Will American Airlines File Bankruptcy? - View from the Wing

CEO Doug Parker told employees last week that the key to American Airlines success will be three things,

t
1. Build up (borrowed) cash
   
t
2. Reduce expenses
   
t
3. Increase revenue by convincing the public to travel

American started out with more debt than any other airline prior to the pandemic, and continues to layer on obligations. He spoke separately to pilots and to flight attendants, and he told flight attendants that 'a few hundred million' in interest payments is no big deal, they can afford it. In fact, American's annual interest payment obligations are over a billion dollars now and they're adding debt at nearly 12% interest.

Parker told pilots that an extra billion dollars of debt doesn't make much difference in a world of $50 million a day cash burn because that's just 20 days.

And he argued that letting an airline fail, or merge, only affects capacity a little and doesn't help any airline survive. All airlines will be smaller, collectively equating to an airline in the U.S. disappearing.

However credit default swap prices suggest American Airlines is going to have a difficult time paying off the debt it's accumulating, even if/when the world returns to normal. That debt is going to be a continued drag on its business, and Chapter 11 restructuring seems a likely outcome at some point.

And a 53% chance within a year. These numbers are probably a little high but give a very rough estimate. pic.twitter.com/cd5aqTlnJG

- Paul (@PointArb) June 27, 2020

There's no question American Airlines, and all of the major U.S. airlines, survive 2020. The federal government gave them over $50 billion. The question is what revenue looks like in 2021, and whether airlines can get closer to breaking even including debt service.

Once that happens though if American Airlines is carrying more debt, with greater debt service, they'll financially underperform the industry. And then Chapter 11 bankruptcy starts looking attractive in order to get competitive costs.

Doug Parker told pilots last week that he doesn't see any problem with increased debt, "It's manageable...we are going to be able to pay for it, so don't worry about that." Incremental debt, on the high side, will "add $500 million in interest expense" but "analysts were projecting American Airlines to make $4 billion in 2020" pre-pandemic. "The 30% reduction alone is more than $500 million a year in cost savings...We certainly can earn our way" out of increased debt. "We are well-positioned to earn through this."

If Parker's statements don't persuade you that bankruptcy isn't the airline's path, perhaps that he's taken his compensation entirely in stock the past several years and owns approximately 2.4 million shares in the company.

American Airlines will survive. Too many people equate Chapter 11 bankruptcy with "going out of business." Delta (and Northwest), United (and Continental twice), American (and US Airways twice) have all been through bankruptcy. There are substantial assets in planes and gates, and people will still want to travel (again). The question is whether the company will pay the obligations it's now incurring in full.