Will American Airlines File Bankruptcy?

CEO Doug Parker told employees last week that the key to American Airlines success will be three things,

  1. Build up (borrowed) cash
  2. Reduce expenses
  3. Increase revenue by convincing the public to travel

American started out with more debt than any other airline prior to the pandemic, and continues to layer on obligations. He spoke separately to pilots and to flight attendants, and he told flight attendants that ‘a few hundred million’ in interest payments is no big deal, they can afford it. In fact, American’s annual interest payment obligations are over a billion dollars now and they’re adding debt at nearly 12% interest.

Parker told pilots that an extra billion dollars of debt doesn’t make much difference in a world of $50 million a day cash burn because that’s just 20 days.

And he argued that letting an airline fail, or merge, only affects capacity a little and doesn’t help any airline survive. All airlines will be smaller, collectively equating to an airline in the U.S. disappearing.

However credit default swap prices suggest American Airlines is going to have a difficult time paying off the debt it’s accumulating, even if/when the world returns to normal. That debt is going to be a continued drag on its business, and Chapter 11 restructuring seems a likely outcome at some point.

There’s no question American Airlines, and all of the major U.S. airlines, survive 2020. The federal government gave them over $50 billion. The question is what revenue looks like in 2021, and whether airlines can get closer to breaking even including debt service.

Once that happens though if American Airlines is carrying more debt, with greater debt service, they’ll financially underperform the industry. And then Chapter 11 bankruptcy starts looking attractive in order to get competitive costs.

Doug Parker told pilots last week that he doesn’t see any problem with increased debt, “It’s manageable…we are going to be able to pay for it, so don’t worry about that.” Incremental debt, on the high side, will “add $500 million in interest expense” but “analysts were projecting American Airlines to make $4 billion in 2020” pre-pandemic. “The 30% reduction alone is more than $500 million a year in cost savings…We certainly can earn our way” out of increased debt. “We are well-positioned to earn through this.”

If Parker’s statements don’t persuade you that bankruptcy isn’t the airline’s path, perhaps that he’s taken his compensation entirely in stock the past several years and owns approximately 2.4 million shares in the company.

American Airlines will survive. Too many people equate Chapter 11 bankruptcy with “going out of business.” Delta (and Northwest), United (and Continental twice), American (and US Airways twice) have all been through bankruptcy. There are substantial assets in planes and gates, and people will still want to travel (again). The question is whether the company will pay the obligations it’s now incurring in full.

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. I equate it partly with dumping the previous iteration of American Airlines’ pension obligations. This was tried – and blocked by the bankruptcy judge – during the last Chapter 11 filing, and will doubtless be tried during the next one. And unlike many large businesses, retirees will be unable to recover.

  2. @ Sheila:

    historically, mileage programs (and your miles) will emerge unscathed following an airline bankruptcy.

    Personally, I would not worry about it.

  3. In 2018 American used 96% of its free cash flow to buy back its stock. (Which benefits management.) Of course AA will go Chapter 11 again. It’s their business model; borrow as much as you can and pay back as little as you can. Everybody gets screwed except management. Doug Parker and Donald Trump: Two birds of a feather.

  4. Everyone..
    Thanks for your responses. You have calmed me. We have lots of mileage and nowhere to go!

  5. How many times can you file for Chapter 11?

    @sheila, unless of course they never come out of Chapter 11.
    In true capitalist countries, your miles would be worthless. See Airberlin.

  6. For some reason every time I hear Parker speak, or read quotes attributed to him, all I can think of are marbles.

  7. @ABC. They can file charter 11 endlessly. The bond holders are the real dummies…why ever buy debt issued by a firm run by Parker. Maybe it is worth it if you pay pennies on the dollar.

    @Sheila. Once we have an effective vaccine,I will be happy to use some of your excess miles. Cheers

  8. @ABC it’s not a socialist vs capitalist thing really. Debt holders will push for what is best for them. If the company continues as a going concern the mileage program is going to be critical. They get a ton of value from the mileage programs to the point that I don’t know that you could be competitive without one. If they zeroed out the miles hat would make the next program worth that much less and generate less value to the company. If bond holders who often turn into equity holders during a chapter 11 thought they’d be better off if they wipe out the miles they’d definitely push for it.

  9. @Gene, if it happens, it would be Parkers first time taking a company into bankruptcy, so how do we know he “thrives” on them?

  10. @Shiela – your miles will be as fine as they were with anyone. That said, miles are generally an evaporating asset. UA and DL have destroyed the best value of miles, and it’s likely that AA will follow suit soon. Nobody in this industry has to be in bankruptcy to screw customers.

    The steady state (where I believe the airlines will be most sated) will be true cash-back, which will be a flat 1cpp for a cash redemption on the airline. That means meager payouts for any rewards.

    I’ve come to accept that reality. I still have a massive number of VA miles all now pending redemption, but at some point, I’m going to have to start paying for business class when I want it – given I will be taking trips less often in the age of Covid, a cash-back and non-mileage dependent premium travel might be the next step.

  11. I hope AA goes bankrupt or people dont fly that much, it was too busy at TSA pre-covid and we at TSA dont have enough staff to support the passenger throughput and its very exhausting and frustrating. I am really enjoying this break, AA puts way too much stress and exxagerates their passenger loads, they need to slow down or raise baggage prices to deter passengers, they should also charge for Golf bags, i cant stand searching those golfbags, dont understand why people play that boring sport. If AA wants to get back to normal then TSA will have to go under govt payscale (GS) Pay so we can get paid a realistic fair pay and not lose officers because we are under too much work pressure with these freaking airlines overcrowding flights.

  12. Good. The customer. culture at AA is terrible. I boarded my flight on Saturday to find 6 crew in uniforms in first having taken all the overhead space. All of it. They had been on board for 20 minutes before customers.

