Analyst: American Airlines bankruptcy is increasingly likely

The likelihood of American Airlines filing for bankruptcy increases due to market conditions and management decisions; There is another risk for those who own American Airlines stock.

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Increased risk of bankruptcy of American Airlines

Despite the very high prices, fewer flights, and a seeming lack of feeling to penalize customers for poor service, US airlines may provide poor service but should make money. Yes, there’s record-high fuel prices and nosebleed inflation, but using a government-reported rate of 9.1%, surely airline ticket prices that are 38% above pre-pandemic levels mean airlines are making more money, right? ?

But they are not.

Make no mistake, American Airlines made half a billion dollars in the second quarter of 2022, and has continued to pay off debt. But it simply isn’t enough.

The alarming stats that make everyone from financial insiders to casual travelers wonder about the future of business is one particular line. The company has assets of $65 billion and liabilities of $75 billion. She is – by definition – insolvent today, now. American Airlines Group, a holding company that manages and operates the network carrier, may be able to make enough money to offset an unbalanced balance sheet but on paper, it is currently insolvent.

Key factors

A Fort Worth-based carrier can catch up on its debt and grow its assets but there are a few reasons why that seems less and less likely.

Huge debt burden

To give some context and scale to the airline’s debt burden ($75 billion), we can focus just on how the carrier is upside down (a liability greater than the assets.) With one dollar. American Airlines is upside down by $10 billion.

Just how much does it cost? Here’s a fun scaling exercise: If Frontier and Spirit were combined, it would be the 5th largest airline in the US which is the largest air market in the world. But for how much American Airlines turns upside down, you can not only get Frontier and Spirit Airlines, but also throw in JetBlue and Allegiant. Or it could be Alaska, JetBlue, and Spirit altogether. Only inverted debt would be the world’s 1,300th company by market value or all of the InterContinental Hotels Group (IHG).

made a point.

The real problem with this mountain of debt is that refinancing is going to be a problem and interest rates are going up. Instead of lower payments, they will go up and it will hurt that even as the company pays off existing debt, its revenue hasn’t gone up enough to overcome this.

She flipped most of her arms

A problem that American airlines face is that American Airlines has already shifted most of the leverage that can support liquidity and reduce the risk of default on its loans. He’s pawned the loyalty program to the max, he’s already taken all the money the government will give (or at least we can hope), she’s retired from less fuel-efficient planes, canceled (and thus standardized) flights, and she doesn’t have to make payments for their 787s. Because Boeing is still unable to deliver.

Labor costs are going up (more on that soon), and the airline isn’t hedging the fuel, so even if the fuel goes up dramatically, there’s no strategic advantage over other carriers and the competition (United and Delta) doesn’t hedge either.

The carrier doesn’t have a new co-branded deal anytime soon with Barclays or Citi, and even if they move to a cheap mileage deal to add some cash to the balance sheet, it won’t be enough. Delta closed a $1 billion deal with American Express for its co-branded card, but even if American could close that and raise it, banks would distribute that over time and not come close to covering the new inflated costs.

work’s relationships

American has proposed a 17% increase to pilots, and if we learn anything about America’s sordid history with the flight attendant group, these battlefront employees will not continue to move forward under current conditions. Labor relations are constantly strained, but labor costs are on track to rise, further exacerbating America’s poor financial situation.

market conditions

Choose a problem, any problem. Let’s say for a moment that the market doesn’t go into recession when the Q2 2022 numbers are released and let’s say the economy has grown a bit. Business travelers aren’t back en masse yet to fly the airline during the usually slower fall months soon. Leisure travelers will fall off a cliff after Labor Day. So, even assuming the economy grows like it didn’t in the first quarter of 2022, there will be fewer passengers, fewer airline tickets and higher interest rates.

Avalanche in Hubris

Not only was American Airlines accumulating most of all US airline debt before the pandemic, but it went straight into that position throughout the pandemic and did little to address the problem after money began flowing into the airline. JetBlue, due to its sins, repaid her loan as soon as possible.

A market analyst regularly assesses the potential for stock failure. Here are the other possibilities of bankruptcy risk among US airlines:

• Delta Airlines by 38%
• JetBlue at 48%
• Southwest Airlines – 27%
• Alaska Airlines – 40%
• Spirit Airlines – 43% *
• United Airlines – 52%

Wait, United have more risks? Why isn’t this article talking about United? Thank you for this rhetorical question, here is the answer. United still has turnaround tools, lower debt as a percentage, and better working relationships overall. JetBlue might be another valid concern especially given its recent quarterly earnings, but there’s a chance they’ll be able to grab pilots and equipment when no other carrier can, and they have very little debt and don’t owe taxpayers any of the COVID loans because they paid them Back.

Soul is also a misleading case because they have not one but two viable options on the table currently, both of which will strengthen his position.

conclusion

American Airlines’ management has been strung on both sides of one of the world’s largest carriers with huge debt obligations for the better part of a decade. The airline was in a much better financial position when it actually filed for bankruptcy just over a decade ago. While bankruptcy protection in the United States would truly prevent American Airlines from failing, these unfortunate management decisions and strategies have already failed customers, employees, and stockholders.