According to financial markets, the major U.S. airline most likely to wind up in bankruptcy is American, followed by United.
American’s five-year credit default swaps hit 6,659 basis points, according to IHS Markit data. The price has risen more than 4,000 per cent in the past three months. The market priced swaps for United Airlines at 3,677bp, for Delta Air Lines at 1,212bp, and for Southwest Airlines at 505bp.
American’s debt totals $34bn, well above the $23bn on the balance sheets at both Delta and United, and almost six times as much as Southwest. That reality is driving speculation that American, which filed for Chapter 11 nine years ago, could be headed back to court — what lawyers grimly call “Chapter 22”.
American says they have $10 billion in unencumbered assets excluding the AAdvantage program which they implausibly value between $30 and $40 billion. The loyalty program could be collateral for the $4.8 billion in CARES Act subsidized loans the airline plans to take. And those unencumbered assets aren’t likely worth what they’ve been appraised at, or what they were worth the last time they were marked to market.
United projects $10 billion in cash for the fall including nearly half of that in government-subsidized CARES Act loans. Earlier in the month the airline couldn’t get investors to fund a $2.25 billion bond offering backed by older aircraft at anywhere near the terms United was expecting, and the airline backed out. They may be out of wood to burn.
At this point the big airlines talk about how much cash they have to make it through this year. But that’s not the issue. After $58 billion in subsidies allocated to commercial airlines, airlines will make it through 2020. The question is what happens in 2021,
- How much passenger revenue will they be taking in next year? That’s a function of how many passengers are willing (and able, to the extent we’re still in recession) to fly and also what pricing looks like if everyone is competing vigorously to fill planes with excess capacity.
- How far down can they get their costs, to accommodate a smaller operation?
American reportedly just spent $1 billion on their new corporate campus. That’s hard to downsize, especially in the current corporate real estate market. Union contracts are tough to undo, at least outside of bankruptcy. Equity markets could turn south, causing pensions to become underfunded even with ‘airline relief’ that’s allowed carriers to underfund pensions.
Even if business recovers and cash burn is reduced, airlines will have huge debt burdens and ongoing interest expense that’ll make it challenging for investors to earn a return and there’ll be little margin for additional unplanned challenges. These will be fragile entities on life support, potentially limping along until the next bail out.
If there’s simply less demand for air travel for some time we might expect a return to the bankruptcy court house for some airlines. American and United appear to be the most likely, in that order. That doesn’t mean they go out of business, it just means that equity holders either take a haircut or get wiped out, that debt holders may take a haircut. New money comes in to own and operate the assets.
Remember that American has been in bankruptcy before. Its predecessor US Airways flew through bankruptcy twice. United went through bankruptcy, and its predecessor Continental flew through it twice. Delta and Northwest each went through bankruptcy as well.
Your miles, by the way, are only really at risk in the event of a Chapter 7 liquidation, not merely if an airline faces defaulting on some of its debt.
We could see consolidation in the industry. The current environment makes it possible to obtain anti-trust approval, perhaps, even if there’s a Democrat administration come the fall. At this point it’s tough to see which airline much be an acquirer (no one has cash to spend, and stock prices are depressed making a stock deal tough) though a merger that simply issues new shares to investors in relative proportion to each carrier’s market cap seems possible.