Quote:
Originally Posted by Excargodog
It is a little more complicated than that.
There are two substantial lots of bonds - one for $750 million and one for $500 million - that come due by summer of 2022 with, as the article says billions more to follow in subsequent years. And yes, it would be HOPED that things would turn around sufficiently that American would be able to make those refinancing sat a lower interest rate, but so far that’s not the case. In fact, both S&P and Fitch have downgraded AA bonds since the $2.5 billion junk bond sale which normally tends to drive the required coupon even higher.
Then there is the cost of the existing debt service. In 2019, Annual debt service for AA was, IIRC, about $950 million. But they have added considerable debt since that time, which will drive that expense up. The $2.5 billion at 12% ALONE will add $300 million in annual debt service. The cheapest money they got - the CARES loan - was another $5.5 billion, and that was at LIBOR plus 3.5%, which today would be approximately 3.9% total, but even at that cheap rate the debt service will be another $200 million annually. And yeah, I know, the first $950 million is not a NEW expense, since AA was already paying that in 2019, but it was being paid at the time of 2019 flying from 2019 revenues, not from the lesser flying of a downsized Airline.
And yeah, much of that debt was indeed for the purchase of airplanes and those bonds are backed by the equity of the aircraft themselves, but those aircraft are no longer new and the used aircraft market has taken a heck of a hit, with used aircraft values falling due to all the international airlines going out of business or downsizing. So the previous equipment does not have the value it once did as collateral for new loans either, and The selling of unsecured loans typically demands a higher coupon than Selling well secured loans.
So in answer to the question of how long is this sustainable, that totally depends on how soon the market perceives the prospects are for AA to become profitable.
If the market believes they will pull out, refinancing cost will indeed drop. But you are looking at AAL being smaller in the future with more debt than it had a year ago and higher debt service costs than when it (and everybody else) was riding high in 2019. That’s an uncomfortable position to be in.
PS: Don’t put big money into the stock of the place you work, a black swan event can cost you your job and your investments.
It's not any more complicated than that. New debt cost is $500m a year. Axing management saved $500m a year. Axing 150 aging aircraft and consolidating fleet types saved another $500m a year. So we are already $1b in lower overhead going into 2021 than we were 2020, or a (-$500m) including debt.
The only thing that needs to happen now is a recovery in revenue, which needs to happen for everyone to recover.
The $1b or so due over the next few years will just be paid out of our cash stock pile. I'm not worried about it as long as there is a recovery.
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