Originally Posted by
notEnuf
AAL had a large debt load prior to Covid19. After some research it looks like they are continuing that plan going forward and adding to it. The plan to use the cash store from increased debt to fund airplanes and operations. SWA and DAL plan to pay off the new debt and are able to use cash for airplanes. The relative debt load is the largest disparity between the companies.
AALs new bonds yield 5+% so investors in bonds have taken a heavy stake in the company which devalues equity. $6.5B in new bonds and $3.5B in new loans and a total debt load of $50B. They pushed out the maturities to try and take full advantage of the impending recovery and growth. They are making a much higher stakes bet on the return of air travel than DAL. DAL bonds are yielding 3ish% and are more linear in maturities. AAL has added $550M in annual interest payments while all indications for DAL is an aggressive debt pay down after cash neutral is no longer the objective.
That strategy at DAL means low profit sharing payouts short term and huge amounts in a few years. Low payouts relative to our high water mark, but in line with UAL. This situation will seem like a good reason to sell profit sharing but it will be hugely back loaded giving management a window to negotiate it away with a relatively quick TA. This works well for DALs resumption of sect. 6 as they will point to no and then low profit sharing payouts for 2020 and 2021 in an effort to take it back. There will be an appetite for a new deal when things turn around and I think the MEC chair will be motivated to deal to get something done which also will help management. The pilot group will also be impatient and hopefully won’t overlook the mounting profit margins as we go forward.
Morgan Stanley also sees the 2-3 year horizon for DAL and will ratchet up their target. DAL management laid the ground work for a ~ $100 target prior to Covid19. See the previous investor presentations on
delta.com.
https://www.wsj.com/amp/articles/american-airlines-joins-debt-market-behemoths-11615973407
Why does DAL's strategy mean lower profit sharing payout? The strategy you describe for Delta results in lower interest payments which boosts the income statement.
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