Originally Posted by
Excargodog
I think this is a tad overly simplistic. Prior to 2019, the US airlines were certainly not making money hand over fist.
Over the last preCOVID decade they AVERAGED - IN TOTAL - a free cash flow of about $5 billion a year. And that’s pretty much everybody except for F9 which is privately held and doesn’t report SEC financials.
A couple of airlines have increased debt in one year by ~$10 billion, while simultaneously becoming smaller. Nor does smaller necessarily mean more efficient. Sometimes it just means smaller. And that debt itself has to be serviced, and most airlines debt right now is below investment grade, limiting buyers and demanding a higher coupon. This summer AA was selling bonds at an effective coupon of 12%, and UA at 11.5%. So even if the bonds themselves don’t mature for five years, the debt service on them is due quarterly and $2.5 Billion at 12% is $300 million off the free cash flow. And while the short term debt isn’t as much, most companies don’t have the liquidity to pay off even the modest amount they do owe, meaning they are going to be refinancing that debt by selling more bonds at their current depressed bond ratings adding to the debt service without really getting rid of any of the debt.
Now none of that means any airline will necessarily fail or go into bankruptcy, but it’s a counterweight to your somewhat Pollyanna-ish comments above. Doesn’t matter if you believe the IATAs estimate of international recovery time or not, , doesn’t matter if you think Gates’ estimate of long term/permanent loss of business travel is accurate or not, doesn’t matter if you think the COVID thing was way overhyped or not, this has been and will be a bigger hit to the industry than 911 and the worst is NOT yet behind us. Will the government continue to provide badly needed support? Well, we hope so, but even that is a long way from guaranteed. This is going to be a tough slog and it isn’t behind us yet.
So yeah, don’t anybody open any veins or anything, but be conservative in your expectations. it ain’t over until it’s over and we aren’t anywhere near there yet.
I agree that people need to be conservative especially with their finances
just in case. It doesn't happen till it happens as far as recovery is concerned but I am absolutely optimistic and I think the rest of the world is as well. Walking through the airports you can see the recovery happening today. The down turn of 9/11 was only partially due to the attack. The world was going into a natural recession as a result of the .com bubble and when 9/11 happened the airlines were unable to position themselves favorable. That was not an artificial downturn like we see today and they are absolutely better positioned. Those charts that the E&FA departments of the various airline advocacy groups puts out are often vague and incomplete designed for new outlets who can't tell a 777 from a 172. You have to look at balance sheets to see where the CapEx was during those years. I am sure you will see plenty of stock buy backs, equipment upgrades, compensation increases, etc. The cash was there, but free flowing implies it was earmarked for nothing. Bottom line, by 2025 AA will have no problem paying that interest back because we will be long past covid. Also I believe UA cancelled their bond sale:
https://www.barrons.com/articles/a-f...ns-51589219455
Also check out the terms for the bonds AA sold. I was surprised they went through with it because the terms were just as bad as UA's except we had buyers for them. This was because UA was more likely to BK at that time according to the bond buyers.
https://www.sec.gov/Archives/edgar/d...32513dex41.htm
More food for thought: If AA put bonds out for 11.5% that mature in 2025 but inflation is scheduled to be around 9-10% in that time frame, the effective rate investors will get is only 1.5% in 2025 money. Inflation will erode the bonds underlying value. AA was hedging inflation will be high and I think that's a sure bet. Better for AA would be inflation of 12% over that time and we get a negative effective interest. This is why the feds tied the CARES loan to the LIBOR, so they wouldn't lose face on the deal.. but again, LIBOR > Fed Rate for inflation.