As I re-examine and position myself for post-coronavirus travel, American Airlines is one I will avoid due to bankruptcy concerns.
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American Should Have Been Best Prepared
American Airlines had the largest cash stockpile of any carrier in the world at over $7bn prior to the coronavirus crisis. Much of the airline’s fleet is new, making the flights that are taken more economical and the recovery cheaper on a per flight fuel burn and maintenance basis than peers. But its exposure to markets affected by the crisis was also high as well as the world’s largest carrier, flying to Europe and Asia – the first two markets to close.
Distrusting American Management
I have not been quiet about my distrust of American Airlines management. I left American for United a couple of years ago and have not looked back since. While I was wrong about CEO Doug Parker surviving the summer, my distrust of the management team’s ability to navigate challenging times is evermore heightened in this particular challenge.
Parker has stated the airline would never again lose money, he lost a bet that the stock price would radically increase, and while few anticipated the current situation, Parker’s failed bombastic claims in the past have not made me more comfortable with my remaining redeemable miles.
Last week I highlighted that the company would rather pay cash to Cathay Pacific and charge their frequent flyers 70,000 miles to do so rather than fill their own 777-300ER which had sold just three seats to-date for which they have no available upgrades and charge 175,000 miles one-way. How could anyone have faith in an airline like that to make responsible business choices?
How I Diversify/Hedge
Many readers and colleagues have asked about my outlook on the airlines in this environment. I have disclosed that I invested personally in some airline stocks including American Airlines (I’m not a financial advisor, don’t take my advice.) But my current concern is that of all of the carriers, American Airlines may be the most likely to file bankruptcy. Others disagree with my assessment, and some agree.
While miles have never been sacrificed in the past, if a situation in which the airline was broken up and sold off, all reliability in that balance would be out the window. With revenue down 90% for some carriers, it’s hard to say who will make it – even Emirates is flying to just three destinations, and South African Airways is likely to shut down entirely.
I am taking the following three steps to protect myself from an American Airlines bankruptcy, even if just on a temporary basis:
- Spending has moved from any individual program to solely with credit cards that earn transferrable points to a variety of programs like the Chase Sapphire Preferred or the American Express Gold card.
- I am spending my miles far out in the future and as much as possible redeeming on partner carriers backed by their governments or less likely to fail.
- I am cautious about buying any tickets in cash on suspect carriers.
Conclusion
American Airlines may come out of this crisis just fine, but they also may not. No one has a crystal ball so it’s impossible to say how American or any other airline will come out. That said, I am not playing roulette with my money nor my miles and won’t place any faith in the carrier’s future.
What do you think? Have you dodged carriers that you think may be in trouble? Do you think all the US carriers will come out ok?
@ Kyle — There is exactly 0% chance American will default on its miles.
+1. Even in the event of bankruptcy, the airlines will just keep going. It’s not like they haven’t done this before, some of them multiple times. As VFTW has pointed out repeatedly, the airlines MUST honor the miles, or the banks that bought the miles will dump the airline instantly and likewise customers will have no faith in the airline either. It ain’t gonna happen.
I do not exactly see your intention here but talking bad over AA right now might influence some gullibles reading your item. Has AA recently kicked your [redacted by admin]?? And you are ranting??
@Joey – Gullibles? Our readership is pretty well informed, I doubt that they would be duped. If you notice the links I included, you’ll see that I was once a 15-year loyalist to American but service and product have degraded terribly since their acquisition by US Airways management. You’d probably also see the leadership choices from Parker that I included that remain highly questionable, and then may recall the $34bn in debt the airline is carrying. You might have also noticed the arguments I included both for and against the airline declaring bankruptcy from both peers (will not declare bankruptcy) and mainstream business media (suggested they are at risk to file.)
Every single article that I read that is written by kyle leaves me feeling dumber than when I started. I seriously don’t even understand why I read his crap anymore… although it does make me chuckle a little bit at the stupidity.
Hi Lisa, always great to meet a fan. Do you disagree with the post on merit? If so, how?
