View Poll Results: Will AA declare bankruptcy?
Yes
219
70.65%
No
91
29.35%
Voters: 310. You may not vote on this poll
Bankruptcy
03-01-2021 | 11:58 AM
#341
Line Holder
Joined: Mar 2015
Posts: 77
Likes: 0
^^^ This makes sense to me.
Last year, before the vaccines were a done deal, AA appeared to be in a more precarious position that the others. If it got to the point where the fed felt that they had to let one airline go BK (or fail), AA was the obvious candidate just based on short-term finances.
But the fed has consistently backed-stopped the airlines' finances (both administrations) and the recovery looks like it's happening now. DC never lost sight of the fact that a severely damaged airline industry would take years to recover, and would drag down the rest of the economic recovery in the meantime... not just us but plenty of businesses and jobs rely on air travel directly or indirectly. And the really cunning politicians know they need an economy to tax, or they're out of business and out of office.
Last year, before the vaccines were a done deal, AA appeared to be in a more precarious position that the others. If it got to the point where the fed felt that they had to let one airline go BK (or fail), AA was the obvious candidate just based on short-term finances.
But the fed has consistently backed-stopped the airlines' finances (both administrations) and the recovery looks like it's happening now. DC never lost sight of the fact that a severely damaged airline industry would take years to recover, and would drag down the rest of the economic recovery in the meantime... not just us but plenty of businesses and jobs rely on air travel directly or indirectly. And the really cunning politicians know they need an economy to tax, or they're out of business and out of office.
03-01-2021 | 12:03 PM
#342
Line Holder
Joined: Mar 2015
Posts: 77
Likes: 0
03-01-2021 | 01:14 PM
#343
Perennial Reserve
Joined: Jan 2018
Posts: 14,237
Likes: 254
Someone help my smooth brain understand this "BK is certain" talk because I fly airplanes better than I can read a balance sheet.
As of year end 2020 the breakdown of assets between AAL, UAL, and DAL was as follows:
Total Equity (total assets minus total liabilities)
AAL: -6.87B
UAL: 5.96B
DAL: 1.53B
We can clearly see how up a creek AAL is right there, but digging into more numbers does that remain the case?
Current Liabilities/ Long Term Liabilities (>12 months):
AAL: 16.56b / 52.30b
UAL: 12.72b / 40.86b
DAL: 15.92b / 54.53b
Yes, AAL has some more current liabilities then the rest which doesn't help cash burn but we don't have long term liabilities that are out of line for the fleet size using DAL as a comparator.
Average Fleet Age:
AAL: 11.2 years
UAL: 16.3 years
DAL: 14.4 years
Obviously the younger the fleet, generally you get a savings in fuel, and maintenance cost. When you remove the newer outlier fleets from both UAL (787) and DAL (350 & 220) they age significantly and the 767, and 757 aren't cheap frames to replace. Even taking into account AAL having some old little busses, you pop new engines on them, do new interiors, and they do become more efficient in a way Delta or United can't make a 757 or 767 thereby saving cash. We also reduced our fleet types streamlining maintenance, equipment and training which saves cash. I'm old enough to remember when the magazine had over 10 mainline bodies consisting of 9 aircraft types. We are down to 4 types today.
Here's my naive take on the whole industry right now. Covid is going to end and its going to end sooner than we think. The anxiety of the public is the same as the anxiety of most on this forum. Everyone just wants to move on with their lives and for a lot of the public that means traveling. Once July/August rolls around you'll see restrictions ease as the vaccine gets rolled out to everyone and even the people who right now are like, nah I'm not taking it will end up getting it purely to move on with their lives. Back to normal in December. Good luck non-reving for a while after that.
When things get back to normal American will be positioned with the most efficient and streamlined operation of the three meaning they make more money to pay more debt. We have the new planes, we have efficient engines, the interiors are fresh, the max is flying again and people are traveling. Its going to explode because this was an artificial suppression of the free market and all you inflation bears need to chill because if AA and the rest of the industry got their debt at fixed rates the debt becomes valued less with increased inflation. Theoretically the cash congress gave us at that dirt cheap interest rate could become a negative interest rate under the right market (as in the LIBOR (currently .28%) + 3.5% rate could be outpaced by inflation of 4% from now till maturity in 2025 for a net negative of (inflation-(LIBOR+3.5%)) since they tied it to LIBOR which is a global indicator and isn't as directly affected by USD inflation like the fed rate. So, in summary, we got new planes, a streamlined operation, and lots of debt. Everyone else has old planes, an antiquated operation and also lots of debt. Who makes more money under that scenario to pay that debt off? I think American and I hope American. If they manage it right we will walk away from this winning after covid in a big way.
I think people need to start being a little more positive for your own mental health.
Note: All my finance figures are from Yahoo finance balance sheets for 12/31/20 and ages from airfleets if you want to check my work.
As of year end 2020 the breakdown of assets between AAL, UAL, and DAL was as follows:
Total Equity (total assets minus total liabilities)
AAL: -6.87B
UAL: 5.96B
DAL: 1.53B
We can clearly see how up a creek AAL is right there, but digging into more numbers does that remain the case?
Current Liabilities/ Long Term Liabilities (>12 months):
AAL: 16.56b / 52.30b
UAL: 12.72b / 40.86b
DAL: 15.92b / 54.53b
Yes, AAL has some more current liabilities then the rest which doesn't help cash burn but we don't have long term liabilities that are out of line for the fleet size using DAL as a comparator.
