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
10-21-2021 | 02:52 PM
#581
Banned
Joined: May 2017
Posts: 2,012
Likes: 0
2) Americans eventual bankruptcy will not be about an unsustainable business model but unlucky timing of a fleet renewal and subsequent debt problems from covid
Lendors/lessors will take a haircut and business will roll on.
10-21-2021 | 03:03 PM
#582
Gets Weekends Off
Joined: Jul 2011
Posts: 2,450
Likes: 0
From: Airbus button pusher
chapter 7 in the future. Ask any APC warrior
10-21-2021 | 03:39 PM
#583
Perennial Reserve
Joined: Jan 2018
Posts: 14,237
Likes: 254
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;
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;
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.
10-21-2021 | 03:53 PM
#584
In a land of unicorns
Joined: Apr 2014
Posts: 7,070
Likes: 102
From: Whale FO
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 doesn’t make the debt go away.
The short term problem they have is that 19.2 billion of current assets is pretty much spoken for, since they have 18.9 billion in current liabilities. So they will have to refinance the older debt that they got with much lower rates than what they currently can borrow. Burning through the 19 billion in liquidity only pays down 2.5 billion of debt. They still have 36 billion of long term debt left after that.
They keep saying they will pay down 15 billion in the next 4 years, they just do not have the cashflow to do right now and they need to pull some rabbits out of a hat to successfully do so. I am excited to see how they manage this.
10-21-2021 | 06:41 PM
#585
You scratched my anchor
Joined: Feb 2011
Posts: 5,126
Likes: 84
I studied underwater basket weaving in college and got mediocre grades at best… so I don’t know what any of this means. What I know is things are drastically better than they have been and it’s the beginning of a substantial hiring boom. You’re in a good place. With that said, anything is possible. I’d say if one legacy declares BK the other two will as well. I wouldn’t think they could compete with the one that trimmed all the fat.
10-21-2021 | 07:02 PM
#586
In a land of unicorns
Joined: Apr 2014
Posts: 7,070
Likes: 102
From: Whale FO
I studied underwater basket weaving in college and got mediocre grades at best… so I don’t know what any of this means. What I know is things are drastically better than they have been and it’s the beginning of a substantial hiring boom. You’re in a good place. With that said, anything is possible. I’d say if one legacy declares BK the other two will as well. I wouldn’t think they could compete with the one that trimmed all the fat.
Without PSP, this would be an existential crisis for AAG.
10-21-2021 | 08:38 PM
#587
Perennial Reserve
Joined: Jan 2018
Posts: 14,237
Likes: 254
I believe AAG does have that amount "sitting around" and do not need to tap into a line of credit to do so. They list almost 15 billion in short term investments and just under a billion in restricted cash.
The short term problem they have is that 19.2 billion of current assets is pretty much spoken for, since they have 18.9 billion in current liabilities. So they will have to refinance the older debt that they got with much lower rates than what they currently can borrow. Burning through the 19 billion in liquidity only pays down 2.5 billion of debt. They still have 36 billion of long term debt left after that.
They keep saying they will pay down 15 billion in the next 4 years, they just do not have the cashflow to do right now and they need to pull some rabbits out of a hat to successfully do so. I am excited to see how they manage this.
The short term problem they have is that 19.2 billion of current assets is pretty much spoken for, since they have 18.9 billion in current liabilities. So they will have to refinance the older debt that they got with much lower rates than what they currently can borrow. Burning through the 19 billion in liquidity only pays down 2.5 billion of debt. They still have 36 billion of long term debt left after that.
They keep saying they will pay down 15 billion in the next 4 years, they just do not have the cashflow to do right now and they need to pull some rabbits out of a hat to successfully do so. I am excited to see how they manage this.
So we are both right, you perhaps a little “righter” than me.
