Originally Posted by
tommy2times
Simple question, should one be nervous if junior on the seniority list?
Always…
But in this case, the fear is more of a 70s like stagflation. And it would appear that worries AA management as well. They indicate that in their own filings:
We will need to obtain sufficient financing or other capital to operate successfully.
Our business plan contemplates continued significant investments related to our fleet, improving the experience of our customers and updating our facilities. Significant capital resources will be required to execute this plan. We estimate that, based on our commitments as of September 30, 2021, our planned aggregate expenditures for aircraft purchase commitments and certain engines on a consolidated basis for calendar years 2021-2025 would be approximately $9.5 billion. We may also require financing to refinance maturing obligations and to provide liquidity to fund other corporate requirements. Accordingly, we will need substantial liquidity, financing or other capital resources to finance such aircraft and engines and meet such other liquidity needs. If needed, it may be difficult for us to raise additional capital on acceptable terms, or at all, due to, among other factors: our substantial level of existing indebtedness, particularly following the additional liquidity transactions completed and contemplated in response to the impact of the COVID-19 pandemic; our non-investment grade credit rating; unfavorable market conditions; the availability of assets to use as collateral for loans or other indebtedness, which has been reduced significantly as a result of certain financing transactions we have undertaken since the beginning of 2020 and may be further reduced; and the effect the COVID-19 pandemic has had on the global economy generally and the air transportation industry in particular. If we are unable to arrange any such required financing at customary advance rates and on terms and conditions acceptable to us, we may need to use cash from operations or cash on hand to purchase such aircraft and engines or fund such other corporate requirements or may seek to negotiate deferrals for such aircraft and engines with the applicable aircraft and engine manufacturers or otherwise defer corporate obligations. Depending on numerous factors applicable at the time we seek capital, many of which are out of our control, such as the state of the domestic and global economies, the capital and credit markets’ view of our prospects and the airline industry in general, and the general availability of debt and equity capital, the financing or other capital resources that we will need may not be available to us, or may be available only on onerous terms and conditions. There can be no assurance that we will be successful in obtaining financing or other needed sources of capital to operate successfully or to fund our committed expenditures. An inability to obtain necessary financing on acceptable terms would have a material adverse impact on our business, results of operations and financial condition.
Our high level of debt and other obligations may limit our ability to fund general corporate requirements and obtain additional financing, may limit our flexibility in responding to competitive developments and cause our business to be vulnerable to adverse economic and industry conditions.
We have significant amounts of indebtedness and other obligations, including pension obligations, obligations to make future payments on flight equipment and property leases related to airport and other facilities, and substantial non-cancelable obligations under aircraft and related spare engine purchase agreements. Moreover, currently a very significant portion of our assets are pledged to secure our indebtedness. Our substantial indebtedness and other obligations, which are generally greater than the indebtedness and other obligations of our competitors, could have important consequences. For example, they may:
•make it more difficult for us to satisfy our obligations under our indebtedness;
•limit our ability to obtain additional funding for working capital, capital expenditures, acquisitions, investments, integration costs and general corporate purposes, and adversely affect the terms on which such funding can be obtained;
•require us to dedicate a substantial portion of our liquidity or cash flow from operations to payments on our indebtedness and other obligations, thereby reducing the funds available for other purposes;
•make us more vulnerable to economic downturns, industry conditions and catastrophic external events, particularly relative to competitors with lower relative levels of financial leverage;
https://americanairlines.gcs-web.com...02ae581f48_157
Now the real issue is bond interest rates which in turn are affected by inflation rates. Most major airlines issue bonds to buy new aircraft and for other capital needs and with the fed pumping out money for a decade or more bonds have been sold with low coupons and servicing them has been cheap, even for airlines which right now ALL have truly crappy bond ratings - generally below investment grade.
But as long as you were making enough money with the new equipment to be able to service the bonds and come up with the cash to pay them off at maturity it wasn’t a problem. But despite PSP, nobody is really doing that. What they are doing is either borrowing money to pay off the debt (creating another debt) or issuing another set of bonds to pay off the holders of the maturing bonds. Either way it’s kind of robbing Peter to pay Paul, except Peter is going to demand a lot higher interest rate than Paul did because of the upcoming inflation, because the credit rating is lower than it was for the first bond issue, and because the collateral is now used aircraft rather than new ones.
And no, $17.9 Billion in liquidity does NOT mean they have $17.9 billion sitting around to pay off these bonds, it means that they can come up with that much cash if they have to, but usually only by tapping a line of credit that will have debt service rates likely just as high as that of the bonds - probably higher. That’s just robbing a different Peter to pay Paul, it still doesn’t make the debt go away.
So that’s the real risk right now, that because of a combination of high interest rates and high debt load with relatively low flying and that at a lower yield, eventually the debt service will so eat into the liquidity that the funds necessary to operate just won’t be there. Or realistically, if the liquidity were to get down around $2-3 Billion, they’d declare bankruptcy because they would need that much available to tide them over the cost of reorganization. And no, it wouldn’t be a Chapter 7, it would be a Chapter 11, so the company isn’t going away, and although you may be furloughed briefly (or longer depending on the economy) you’d still have a seniority number and eventually you’d be brought back.
The real long term risk for all of us is what a bankruptcy court might do to contracts, both existing and future ones. Next year military retirees and social security recipients will be getting a 5.9% increase in their payments - a cost-of-living-allowance (COLA) increase to offset inflation. Most of us won’t, because we don’t have COLA built in to our contracts, nor is that something anyone will be anxious to give us. It is in fact more likely, if we were to develop a 70s era stagflation, that someone would try something dumb like wage and price controls. Nixon actually did that, allowing him to kick the can down the road so Carter got blamed for not only his own poor policies that extended the stagflation but the part that belonged to Nixon as well.
So hold off on expensive toys and put some money away until this sorts out. It’s more than just COVID now, and it ain’t over yet.