Average Fleet Age:
AAL: 11.2 years
UAL: 16.3 years
DAL: 14.4 years
Obviously the younger the fleet, generally you get a savings in fuel, and maintenance cost. When you remove the newer outlier fleets from both UAL (787) and DAL (350 & 220) they age significantly and the 767, and 757 aren't cheap frames to replace. Even taking into account AAL having some old little busses, you pop new engines on them, do new interiors, and they do become more efficient in a way Delta or United can't make a 757 or 767 thereby saving cash. We also reduced our fleet types streamlining maintenance, equipment and training which saves cash. I'm old enough to remember when the magazine had over 10 mainline bodies consisting of 9 aircraft types. We are down to 4 types today.
Here's my naive take on the whole industry right now. Covid is going to end and its going to end sooner than we think. The anxiety of the public is the same as the anxiety of most on this forum. Everyone just wants to move on with their lives and for a lot of the public that means traveling. Once July/August rolls around you'll see restrictions ease as the vaccine gets rolled out to everyone and even the people who right now are like, nah I'm not taking it will end up getting it purely to move on with their lives. Back to normal in December. Good luck non-reving for a while after that.
When things get back to normal American will be positioned with the most efficient and streamlined operation of the three meaning they make more money to pay more debt. We have the new planes, we have efficient engines, the interiors are fresh, the max is flying again and people are traveling. Its going to explode because this was an artificial suppression of the free market and all you inflation bears need to chill because if AA and the rest of the industry got their debt at fixed rates the debt becomes valued less with increased inflation. Theoretically the cash congress gave us at that dirt cheap interest rate could become a negative interest rate under the right market (as in the LIBOR (currently .28%) + 3.5% rate could be outpaced by inflation of 4% from now till maturity in 2025 for a net negative of (inflation-(LIBOR+3.5%)) since they tied it to LIBOR which is a global indicator and isn't as directly affected by USD inflation like the fed rate. So, in summary, we got new planes, a streamlined operation, and lots of debt. Everyone else has old planes, an antiquated operation and also lots of debt. Who makes more money under that scenario to pay that debt off? I think American and I hope American. If they manage it right we will walk away from this winning after covid in a big way.
I think people need to start being a little more positive for your own mental health.
Note: All my finance figures are from Yahoo finance balance sheets for 12/31/20 and ages from airfleets if you want to check my work.
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.
03-01-2021 | 03:20 PM
#344
Line Holder
Joined: Mar 2015
Posts: 77
Likes: 0
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.
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.
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.
03-01-2021 | 03:37 PM
#345
Perennial Reserve
Joined: Jan 2018
Posts: 14,237
Likes: 254
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.
03-01-2021 | 04:28 PM
#346
Line Holder
Joined: Mar 2015
Posts: 77
Likes: 0
If you neglect the 11.5% annually you have been paying out in quarterly dividends. These were not zero coupon bonds.
More food for thought: Your logic MIGHT work if the airline involved could actually pay off the bonds as they mature, but the prospects of the smaller (shrink to profitability) airlines being able to do that is low. So the $1.5 billion that is owed THIS year will be rolled over into another bond issue that reflects AAs creditworthiness at THAT time, driving the interest rate even higher. Effectively, you wind up switching your credit card balance from one card to another, but your debt service just continues to skyrocket. If you can’t afford to pay a 12% coupon on your debt now it is ludicrous to believe your prospects will be improved by having to pay an even higher debt service later.
More food for thought: Your logic MIGHT work if the airline involved could actually pay off the bonds as they mature, but the prospects of the smaller (shrink to profitability) airlines being able to do that is low. So the $1.5 billion that is owed THIS year will be rolled over into another bond issue that reflects AAs creditworthiness at THAT time, driving the interest rate even higher. Effectively, you wind up switching your credit card balance from one card to another, but your debt service just continues to skyrocket. If you can’t afford to pay a 12% coupon on your debt now it is ludicrous to believe your prospects will be improved by having to pay an even higher debt service later.
03-01-2021 | 04:58 PM
#347
Perennial Reserve
Joined: Jan 2018
Posts: 14,237
Likes: 254
Yeah I was partially wrong. The coupon is 3.75% paid twice a year, not quarterly. But that's just hyperbolic talk about bonds. AA issued senior secured notes which needed collateral to be made. You can't collateralize bonds with other collateralized bonds, not how that works.
the fact is that debt is a cost - you are renting that money - and if you can gainfully employ it - like to buy aircraft you are flying at a net profit - that’s Ok despite the debt service. But those collateralized aircraft you park are costing you even if you nominally own them.
03-01-2021 | 05:11 PM
#348
Line Holder
Joined: Mar 2015
Posts: 77
Likes: 0
Nope. Generally you collateralize bonds with things like aircraft, which even if originally new are used aircraft when the bonds mature and have to be redeemed. And if you have to refinance them they have now depreciated in value so you either need more of them or you pay a higher coupon.
the fact is that debt is a cost - you are renting that money - and if you can gainfully employ it - like to buy aircraft you are flying at a net profit - that’s aOk. But those aircraft you park are costing you even if you nominally own them.
the fact is that debt is a cost - you are renting that money - and if you can gainfully employ it - like to buy aircraft you are flying at a net profit - that’s aOk. But those aircraft you park are costing you even if you nominally own them.
03-04-2021 | 07:18 AM
#350
Gets Weekends Off
Joined: Mar 2017
Posts: 4,171
Likes: 151
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