But I agree about the cash flow issue. Even in 2019 - before COVID - AA wasn’t turning out that much net income, only about $1.5 billion a year. It is difficult to see where they will find the net income to meet their goals with the increased cost of the debt service they have recently incurred at far higher interest rates, let alone what will happen if interest rates go up which will increase the costs of their lines of credit almost immediately.
Still, you can certainly understand them wanting to pay off those senior secured notes at 10.75 and 11.75% as soon as possible, but like you, I’m not certain they can do it.
Time will tell I suppose, but with any prolonged significant inflation or recession, their financial plan looks fairly shaky. Unless there is another PSP.
10-21-2021 | 09:13 PM
#588
In a land of unicorns
Joined: Apr 2014
Posts: 7,070
Likes: 102
From: Whale FO
You are partially correct. Digging in to the details they have $14.5 Billion “sitting around” but the balance ~$3.4 Billion is in lines of credit.
So we are both right, you perhaps a little “righter” than me.
But I agree about the cash flow issue. Even in 2019 - before COVID - AA wasn’t turning out that much net income, only about $1.5 billion a year. It is difficult to see where they will find the net income to meet their goals with the increased cost of the debt service they have recently incurred at far higher interest rates, let alone what will happen if interest rates go up which will increase the costs of their lines of credit almost immediately.
Still, you can certainly understand them wanting to pay off those senior secured notes at 10.75 and 11.75% as soon as possible, but like you, I’m not certain they can do it.
Time will tell I suppose, but with any prolonged significant inflation or recession, their financial plan looks fairly shaky. Unless there is another PSP.
So we are both right, you perhaps a little “righter” than me.
But I agree about the cash flow issue. Even in 2019 - before COVID - AA wasn’t turning out that much net income, only about $1.5 billion a year. It is difficult to see where they will find the net income to meet their goals with the increased cost of the debt service they have recently incurred at far higher interest rates, let alone what will happen if interest rates go up which will increase the costs of their lines of credit almost immediately.
Still, you can certainly understand them wanting to pay off those senior secured notes at 10.75 and 11.75% as soon as possible, but like you, I’m not certain they can do it.
Time will tell I suppose, but with any prolonged significant inflation or recession, their financial plan looks fairly shaky. Unless there is another PSP.
From those numbers you can see why they went on a lending spree for the past 8 years. Borrowing money at 2% is a very attractive proposition. Too bad it backfired now when they chose to carry the debt instead of paying it back.
The only "good" thing with those numbers is, that they can now borrow at half the interest rate of 2020.. But borrowing 10 billion dollars at over 5.5% interest rate is a financial hail mary, especially when 25% of it went to service existing debt that had a much lower interest rate. Kinda like stacking payday loans.
People much smarter than us are dealing with this at AAG. I'm just excited to watch it from the sidelines to see what plays they call.
10-21-2021 | 10:10 PM
#589
Perennial Reserve
Joined: Jan 2018
Posts: 14,237
Likes: 254
At $476 million a quarter (which it was in the 3rd quarter) their annual debt service will be just over $1.9 Billion. That’s a lot of money to shell out annually for debt service every damn year until it’s paid off.
10-22-2021 | 04:59 AM
#590
Line Holder
Joined: Mar 2017
Posts: 436
Likes: 18
Was that the interest payment that was actually due, or did they pay future interest now? (I know the answer to this, do you?).
It is easy to move payments between quarters to show either massive losses, massive gains, or what is essentially breaking even. That is what you see here.
That is not the interest that is due every quarter, it shows the interest that they paid this quarter. The actual interest could be significantly more or less than this.
Oh, and what happens if you pay the interest for the next several quarters now, and then pay the principal early?
It is easy to move payments between quarters to show either massive losses, massive gains, or what is essentially breaking even. That is what you see here.
That is not the interest that is due every quarter, it shows the interest that they paid this quarter. The actual interest could be significantly more or less than this.
Oh, and what happens if you pay the interest for the next several quarters now, and then pay the principal early?
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