American Airlines Could Face Chapter 11 Bankruptcy

Three successive rounds of taxpayer bailouts and the recovery of the airline industry should be good news for American Airlines, as it is for other U.S. carriers. However American remains in a more precarious financial position than its competitors and has less maneuvering room than other airlines do facing the headwinds that are on the horizon for the industry.

American’s financial statements show liabilities that are greater than their assets. Liabilities on their second quarter balance sheet total $76.4 billion and assets of $68 billion. No other major airline is underwater in this way, and they face four major challenges that could make things worse:

  1. Interest rates are rising. American has the most debt of any airline. As the debt matures and they need to roll it over, interest expense will rise. They’re already making $2 billion per year in interest payments, and outstanding debt will be getting more expensive. They’re in a race against time to make money now in order to pay off debt before it becomes unsustainable. Whether they can keep making money depends on factors largely outside of their immediate control.

  2. Labor costs are rising. They’re in contract negotiations with their pilots and already publicly offered a 17% raise, and the union was unimpressed (though United’s pilot union pulled its endorsement of a recently-negotiated contract on the news).

  3. Fuel is an open question. Does we stay at $100 oil? Historically $100 oil has been challenging for airlines. The recent fare environment has supported it. Will it continue to?

  4. Recession is looming. That could hit demand hard. And demand will already fall in the fall – it always does, though usually the end of summer travel gets replaced by an upswing in business travel. That’s unlikely to happen in full force in 2022, with not everyone (especially in big cities) back in office and many companies not having fully restored their travel budgets this year. During the second quarter earnings call Vasu Raja reported corporate managed travel recovered to 70% – 75% of pre-pandemic levels.

Even after about $10 billion in direct taxpayer cash, and $5 billion in subsidized loans, American Airlines could wind up in chapter 11 reorganization. It remains the most vulnerable major airline. A recession combined with higher interest rates could both drive costs and sap revenue that the carrier needs to service its debt.

Regardless, American’s prospects for improving its balance sheet are limited, which suggests that it will continue to financially underperform the industry, since it will have higher debt servicing costs than competitors.

They are a high cost airline. They’re moving the needle on revenue generation with the loyalty program, selling status-qualifying miles to partners at a premium compared to how they’ve priced redeemable miles. To further generate revenue they can’t operate as an ultra low cost carrier with low fares. They need to offer a product that customers are willing to pay a premium for – generating higher margins. Even now, with the airline profitable, their margins haven’t recovered. That has to change. The question is how much time they have to make that happen.

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, 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. Time to let American fail. Stop bailing these airlines out on the taxpayer dime. They bought back billions in stock during the Covid shutdown, and spent more on stock buybacks prior to Covid (from 2014-2020) than on employee salaries. American dies and the rest will figure out how to provide better service really, really fast. Worst case there will be room for new airlines.

  2. I don’t want AA to fail. I finally achieved lifetime status with an airline (only Gold), but for selfish reasons I don’t want that to go away. Is that wrong?

  3. They also have huge demand and should take advantage of that. If they don’t it’s their own fault.

  4. People they won’t “fail”. Almost all the major airlines have been in bankruptcy. If AA files they will get rid of some lease obligations, likely walk away from some pension requirements and keep flying.

    Gary – you know this so why post an article that acts like they will go out of business instead of, worst case, reorganizing yet again under a Chapter 11 filing?

  5. @Babblespeak – you are completely misinformed. They did not buy back any stock during Covid, in fact they were banned from buying back stock and for a defined period thereafter.

  6. Maybe DFW will turn into a non-hub city with more choices than AA. That would be great!

  7. Big surprise. I remain grateful that I’ve never had to fly on American Airlines except once after they acquired TWA and I was able to use my miles for two first class seats to Boston. The minute I heard that TW was going under, I opened a frequent flyer account at AA and waited patiently. Got very lucky to use my TW miles on AA. Paul Davis, this would be a good time to get a status match with United, they’re still doing most things well. In comparison, United is doing things VERY well indeed. Delta is a disaster, but not as bad as AA. I’m afraid that the affects of the virus hysteria will make travel a real challenge for the next few years.