Just because American had the largest stockpile of cash before the virus doesn’t make them the best prepared. American’s cash burn rate is much greater than the other airlines. Therefore, having the largest cash stockpile is meaningless when they are burning through that cash. This was the reason why American was first to sound the alarm about survival.
I think that unless there is another round of funding to the airlines from the Govt. (I hope not!) it’s pretty safe to bet that all but Southwest will file for Chapter 11 come this fall.
With that I think our miles are wholly safe. However I am not one to leave millions in my account like others. Earn and burn is my mantra ever since devaluations. And under Chapter 11 further devaluation of miles is a real possibility.
Should American or others go Chapter 7 I think miles will be the least of our worries.
Right now I am more trying to decide whether to get a $50K AAirpass at the new promo half the cost of the usual buy-in. I could burn through that in a year easily if I did not use any miles for travel and focused solely on AA. And I would get Concierge Key. But, if they go under I am SOL.
They were the most levered of the carriers, but had the most cash. I’m thinking that may work for them over the crisis. But really, knows what the skies will look like in the future. I think it is VERY possible in the next few weeks each of the Big 4, at least, will ask for substantial concessions from labor. (WN already has). That will predate Chap 11 by at least a year.
It been said many times before how does Parker keep his job? The board of directors need to wake up and fire Parker!
+1
It boggles the mind that such a corrupt, customer unfriendly CEO who has made blunder after blunder manages to keep his job. He’s despicable.
When Parker made his laughable statement about AA never losing money again, it was a sign the airline’s senior management was delusional. When AA started cramming 350 seats (slight exaggeration) and micro-closet toilets into each of their 737 MAX aircraft on the assumption that passengers wouldn’t care, Parker and his cohorts essentially said FU to the flying public. I haven’t forgotten, and neither should you.
Good to see you putting your money where your mouth is and voting with your wallet.
I’m confused how you can hate on American when they have definitely Handled refunds way better than both delta and united in their crisis. I think if anything that makes them the least likely to fail as I know many more people very ticked off about the credits for canceled flights from other carriers.
Are your comments based on conducting standard business as usual or is it based on what they are doing now to not burn through cash?
From what I have been reading, United is in worse shape financially and more debt due that any othe major.
There are two competing realities here. The first is that absent intervention of some sort, no airline will survive 18 months of social distancing. AA isn’t any better or worse in that regard than anyone else. The second, though, is that there is a roughly 0% chance that the government will allow any of the four majors to actually go belly up. As AA/DL/UA/WN all firmly fall in the “too big to fail” bucket, continuous bailouts will be the inevitable result. Yes, they’ll probably be forced to downsize significantly. I won’t rule out a turn through Chapter 11, though it’ll likely be the “prepackaged” variety like GM’s in 2008. But I really don’t see any point in worry about your miles. As a depreciating asset, you shouldn’t hoard them, but they aren’t going anywhere, either.
Another single minded terrible post by Kyle, based on *1* anecdotal evidence. AA is welcome to charge any amount they wish to charge for their own flights, especially for a flight 8 months from now. However, if an oneworld partner is offering a saver award available to fellow partners, because it is in desperation mode, it is obliged to offer the seat at that set rate. AA can reset its redemption rate to offset the desperation of its partner, but it does not have to. After all, AA would prefer to sell the seat instead of giving it away with only offset of balance sheet. Especially it’s a flight 8 months from now, which is really selling for leisure customers only. Last minute business travelers will always willing to pay more in cash than miles.
While no fan of AA, I can’t help but shake my head at the assertions made in this ill-informed missive. There is no reason to believe that AA is more or less likely to declare bankruptcy than any other US airline. And, even if they did, they would still operate – just as they did the last time they were in bankruptcy.
Sorry, but this article was a waste of time. For those of you who peruse the comments before reading the article, stop now and click away. You’ll thank me later.
I wrote you last week and told you you were considerably off about the load on that Hong Kong flight. By reiterating that false statement, you are doing a good job of losing my trust.