As coronavirus reduces travel, American Airlines is in a tough spot owing to its high levels of debt. Its next destination could be bankruptcy court.
Fears about the coronavirus epidemic have disproportionately hurt the travel industry, with airlines announcing a drastic fall in bookings, some by as much as by 70%.
American Airlines Group Inc (NASDAQ:AAL), with its high debt and poor ratings among flyers, now faces the prospect of repeating its 2011 experience – filing for bankruptcy.
Investors have taken note and are heading for the exits. Despite a Tuesday surge where the stock went up 15%, AAL has lost nearly 50% of its value from its 2020 high.
In 2011, a highly leveraged American Airlines filed for Chapter 11 bankruptcy protection. Many of the issues that were present in 2011 – high debt and ongoing labor dispute – are still impacting the airline today.
With regards to debt, for instance, American is now more leveraged than nine years ago. On this metric it dwarfs all its major rivals.
When filing for bankruptcy in 2011, American Airlines reported liabilities of $29.55 billion. This time round, American has more than $34 billion in debt.
This contrasts sharply with the $20 billion held by United Airlines Holdings Inc (NASDAQ:UAL). Delta Air Lines Inc (NYSE:DAL) and Southwest Airlines Co (NYSE:LUV) hold $17.4 billion and $4.6 billion in debt, respectively.
Already, AAL bonds are near distressed levels. This elevates bond investors’ worries over the carrier’s ability to repay debt. Last week some of the firm’s bonds were yielding over 12%. At time of low or negative interest rates, a double-digit yield suggests high levels of default.
On average, labor costs comprise around 35% of the total operating expenses of an airline. During the 2011 bankruptcy, labor issues were another factor that forced American Airlines into bankruptcy as unions constrained efforts to cut costs.
With a larger unionized workforce than say at Delta, where flight attendants aren’t unionized, reducing capacity in a downturn won’t be so easy. At a time when cost-cutting is absolutely necessary, American will find it hard to adjust.
At a time when airlines will be competing for a limited number of passengers, American lacks a compelling proposition among flyers. Among the nine major U.S. carriers, American Airlines was rated the worst airline in 2019. It ranks at the bottom on canceled flights, mishandled baggage, involuntary bumping and tarmac delays.
Such a poor reputation significantly lowers the odds that it will be able to ride out the coming storm successfully.
The downturn in flight bookings due to coronavirus is coming at a time when American is still reeling from the 737 Max debacle. American grounded 24 737 Max jets and had 76 more on order.
Sadly, even as the situation worsens due to reduced travel, executives at American Airlines are slow to take badly needed cost-cutting measures. Top executives at Southwest and United, airlines which have better balance sheets than American, have already cut their salaries as a first step. American’s senior management may delay this but the journey to bankruptcy court has already started.
Disclaimer: The opinions expressed in this article do not necessarily reflect the views of CCN.com.
Last modified: September 23, 2020 1:38 PM