  8. Too bad bankruptcy is not a financial crime. It would be great to start locking up company executives for a change. Management incompetence is always paid for by the employees and customers – it’s the American way.

  9. Yet another piece of proof that Gary is focused on sensationalism and page clicks than any kind of accuracy.

    AAL has negative stockholder equity but that has been the case for years even before covid. Having negative SE doesn’t mean a company has a higher risk of bankruptcy but that it is essentially worthless to the stockholders.

    AAL is paying salaries, providing transportation, and paying its debt. It has value to a whole lot of other entitites – just not its stockholders.

    And, btw, AAL’s net income margin was the same as UAL’s for the 2nd quarter. Unlike UAL, AAL is cutting its spending.

    according to the investors, Frontier Airlines stock is much more likely to collapse based on its high level of short interest than American. ULCC’s short interest rate is over 37% compared to AAL at 12%. LUV has the lowest short interest at 2% followed by DAL and then ALK.

    You’ve tried to be the expert about everything under the sun, Gary, but please leave financial analysis to people who know what they are talking about.

  10. Reorganization yes, going out no. No because AA is too big to go for a lot of reasons. First, create an “anti-trust” type situation. We’re going to have 2-1/2 (consider SW a half) majors remaining? Don’t think so. Second, DFW is in the center of the biggest economic engine in the US. With both coasts under Dem rule and anti-business, do the math. DFW and the rest of Texas ranks in top 10 GDP of the world, not just US. SW business model too totally different than AA and they can’t fill the void. Yes, DL could come back and make DFW a hub again, but don’t think so. Good side, AA can hopefully get rid of US Air management team or at least what it cost to take-over AA which I’ll never understand.

  11. Well, I hope AA can avoid it. Management wasted a bunch of cash back in 2016 on stock buy backs instead of improving their balance sheet. That was to enrich themselves for sure, but failing to look out for the best interests of the Company and stockholders. The stockholders should sue the Carrier if it goes into bankruptcy, though saying they were damaged by a stock buyback would be difficult to prove management failed in their fiduciary duties.

    The sad thing is the employees and customers always suffer in Bankruptcy, not management. I have come to the conclusion that the boards need to write into management contracts that if the company has to go into bankruptcy, any and all bonus’s are retroactively null and void. Add to that the executive team is fired.

    Add to that, after the SEARS debacle, bankruptcy law needs to be strengthened to keep stakeholders from spinning off and pocketing cash with a company that needed that cash to survive.

    This was clearly avoidable. The other airlines are healthy, why not AA? The other airlines are making loads of cash during high demand, why not AA? AA’s performance is dismal compared to other airlines, why? If AA survives the next few years, let alone 5-10 years without going into bankruptcy, management should be complimented. If they don’t, they should be fired.

  12. OMG. . .every time AA provides financial, you have them going bankrupt. Dude. . .take a business course.

  13. Wow, Gary, you sure hit a home run on this post!

    But the astonishing thing, really, is the huge variation in the sophistication of the commenters. So, folks, I’ll give you a hint: the one to read is the one that calls AA “AAL.” Extra points to anyone who can figure out why this is so.

    The funniest comment, by far, is the one claiming you don’t know about this thing called Chapter 11. And for those wondering, no, in financial circles that’s called “Chapter 22.” More extra points here, too, for those who can figure out the joke.

  14. And yet the “Great Architect” of the “new” AA has jumped ship and ridden off into his multi-million dollar cash rich sunset. Hey unions, this is what you got sandbagged into buying off on when you signed on with this loser with a horrible track record.

  15. Union that,
    let’s get a few things straight.
    American Alaska Delta and United are the onlyl airlines that have reported their 2nd quarter 2022 earnings so far.
    American reported net income of $476 million while United’s net income was only $329 million. American flew far more passengers and generated more PASSENGER revenue than any of the airlines that have reported -and it is not likely that anyone will beat AA’s passenger revenue.
    Granted, Delta had a profit of $734 million – about 90% of what AAL and UAL made COMBINED.

    Alaska so far has the best margins – the percentage of revenue that went to profit -but still both AAL and UAL were at 3.5% – almost half of DAL.

    Don’t let people feed hysteria about American. They made money and are right now doing financially as good as United.

