American Airlines has an increased likelihood of filing for bankruptcy due to market conditions and management decisions; One more risk for those who hold American Airlines stock.
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American Airlines Bankruptcy Risk Growing
Despite sky-high prices, fewer flights, and seemingly no sense of customer retribution for poor service, airlines in the United States may be delivering bad service but should be raking in the cash. Yes there are record-high fuel prices and nosebleed inflation, but using the government-reported rate of 9.1%, certainly airfare that registers at 38% higher than pre-pandemic levels should 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 continued to pay down debt. But it’s simply not enough.
The alarming stat that has everyone from financial insiders to casual travelers questioning the future of the business is one particular line. The airline reports assets of $65 billion and liabilities of $75 billion. American Airlines Group, a holding company which engages in the management and operations of the network carrier may be able to make enough money to offset that lopsided balance sheet but given the (below) challenges, it’s unlikely American will continue to be able to turn a profit and service its debt.
The Fort Worth-based carrier could catch up to its debt and grow its assets but there are a few reasons why that seems less and less likely.
Huge Debt Load
To give some context and scale to the airline’s debt load ($75 billion), we can focus just on how upside down the carrier is (more liability than assets.) No other US carrier is upside down at the moment, not by a billion, not by a million, not by $1. American Airlines is upside down by $10 billion.
Just how much is that? Here’s a fun scaling exercise: If Frontier and Spirit were to combine they would make the fifth largest carrier in the US which is the largest air market in the world. But for just the amount that American Airlines is upside down by, not only could you have Frontier and Spirit Airlines, but you could throw in JetBlue and Allegiant too. Or it could be Alaska, JetBlue, and Spirit altogether. Just the upside-down debt would be the 1300th largest company in the world by market cap or all of InterContinental Hotels Group (IHG.)
The real problem with that mountain of debt is that refinancing is going to be a problem and interest rates are rising. Instead of payments decreasing, they will rise and that is going to hurt even as the company pays existing debt down, their revenue has not risen enough to overcome this.
Turned Most Of Its Levers
A problem for American that other carriers don’t face is that American Airlines has already turned most of the levers it can to shore up cash, and lower the risk of default on its loans. It’s mortgaged the loyalty program to the hilt, it’s already taken all the money the government is going to give (or at least we can hope), it’s retired less fuel-efficient aircraft, cancelled (thus consolidated) flights, and doesn’t have to make payments on their order of 787s because Boeing remains unable to deliver.
Labor costs are going up (more on that shortly), the airline doesn’t hedge fuel so even in a situation where fuel were to dramatically rise, there’s no strategic advantage over other carriers and the competition (United and Delta) don’t hedge either.
The carrier doesn’t have a new co-brand deal coming up any time soon with either Barclays nor Citi, and even if they moved up a deal selling miles cheap to add some money to the balance sheet, it wouldn’t be enough. Delta closed a $1 billion deal with American Express for its co-brand card, but even if American was able to close that and move it up, the banks would distribute that over time and it wouldn’t approach a level that covers new inflated costs.
American has proposed a 17% raise for pilots and if we know anything about American’s sordid history with its flight attendant group, those battlefront employees won’t continue to march on under the current conditions. Labor relations are constantly strained, but labor costs are set to rise, further compounding American’s dire financial position.
Pick a problem, any problem. Let’s assume for a moment that the market does not enter a recession when Q2 2022 numbers are released and let’s assume the economy grew a little. Business travelers have not returned en masse yet to carry the airline through the traditionally slower fall months coming soon. Leisure travelers will fall off a cliff after Labor Day. So even assuming the economy grows as it did not in Q1 2022, there will be fewer travelers, lower airfares, and higher interest rates.
Avalanche of Hubris
American Airlines not only amassed the most debt of all airlines in the US before the pandemic, but it leaned right into that position throughout the pandemic and did little to address the problem after cash started to flow into the airline. JetBlue, for its sins, paid back its loan at its earliest convenience.
One market analyst regularly assesses stock failure probability. Here are the other probabilities for bankruptcy risk among US carriers:
- Delta Air Lines – 38%
- JetBlue – 48%
- Southwest Airlines – 27%
- Alaska Airlines – 40%
- Spirit Airlines – 43%*
- United Airlines – 52%
Wait, United has a higher risk? Why isn’t this article about United? Thank you for that rhetorical question, here’s the answer. United still has levers to turn, its debt is lower as a percentage, and labor relations are generally better. JetBlue would be another valid concern especially given its last quarterly earnings, but there’s a chance they are able to grab pilots and equipment when no other carrier can, and they hold very little debt and owe the taxpayers nothing from COVID loans as they have paid them back.
