Which U.S. Airlines Are Most Likely To Wind Up In Bankruptcy?

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.

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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  1. @ Gary — It seems to me that the Big 3 US legacy carriers should all file Chanter “22.” After all, if AA and UA file, wouldn’t that leave DL at a disadvantage? Perhaps, AS, B6, WN, etc. should join in as well?

  2. Ouch! That’s going to be a hard hit for those of us with lots of AA miles stashed. Any suggestions?

  3. The AAdvantage program is a liability and not an asset if you count the cost of the Miles because they can be exchanged for seats with little or no revenue to AA.

  4. Please AA, don’t go bankrupt before I get a chance to sue you for the theft of my miles. After that, by all means.

  5. Maybe this will rid us of Parker. Worst part of all this is Alaska’s partnering with AA, maybe Alaska Air will take them over !!!

    When articles like this are published and republished they tend to gain momentum rightfully or not. Of Calhoun’s irresponsible comments have not helped the airline stocks he should be censored by his board for those stupid remarks. Boeing of all companies.

  6. @WR2 – for such an avowed Republican capitalist, who spits on anything that has a hint of socialism, quite surprised you have an issue as this seems like this is “survival of the fittest” capitalism at its finest. LOL. Maybe NOW you’d like the government to pick winners and losers?

  7. If AAdvantage miles went away would anybody (other than DFW captive) fly with them and trust any program they ever had from then on? I think the miles only go away if the airline itself goes away. The AAdvantage program has been a moneymaker, and they can limit program seat availability to avoid any revenue seats being taken.

  8. The FT article quoted here said that American is the most likely to go bankrupt because AA had $34 billion debt compared to $23 billion debt of United and Delta.
    It also said that AA had chosen to do $13 billion in share buybacks instead of paying down their debt.
    So the extra $11 billion in debt that threatens AA was was entirely the result of share buybacks. Which incidently increase management’s income.
    Go figure.

  9. @Henry M Gehman – which is why the board needs to show Doug Parker (and probably other executives) the door ASAP. For sacrificing AA’s future for their own gains.

  10. I can’t imagine the Big Three involved in any sort of merger involving each other. I could though see B6 and AS. Or AA and AS as a possibility.

    It’s going to be interesting in the fall.

  11. So union inflexibility is the culprit as it always is with airlines. Let the airlines fire 100% of their non management employees. A union contract is null and void if there are no employees. They can rehire them for 60% of what they were making and they would still be overpaid given the poor service performance rating of the Big 3 flight attendants. With hundreds of thousands of flight attendants looking for jobs, now is the time to finally get fair contracts.

  12. Far too many unknowns at this point, and my crystal ball is not that strong. American is the weakest (in all ways as they are my carrier of last resort). United, Delta, SouthWest and hopefully Jet Blue all survive. As I fly often to South and Central America, I hope COPA airlines from Panama comes thru all this as they are a good carrier going to everywhere I go down there.

  13. @Jackson Waterson/Wayerson/Aimson/Hutson – why do you always change your last name every time you post? Poor form to try and represent different people to amplify the same POV…may want to change the first name from time to time too, it’s a straight giveaway, it’s very Russian Troll Farm. LOL.

  14. @WR2, nice try. but technically you don’t own any of your miles. read the fine print next time you enroll in a “loyalty program”

  15. @UA-NYC

    I randomly enter whatever name and email come to mind to comment. It’s not something I have an inclination to think about on a travel blog. You sound like you are working for the Chinese government cross linking comments for their social credit system.

  16. The reading comprehension of the commenters, is very poor. I’ll leave it at that.

Comments are closed.