    Bankrupt is not defined by negative stockholder equity but by the inability to pay your bills.

    No large jet US airline is in that position.

  16. If aa declares bankruptcy, what will that mean for those of us holding partner awards for next year?

  17. I still say bring back Bob. He would never have let this come to be, not that I believe in the bankruptcy theory.

  18. So far Tim Dunn has the most cogent comment. He partially explains why LUV is the only airline stock I previously considered owning and might still consider owning some day.

  19. I’m not worried. AA has positive CF and net margin at the moment and the travel forecast – as long as CoVID doesn’t cause more travel restrictions – is a tailwind. If there are more COVID style travel restrictions, all bets are off.

    I’m a fairly loyal AA flier – also do some UA from time to time – AA has done right by me most times, and I’ll stick with them. The interest rate issue is going to affect way more companies than AA and may be a domino on multiple fronts. Companies can no longer rely on cheap debt financing.

  20. Sometimes Gary pushes too hard for clicks. This is one example that I have a feeling is going to come back to bite him hard. Pretty bold and we will see. You better hope you have a leg to stand on.

  21. Dougie,
    thank you.
    It is beyond irresponsible for someone with a platform to not only incorrectly use business terms that they clearly don’t understand but even more so to talk about bankruptcy in an industry where far too many employees, customers, and stockholders have paid a horrible price for real bankruptcies.

    And United’s CEO is now admitting that the rosy world he painted just a few months ago is not going to happen. United has wiped out well over a billion dollars in stockholder value with a 10% plus drop in its stock price. American’s stock has moved in sympathy even though American’s financial results and commentary are not near as dire.

  22. Poor “look at me Gary” trying to look relevant. How much does Delta pay you?

  23. RF – “merger” is really a nice way of saying purchase. US Air bought AA because AA was bankrupt!
    This was a result of poor financial decisions and poor management.

  24. Negative shareholder equity is called insolvency. Inability to pay debts when due is called illiquidity.

    A company with positive shareholder equity can be forced into bankruptcy — also called liquidation — simply because it can’t pay its debts when due. At the end of that process, the shareholders can have what’s left over but it’s not necessarily zero.

    A company with negative shareholder equity — absent covenants — cannot be forced into bankruptcy if it is still liquid and paying debts WHEN DUE.

    After the mass tobacco litigation 30-something years ago, Philip Morris et alia had negative net worth. BUT, much of their debt was structured (strung out over time) and their ongoing cash flow allowed them to meet their debts WHEN DUE. If AA is able to do the same, they are. If AA is not able to do the same, they aren’t. And, as with PM, we’ll just have to wait and see with AA.

  25. Tim Dunn wrote: “Bankrupt is not defined by negative stockholder equity but by the inability to pay your bills.”

    Tim is absolutely right!!!

    It’s really no different than one’s personal finances. If one has enough income and assets (savings) to pay one’s bills, one stays afloat. If one doesn’t, one files for bankruptcy. Put in business terms it’s about assets and cash flow. That’s why so much attention was paid to “cash burn” at the beginning of the pandemic. It’s really not rocket science.

  26. AA problems lies in logistics. The airline in fact, could actually expand (economy not withstanding).

    The regional strategy is solid but the integration of mainline and regionals are poor, particularity with managing staffing and flight crews. There is too much duplication and the inability for the regional to be competitive and develop markets because they are the mainlines step child. I they better integrated these two business objectives (Premium long haul vs regional volume) they could improve operating costs. Also airline margins are and will always be thin because it takes lots of technology and talent to make the experience a good one. But it’s he best way to travel and see the world. Try not to knock down the industry or an airline. We should always look for improvements from each airline (i.e competition) and the industry as a whole.

  27. You got to love butt heads that wish bad things on a company that would ultimately affect tens of thousands of current and even more former employees. The ONLY ones who gain anything in a bankruptcy are those at the top. The public will gain some relief for a short time and only a short time It’s not good for anyone or the economy. The vendors, employees, and eventually the public suffers.

    Every service industry in this country is at a point of horrible customer service and mostly not due to the front line employees, but due to the fact that the guys at the top running these companies care about themselves and their stock prices ONLY. The richer they get the less they care, and then the poor suckers trying to make a living and those depending on their pensions from years ago are the ones who get screwed.