Spirit is also a misleading stat because they have not one but two viable options on the table currently, both of which would strengthen its position.
American Airlines management has been straddling one of the world’s largest carriers with oversized debt obligations for the better part of a decade. The airline was in a far better financial position when it actually filed for bankruptcy a little more than a decade ago. While bankruptcy protections in the United States will prevent American Airlines from truly failing, these deplorable management decisions and strategies have failed the customers, the employees, and stock holders already.
Why are you rooting for American to be liquidated?
I am more lamenting that if American were to file bankruptcy, the only thing that would really happen is the businesses that lent money to American and the employees for the carrier would suffer while management could continue running a shocking organization. So why not do it again, and again, and again?
Your a loser maybe they didn’t give you a free first class upgrade
Total idiot that is the dumbest article ever written this guy doesn’t realize the market power of American
I’m all for free speech but being stupid is too much
@Giovanni Setta – That’s an eloquent comment. Do you have an data-driven retorts or just “the market power of American”?
Going down…Just like Eastern!
Good article, but one point: just being upside on a balance sheet (negative equity) doesn’t mean a company is insolvent. Insolvent means unable to pay current debt. American Airlines may reach that soon, but its not currently insolvent.
American had a chance about 8-10 years ago to become a premium airline but instead decided to become a total pile of crap which I’ve refused to fly since about 2016. They should ask Doug Parker for a refund of his salary since the merger for leading them in this direction.
Agree. What a mess Parker left. It was said many times before Parker should have been fired years ago. Now he is chairman of the board. Good luck with that.
The merger with US was the beginning of the end. US management proved to be the decline in customer service, AA is just a larger version US and HP.
Airlines are a risky business with lots of financing needs, yes bankruptcy is always on the minds of management and investors.
Let seasoned credit analysts handle the interpretation.
Enough of the click bait that started with Gary.
I have a few thousand worth of gift cards with them. But the laptop i had it on died.
Anyway to find the gift cards? Effing too many miles and points and gift cards expiring and keeping me on the treadmill.
A computer tech could probably salvage your gift cards. Are you a Democrat?
So Gary got called out for plagiarism on his post a few days ago, as well as taken to town on this identical post. And now you follow him down the rabbit hole?
Reminds me of the two idiots drunk on the roof. On jumps from the roof and dies. The other laughs and says, “You think that’s good? Watch this, Bubba.”
At least this site still offers the occasional trip report, though. I wonder why Gary stopped them?
@Stuart – Can you clarify, are you suggesting I committed plagiarism? I’ll patiently await your evidence.
As for Gary and I writing about a topic that seems similar, my goodness that’s dumb. American had its earnings call and released Q2 2022 results last week, should just one of us write about it? Did you happen to click on the supporting links that find the same analysis or should they have run it past you first to make sure that there was only one post in existence on the topic? Delta announced earnings too and I thought they were poor with respect the amount of premium the airline is getting, but I chose not to write about it at the time, but it’s a good thing I didn’t because someone else likely had a thought on the matter. I know this will come to you as a shock, but not everyone subscribes to all of Boarding Area. It may seem idiotic to you for more than one person to share an opinion (I doubt ours are exactly the same) based on the news that was released.
I’ve been unambiguous about the airline’s debt issues over the last 4-5 years. I have been equally shocked that even during prior peak travel in 2018/2019 the airline was consistently losing money from flying passengers and cargo despite competitors doing just fine in this regard. I have called for Parker’s removal over the years and followed their labor issues too. Should we ignore the financial failures of one of the world’s largest carriers?
However, as always, we offer a 100% money-back guarantee. Just submit your receipt for this post and we will refund your purchase entirely.
Perhaps you are so overly sensitive and defensive that you failed to see my simple statement which said that Gary had been accused of plagiarism, with links to the article, by others. Not you. Further, if you read the many expert comments to his post you might have seen the many people, smarter probably than you and I combined, point out Gary’s faulty analysis in seeing just one side of AA’s situation. I can’t imagine if you read these comments and actually thought about what they were saying that you would have jumped the gun to such a sensationalist bandwagon header (if Gary is a bandwagon) approach to throwing AA under the bus. This is serious stuff. And a pretty damning title that can affect a company. Speculation on their weaknesses, which all the airlines have, is perfectly fine. But creating a dumpster fire when you can clearly read many, including Tim Dunn, who is right, point out the fallacies in this argument, well, not so fine.
