  • More debt, and more debt service costs. It therefore needs to generate more of a revenue premium just to be even.

  • Higher trip costs, airlines like Delta and Southwest were more successful in reducing future employment costs with buyouts while American is staffed largely by its most senior crewmmebers earning the most money possible on each trip.

American is at a cost disadvantage relative to the industry. Management won’t want to seek a strategic restructuring. Chairman and CEO Doug Parker owns approximately 2.4 million shares of the airline’s stock. However American remains at greater risk of bankruptcy than rivals, that hasn’t ended with the close of 2020 (though vaccines improve the carrier’s prospects), and talk of bankruptcy risk certainly hasn’t been “nonsense.”

About Gary Leff

Gary Leff is one of the foremost experts in the field of miles, points, and frequent business travel - a topic he has covered since 2002. Co-founder of frequent flyer community InsideFlyer.com, emcee of the Freddie Awards, and named one of the "World's Top Travel Experts" by Conde' Nast Traveler (2010-Present) Gary has been a guest on most major news media, profiled in several top print publications, and published broadly on the topic of consumer loyalty. More About Gary »

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Comments

  1. They won’t enter bankruptcy “yet” but they do need to time it with Delta and United this time around.

  2. Gary,
    To someone who is not so knowledgeable about corporate bankruptcies, could you please explain to me the significance of your statement: “ Chairman and CEO Doug Parker owns approximately 2.4 million shares of the airline’s stock”. Does this mean that the personal interests/finances of the CEO influence decisions about bankruptcy?
    Thanks

  3. I’d like to see Ted Reed’s 2020 W-2 to see how much AA paid him for his beyond obvious pro-AA bias. His reporting has really lost touch with reality.

  4. @Franicsco – Yes that basically his point. Bankruptcy wipes out the value of the stock which American has been juicing up the last several years by borrowing money at cheap rates then buying back the stock thus pushing the price up. So the thought is the CEO will try to avoid bankruptcy at all costs due to his level of ownership of said stock.

  5. Based on your concern about American Airlines declaring bankruptcy, do you still recommend that we place money in a Bask Bank account to earn AAdvantage miles?

  6. @BklynProf – chapter 11 bankruptcy isn’t a risk to miles in my opinion (and wasn’t when American went through restructuring last decade, nor for Continental/United/Delta/Northwest/US Airways)

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