The American Airlines Bankruptcy Scenario

JP Morgan, in an investor note, says American Airlines would have to file for Chapter 11 bankruptcy protection if they get down to $8 billion in cash. The airline has shared its loan covenants require it to retain $2 billion in liquidity, but that’s not the trigger for a filing.

JP Morgan’s Jamie Baker says that at most the airline has another $2-$3 billion in assets they can encumber depending on market sentiment. With everything at the airline already mortgaged they aren’t likely to do well with debtor-in-possession financing and would have to file early enough to manage chapter 11 on their own liquidity.

I think this helps explain why,

  • American Airlines was cheap with its employee voluntary retirement packages, they’d rather conserve cash than reduce future costs. Indeed, the big package they offered was money for healthcare later that employees worried wouldn’t be there if the company went through a restructuring.

  • They furloughed the largest number of employees.

  • Their CEO has been the most forward-facing advocate of a second federal bailout amongst airline CEOs. (Other CEOs have been on board, and have spoken publicly – the won’t turn down billions of dollars – but it’s Parker who’s been on a mission.)

American Airlines has been adamant that they do not wish to file for a strategic bankruptcy. They would only file if forced into it. Parker himself still owns about 2.3 million shares in the company (after selling around $100 million in the airline’s stock when share prices were much higher).

This wouldn’t happen soon, by the way. They’re probably burning about $1 billion a month in cash currently, which is a little higher than expected but revenue forecasts haven’t fully materialized. American is the most vulnerable of the major airlines, but their position is ultimately dictated by whether travel demand recovers enough so that they can stop losing money early enough in 2021.

If American does survive, though, they’ll have higher costs than competitors (with only their most senior employees working flights, since they’ve furloughed less expensive staff) and more debt as well. So they’ll still be likely to underperform the industry. On the other hand, their international exposure is less than Delta’s and especially United’s, so it’s possible that their business could recover a little faster too.

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. Recall Boeing did call out that a major US airline would file bankruptcy. At that time, travel bloggers where crying wolf: no way Jose

  2. Dougie is the CEO with 9 lives. Even if AA dissolves, Dougie will somehow remain in charge. What a damn shame.

  3. You are pure GARBAGE! You didn’t really say anything. “Likely to underperform” then the next sentence “could recover a little faster”…. way to make a call you hack! Stop wasting people’s time and continuously harping on AA. Your the CNN of blogging.
    FAKE NEWS

  4. Sounds like a pro Trump supporter above trumping/beating the fake news drum
    Yawn
    So so sad

  5. The issues of unsuccessful management concepts and failed implementation CEO Parker has created since his management team consumed AA is like “Groundhog Day” in the air. Enough already.

    It is time to ‘cut the rope’ with Parker and his Praetorian Guard of executives, certainly by the U.S. Treasury and Wall Street. How will the market, domestic and international, actually suffer with only 2 legacy carriers, when Jet America and Alaska are already ramping up? And what will it take for AA’s Board to resign before being criminally indicted?

    Given the number of years anticipated to get U.S. legacy carriers traffic/financial numbers back up, that time should be used to constructively purge failed management and concepts to prevent our carriers from failing again in the future; ending up brought together as an Aeroflot of America.

    Funny, even in failure, our legacy carriers have received a significantly higher bailout by the taxpayers than the nation’s railroads that suffered from revenue inadequacy, thanks to the fed’s propensity to to interfere in the marketplace by financing railroads competition by building their infrastructure, removing mail from the rails and giving it to the airlines, financing airports, road access to airports, and air traffic control.

  6. Can someone explain why we need an airline bailout!!!??? There are many businesses that are folding left and right and I truly believe air travel will be rebound once this pandemic dies down. Millennials and Boomers love to travel the in which the former always seem to be on planes anyways. Also AA, DL and UA have had consecutive profitable years for about a decade all while sticking it to loyal, elite flyers… They shouldn’t have bitten the hand that feeded them.

    Also gotta say that I feel bad that people were furloughed at the airlines but I truly dont believe the money should go to the airlines but the workers… We dont need their grubby hands taking extra money.

  7. International travel looks weak including holiday season. Just last weak Turkish slashed their winter schedule and so did several other airlines. Turkish is good because they are still flying to so many places around the globe. Some routes which are still open but selling tickets for pennies on the dollar. With these cancellations, I am now puzzled of how to re-book two international trips because the schedules are too “thin” and I do not want to have an overnight in LHR, ZRH, or JFK. Also, LH a AF could potentially cut the schedule and cancel again. So a routine trip through Europe that should take 18-20 hrs is now only possible for >35-40 hrs.
    Domestically, the schedules are also “thin”. I told AA EXP desk guy who called me about my future travel plans and told him to keep late evening flights from DFW to enable connections but that is not happening. For AA (and also for DL, and UA), “virtual” Thanksgiving and Christmas mean big losses in leisure revenue.

  8. American didnt give a damn about fleecing theit customers with ridiculous fees over the past ten years. LET THEM DIE.

  9. Sad very very sad, But only God bails out the Poor people!! We eat less and travel is only for the rich!! Very true!!

  10. The money they are asking for IS for paying the workers, NOT for the airlines to use for anything else. Most comments all reference the CEOs, which have not made the best decisions it’s true. However what is being asked of congress is to keep the WORKERS paid until the demand can recover after the first quarter March 2021. The WORKERS did not cause the problem with the airline.

  11. @David Johnson – but 90% of the money is to pay people *who will be paid anyway*. The cost of paying people being furloughed is only about 10% of what airlines are demanding from Congress. Do the math…

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