As to articles appearing in both. I have no issue with that and it’s quite common. So what. But when one of them gets completely trashed by experts and you still follow him down the rabbit hole, of course I am going to laugh at you.
And no, I don’t require a refund, but if you have a spare SWU I’ll take that as a gesture of good will.
I can’t find an upside. If American somehow gains more customers than the competition, tightens up its costs, and aggressively pays down debt, they will – at best – bring the balance sheet to parity with the competition. Considering what American would have to do to achieve an even balance sheet by the beginning of 2025:
1) Double net income from $500MM to $1bn
2) Aggressively pay off debt with all of that doubled income
3) Do that for 10 straight quarters
That’s in the face of a possible recession (we could already be in one), certain interest rate increases, and certain increased labor costs. I don’t know what Gary wrote and it doesn’t affect my opinion (though I think he’s a pretty smart guy.) If you said that Spirit was in the same position (and they are with respect to rate increaases and labor cost) I would make the same claim if they had the same issue with assets and liabilities flying into these headwinds.
Those experts, and we have so many smart commenters, you mentioned have a difference of opinion for which they are entitled to. They believe that American can ride it out, make the payments they need to make, and avoid filing and they may be right. The title of the post was not: American Airlines’ Imminent Bankruptcy, but rather it notes that an analyst (not me, those linked to in the article) have said the chances for a bankruptcy are increasing.
And as for causing alarm, Bloomberg, Macroaxis, and Forbes all beat Gary and I to the punch before the earnings call but those outlets are probably unrelaible too. If you can openly say that American’s chances for filing bankruptcy are not increasingly likely given its performance in the last quarter and challenges ahead – then say it. But I think you’re smarter than that.
AGREE THESE 2 IDIOTS HAVE A VESTED INTEREST IN DELTA!
THEY LOST ALL CREDIT ABILITY WITH ME.
I’D CHOSE AA OVER DELTA’S OLD 757,767 717’S ANYDAY.
Why are they spending money on electric aircraft with all this debt ?
That was exactly my point last week before the Q2 results. Spot on!
Another government bailout in the future?
Am I reading this heading correctly?? A story that’s not about United Airlines for a change? That last one about a menu typo on UA… talk about small world problems…
Your rationale for UA being better off is pretty weak. Theyre both kinda effed.
They certainly aren’t a shining city upon a hill but they are marginally better. Southwest is the best off.
Do you ever have anything positive or nice to say about AA or any airline? Quit looking from the outside in,and look from inside out! Running an airline is not like running any other business out there. Take it from a 35 year airline veteran.
Literally every other airline has more assets than liabilities and I pointed that out in the piece. Doesn’t that say something positive about all others? American is running legitimately the worst airline in the country, what would you like to objectively add in its defense?
“Doesn’t that say something positive about all others?”
Well, in Delta’s case, they’re not burdened by having to provide award tickets at reasonable rates, so I’m sure they save a ton of cash there.
It is easy to see who is in dire condition by looking at the bond ratings. JetBlue has BB- which is higher than United of B+, which is 2 steps higher than American Airlines B-
AAL working capital has been negative, so it runs on debtor’s funds by delaying payments…
Yes, it is distressed
Don’t tell the AA cheerleaders that, they will get mad.
SORRY BUT THIS GUY IS JUST ANOTHER DUMBA$$
Out of curiosity, and for full disclosure, is the author shorting the stock?
Nope. Not because I feel a conflict in my analysis nor due to any FTC/SEC concerns (I would just put a disclosure up) but rather because I have even less faith in the exuberant market that has propped up the airline’s terrible stock for years.
I thought the almost $13 billion in stock buybacks were the tool propping up the stock price.
It probably was.
This is a sophomoric analysis by someone who appears to have no financial background. Stick to what you know and let people who know what they’re talking about on this subject do the analysis. What’s next, Kyle’s learned opinion or brain surgery or rocket engine design?
I guess I’ll need to go back to school for a fifth business degree and trash that MBA on the wall.
Ask for a refund, at least.