    One of the real shames in this industry is the fact that the public isn’t willing to pay enough for a service that will also lead to profits and allow the employees to be able to pay their bills and survive. Stop outsourcing, put some control on the salaries and stock options for the ones at the top. It’s all about how CHEAP we can get things at the expense of jobs, good employees, and the loss of the “American Dream.”

    This is the price we pay in this country at the expense of the working class. Keep outsourcing, and offshoring, and only those at the top will prosper. Wage gap between CEOs and US workers jumped to 670-to-1 last year. Report on 300 top US companies found CEOs making an average of $10.6m, with the median worker getting $23,968.

  28. American has been scraping the bottom of the airline barrel for years. While all of the airlines have suffered from some form of “meltdown” lately, American seems to be the worst offender. Frankly, I think it’s their total union mentality and managements failure to work with everyone. If one recalls many years ago, “Dougie” Parker told all 100,000 employees (basically) “you do what we tell you to do and we’ll make money.” So…how’s that working out, eh? Other airlines have told employees that if the employee has a better idea, let management know and if implemented, you get a piece of the savings. Hmmm…who am I gonna work harder for? Instead of taking care of the customer (who pays the bills, by the way) American employees will “pass the buck”…”That’s not my job.” “We’re only required to do one drink service.” Go the extra mile! Other airlines will say, “stay within the box to get the job done but if you have to go outside the box, do what is right.” One airline executive once said, “An employee’s devotion to his or her company, dedication to the job and consideration for the customer determines a company’s reputation.” Slowly fading into the sunset should be a coup d’grace for American. Buh bye!

  29. I’m shocked! Doug “Never Going to Lose Money Again” Parker, what happened?!??

  30. The,Demise of the once Great American Airlines was after the Merger with USAIR.Period.Their Manangement and Doug Parker dismantled AA,turning it into a Low Class Carrier.Lower Profits and a CEO with 3,4 DUI’s.And,Ruined Employee Moral,too.

  31. So Warren Buffet isn’t stupid. He was wrong to get in, but smart enough to get out.

    Gary never said AAL was likely to go out of business but that they could file for Chapter 11 and listed some good reasons they are at risk of doing so.

    Tim Dunn you wrote that “having negative SE doesn’t mean a company has a higher risk of bankruptcy.” I’m having trouble understanding that assertion.

    Without a financial cushion an enterprise is at more risk of running into trouble, say during a downturn, because they don’t have the financial resources such as borrowing power or assets to sell that would be necessary to weather the storm.

    So a company with a negative net worth is far more likely to have to file for protection, don’t you agree?

  32. I think the root cause of AA problems is (was) Doug Parker and USAir management who took over the airline after the merger. Doug Parker ran AA into ground like he did with the previous 2 airlines for which he was the CEO. it is about time to run out all the leftover morons from USAir and get some decent people who know how to run a good profitable airline. AA deserve better.

  33. @Mike L – “You got to love butt heads that wish bad things on a company that would ultimately affect tens of thousands of current and even more former employees. ”

    Goodness, I do not wish bad things for American, I want good things for American, I fly them quite a lot and know many employees there who I think are great people. I also think no airline has more potential to be better than it is today than American!

  34. @DesertGhost “Why are you rooting for American to be liquidated?”

    1. I did not say anything about liquidation, I wrote about reorganization
    2. I am not rooting for this, simply saying this is quite possible if a few things break wrong for them

  35. @Jim – I’ve worked in accounting for 20 years but that’s not the point, I offered the *current* negative equity and interest expense numbers in the post, that’s straight from the airline’s 10-Q filing today.

  36. @bklynprof “if aa declares bankruptcy, what will that mean for those of us holding partner awards for next year?”

    Absolutely nothing, just like it didn’t present challenges in the last chapter 11…

  37. @Tim Dunn – I am *not* saying American is about to file today, read what I wrote, they are in a precarious position and several things breaking wrong for them could put them there. Their margins are atrocious, CASM > RASM even at today’s high fares, if recession doesn’t bring down oil prices and interest rates rise they could see higher costs and lower revenues pretty quick.

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