    If it was a customer business they would all sit in coach, board last, and move loyal customers up. They would also keep to two bags instead of three or four when they kick customers bags off. They also would have served customer before crew – which they didn’t.

    I asked the flight attendant and she said “oh they aren’t crew, they are all deadheading.”

    Also flight attendants scolded passengers to social distance and the. Immediately after takeoff went to the galley and closed the curtain. Then a few of the deadhead crew (who were not working, joined in). They didn’t come out until final approach….and announced they wouldn’t be coming to do final checks it’s on the honor system.

    Come on people – you are killing there company – fight for your jobs. People want to travel and they want to fly – you are discouraging it.

  13. @Florida Man: ” The bond holders are the real dummies…”

    Of course not, they charge a risk premium to lend. Did you read the article above?

  14. Florida man… once we can fly again, in safe conditions, we will plan several trips. Two international trips were canceled this year. So thanks, however we will travel again..I hope.
    Andrew… you are right. As time goes by, mileage value disintegrates like sand.
    we can begin to come back to life.

  15. Gary, your work continues to demonstrate mainly opinionated stories. The bottom line is this-

    Can AA file for CH11? Sure. Can UA or DL? Sure. Who is to say just because AA has the most debt than another carrier that magically they’re going to file? That’s like assuming because the light turns red someone isn’t going to run it.

    A LOT can happen between now and OCT 1, DEC 1 and Jan 1,2021. Perhaps if you described what they’re doing -based on facts- that will lead to CH 11 may be more interesting a read rather than just saying “oh, they have the most debt.. So, I need some extra ‘clicks’ today so read this story I made up as to why an airline will go to CH11 based on opinion” and here are some things that Douggie said that no one outside of the employees of AA can see. I have no way to prove your quotes ever were said.

    Come on Gary, it’s very easy to tell your insider sources at AA are gone, or perhaps, not working with you anymore. You used to have factual relevant information. Now you just seem to take from Twitter’s XJONNYC, add talking points the average non-industry person can’t verify or prove and consider it fact.

  16. I lived through both TWA and the NWA bankruptcy (as well as several strikes) without issue. Actually, it would be smart for AA to declare bankruptcy, new union contracts, gate contract, lease agreements and a clean balance sheet. Much of AA’s debt is from the previous LAA management who spent foolishly and felt it was a badge of honor not to declare bankruptcy when everyone else did (sort of like Ford, but they too should have done it). Going forward, I see AA being the first to go, clean house (usually a new CEO too) and a much leaner operation, although, still the largest in the world.

  17. @L3

    Did you not read my full comment. The second sentence said: “Maybe it is worth it if you pay pennies on the dollar.l Effectively, that risk premium, which is effectively a lower price. Maybe you need to work on reading compression or better understanding how debt is priced.

  18. AA’s cost structure is significantly higher than its two other US3 network carrier peers because Parker & Co took shortcuts in order for the 2013 merger to take place. And there is no way to structurally remedy this except for taking the company through bankruptcy restructuring. The sooner AA goes through this, the sooner they can come out as a viable entity in the market.

  19. @Florida man: I did, you contradicted yourself, pretty much proving that you didn’t understand pricing risk. You claimed bond holders were dummies. Not if prices are set to unbiasedly reflect risk.

  20. @L3 @Flirida Man

    There are secured bonds that AAL just issued at ~12%. They have unsecured bonds, including ones issued early this year pre-crisis, that are trading below 0.50 cents on the dollar or a yield of 24% (which suggests the market doesn’t believe the company is likely to pay timely principal and interest). Obviously if you had bought the bonds in Jan you probably have regrets. It’s too early to tell if secured bonds at 12% will be a good investment.

  21. @PointArb: Yes indeed.

    Investors who bought just after the last bankruptcy paid less than $3 and made a fortune if they held for several years.

    Best.

  22. How is Gary so opinionated when he shares what Credit Default Swap market rates and probabilities are? Where’s the opinion in a financial instrument’s modeled probability? Go back and read the article and take note that Gary quotes Doug and closes by saying that AA will survive. If you’re such a hater, please go somewhere else to hate.

  23. Come on people, I read some of your comments and wonder where you were in history class. Bankruptcy is not a conservative or capitalist concept, but it was introduced in our country in 1800 temporarily after land speculators had major losses and then repealed after it was brought back in 1837 and reformed numerous times over the years mostly by less conservative leadership but the bottom line is this is our system, so to blame anyone for working within it is ridiculous. If you want change, start voting for real change but I suspect on topics like Social Security or Bankrupcy law you won’t get far on a platform that calls for individual freedom because people seem to favor order over sudden change and if there is no government provided soft landing ya run out of money you crash and burn! I fear that more and more if of society will favor these handouts until the so called rock solid foundation we have been loading all of our careless failures on collapses in a mighty but inevitable crash. I would have told you that the financial system due to chronic mismanagement would be the first to go but surprise it is our legal system and the concept of law and order. You worried about your miles or next year’s travel….AA going into CH 11 should be the least of your concerns as we pile dept upon debt to prevent what would have been a painful object lesson to others and some inconvenience,….amazing that personal finance is in the same condition.

  24. They’ll file if it is beneficial to AA. It might be a positive strategic move; we can only imagine what the Board goes through to reach a decision.

  25. @Lex G: What are you thinking? If AA didn’t provide all those customers, you and your fellow TSA workers would be out of a job. Sure, scanning and searching a golf bag might be time consuming, but what are you getting paid for? Maybe you’d be more comfortable at a desk job at the Unemployment Office.

  26. Not sure if slamming someone’s opinion because of their profession adds any value to this discussion.

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