American Airlines Could Face Chapter 11 Bankruptcy

Three successive rounds of taxpayer bailouts and the recovery of the airline industry should be good news for American Airlines, as it is for other U.S. carriers. However American remains in a more precarious financial position than its competitors and has large maneuvering room than other airlines do facing the headwinds that are on the horizon for the industry.

The financial statements show American's assets and liabilities in different ways. Their second quarter balance sheet contains $76.4 billion in Liabilities and $68 billion in Assets. There are four major challenges that could make things worse for the airline.

1. Interest rates are rising. American has the most debt of any airline. As the debt matures and they need to roll it over, interest expense will rise. They’re already making $2 billion per year in interest payments, and outstanding debt will be getting more expensive. They’re in a race against time to make money now in order to pay off debt before it becomes unsustainable. Whether they can keep making money depends on factors largely outside of their immediate control.
2. Labor costs are rising. They’re in contract negotiations with their pilots and already publicly offered a 17% raise, and the union was unimpressed (though United’s pilot union pulled its endorsement of a recently-negotiated contract on the news).
3. Fuel is an open question. Does we stay at $100 oil? Historically $100 oil has been challenging for airlines. The recent fare environment has supported it. Will it continue to?
4. Recession is looming. That could hit demand hard. And demand will already fall in the fall – it always does, though usually the end of summer travel gets replaced by an upswing in business travel. That’s unlikely to happen in full force in 2022, with not everyone (especially in big cities) back in office and many companies not having fully restored their travel budgets this year. During the second quarter earnings call Vasu Raja reported corporate managed travel recovered to 70% – 75% of pre-pandemic levels.

American Airlines could wind up in chapter 11 reorganization after receiving about $10 billion in taxpayer cash and subsidized loans. It is the most vulnerable of the big airlines. The carrier needs to service its debt, and a recession and higher interest rates will cause it to lose money.

Since it will have higher debt servicing costs than competitors, American is unlikely to improve its balance sheet.

They are expensive to operate. They are selling status-qualifying miles to partners at a premium compared to how they have priced redeemable miles. They can't be an ultra low cost carrier with low fares. They need to sell a product that customers will pay a premium for. The airline's margins haven't recovered even now that they're profitable. It has to be different. How long do they have to make that happen?

All of the major US airlines will survive in 2020. The federal government gave them a lot of money. Is it possible that airlines can get closer to breaking even in the next few years? If American Airlines is involved.

In airlines.

The management of American Airlines is known for beingpenny wise and pound foolish. They spend a lot of money on aircraft, investing in foreign airlines, and a new corporate headquarters while taking short cuts.

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The frequent flyer program is going to be spun off. The market cap of the airline is less than 180 million dollars. They are not the only ones. The frequent flyer program was valued at up to $30 billion.

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