People think that because they completed some classes that they know more than they actually do. Kyle seems to think that he knows more than all of the hundreds of other MBAs at the big banks and Fortune 500 companies that extended credit to American Airlines. Just maybe, the fine intricacies of corporate finance might be a tad more complex and nuanced than a travel agent (with some degrees!) can grasp.
American Airlines will not go bankrupt, and Kyle will not publish an article years down the road apologizing for his ignorance.
@Steve – If American somehow rides this out and its business is so radically transformed that its depreciating assets can be overcome, I will absolutely write that retraction post. I have done it before, I will do it again.
However, let’s address your logic for a moment. Interest rates have been low (maybe too low) in the US since the housing bubble crash in 2008. American filed for bankruptcy in 2011/12. Loans given to the airline prior to COVID-19 were likely based on those very low rates, didn’t account for a supply chain issue and 40-year high inflation. I would be willing to bet that MBAs advised on loans prior to the company’s bankruptcy in the early 2010s. Were they right or wrong? Further, are you suggesting that qualified people have not made drastic financial mistakes? Shall I point you in the direction of the eminantly qualified Jamie Dimon of Chase who at one point valued the loss-making and disastrous WeWork at $65bn? It doesn’t mean that Dimon is a fool, it means that people – even highly qualified people – make mistakes despite an abundance of evidence. To Dimon’s credit, he hadn’t seen the company’s (now legendary) S-1, but it was still a crazy act of either hubris or poor judgement. I’d still trust his advice but he was wrong by a lot on that one. Suggesting that these metrics don’t matter because qualified personnel have the matter in hand wreaks of a lack of business historical knowledge.
For what it’s worth, Delta made 50% more money net than American did on a billion less in revenue, but that’s probably not down to disatrous management at American, right?
Bellevue University is one of the top 150 universities in the Midwestern United States. Show some respect, Joey!
Perhaps I missed it. But I don’t believe anywhere in the article you actually say what the bankruptcy risk for American is, according to the analyst. I only found it by going to the source (it’s 51%). It would be helpful to include it in the list of probabilities.
Regardless of your education, you are not an investment analyst. This story is all about the click-baiting headline and nothing more. If you were an actual journalist, I would accuse you sensational journalism, but you’re not. You’re just a travel blogger.
I’m not a chef either, but I still know when the bread is moldy.
Wow, lots of ignorant and lonely haters out there still living in mommy’s basement. Don’t let the get you down.
Let them go already. Enough is enough. AA has taken so much American tax dollars it pathetic. Top it off with poor service and maybe, just maybe it’s merger time.
The merger between us and aa was the beginning of the end for aa! Partnering with a forever crappy airline was aa’s mistake! Aa will be the next eastern and pan am thanks to this incredibly shitty management of usairways!! Sad to see them go! If they want to right the ship they need a old style aa manager and fire everyone and i mean everyone that came from that night mare of a airline usair especially their management board etc…!
Idiotic post, when a young couple buys their first house, their debt to assets ratio goes out the window. Are they insolvent? No. When you dry age beef, it is moldy on the outside, but you would throw it out! Truthfully, I do not think you bring anything value to Matthew’s blog, I personally wish Matthew would no use you.
As a long time AA employee, I see a regional airline management team that shouldn’t be allowed to run a regional airline
We’re talking some high-level debt loading here. They continue to lower service standards. It’s like chasing two rabbits at the same time, you probably won’t catch either one of them!
I literally just read another story from this site that said they will not file bankruptcy and that is delusional to think that. So why even post this story?
Two different authors. Two different perspectives.
Isn’t the insolvency test essentially a cash flow test (ie ability to pay debts when they become due and payable) rather than assets less than liabilities as implied by the article?
@Triple B – I had used (and cited) an analyst that was projecting with rate increases (another came through today) that they are currently insolvent, but I agree with you that they are still able to service their debts today. I have adjusted the post and appreciate your comment.
Interesting article. I believe the article is missing one component. How did AA accumulate such huge debt in the first place? Why is the company upside down by $10 billion and no other airlines is in even a similar financial position? Obviously poor leadership is one reason. The others? Acquisitions?
gosh right or wrong I never want to be a travel blogger
You have to have a very thick skin.As soon as someone doesn’t like a thing they say the readers bite like sharks & piranhas and dispose of the body
Whatever happened to polite conversation and bypassing personal attacks? It’s ok to disagree but not necessary to get mean
It could be just a passionate productive debate on the view points
@Dwondermeant – We don’t have an award for comment of the year but if we did, I would be stenciling your user name on a trophy.