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:
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.