AA and US merger?

[BoeingBoy]

and as been noted, they will park some owned aircraft and write them down... but that is debt they have to cover somehow and secured debt has a higher rate of recovery in BK... which means that if AA dumps a bunch of owned capacity, then the recovery for unsecured creditors is much less certain.

You're still hung up on this "owned" thing...

AA could renegotiate the payments on that debt downward. If the EETC holders don't go along, turn the airplane securing that debt over to them - "parking" airplanes since AA would no longer own or operate them. If the last decade's airline bankruptcies are any guide, AA will be pretty successful at renegotiating the EETC payments - the last thing people who invested in EETC's for the interest want is to own an airplane worth relatively little with no market for it.

FWIW, AA had already parked 46 MD-80's prior to the bankruptcy filing. Sometimes it's cheaper to just park an airplane, even if you have to keep paying the EETC holders, than operate it at a loss. Don't you think it's at least likely that AA will just turn those 46 planes over to the EETC holders and stop making the payments now that they've filed bankruptcy (if AA is indeed still making EETC payments on them)? They even have a replacement for one of them sitting in storage - a 737-800...

Jim

 

[FWAAA]

Jim,
About half of AA's mainline "older generation" aircraft are leased - and those leases can indeed be rejected or renegotiated in BK... they have plenty of capacity that can be cut within the "norms" of BK... and as been noted, they will park some owned aircraft and write them down... but that is debt they have to cover somehow and secured debt has a higher rate of recovery in BK... which means that if AA dumps a bunch of owned capacity, then the recovery for unsecured creditors is much less certain. If the recovery for unsecured creditors sinks too low, then the alternatives increase for the company to be sold or "parted out".

BoeingBoy is correct; the bolded portion of your post above is completely incorrect. You are simply misinformed about how bankruptcy works on secured debt. Bankruptcy permits the debtor to discharge even "secured" debt that exceeds the value of the underlying collateral. The excess of above the collateral value becomes unsecured debt and is discharged just like other unsecured debt. Had AA not filed a Ch 11 petition, then you might be correct, depending on the notes and mortgage documents. A repo of an owned plane outside bankruptcy would involve cascading defaults that would probably prove ruinous. Not so in Ch 11.

And I agree with BoeingBoy: if AA notifies lenders that it plans to relinquish some deeply depreciated collateral, those lenders will likely be willing to compromise so that they get something besides tens of thousands of pounds of scrap metal (in the case of MD-80s).

The more fat AA can trim out of its old airplane costs, the happier the unsecured creditors will become.

 

[WorldTraveler]

no, I get how unsecured and secured debt and renegotiation all works... but you all again can't see the forest for the trees.... ANY and ALL DEBT that is renegotiated becomes a claim in BK... I have never said you can't renegotiate owned assets but there is a limit to how much you can expect your creditors to give up before they decide it is no longer worth keeping the company alive.
.
Given that AMR has 400 owned or leased MAINLINE aircraft and several hundred more RJs, they could potentially be asking to write off billions of dollars in debt.... in addition to benefit cuts which employees will make, there is an effective limit of how much AA can do... that is why it took US two rounds of BK to accomplish all it did.
.
After years of arguing about now noble AA was in not filing for BK, there is now an exuberance at what AA can accomplish in BK... history shows that AA has enormous power to clean itself up but you never get everything you want.
.
And keep in mind all of these assets are happening against a backdrop of significant competitive incursions which will continue to put enormous pressure on AA's revenue generating capacity - and thus the outlook for the creditors to believe that AA can cover the debt it is left with the stock the company chooses to issue.
.
It is far too early to know how well AA/AMR will fare by the time it emerges - or if it is able to succeed at the turnaround it is seeking.

 

[usa1]

In addition to benefit cuts which employees will make ... After years of arguing about now noble AA was in not filing for BK, there is now an exuberance at what AA can accomplish in BK... history shows that AA has enormous power to clean itself up but you never get everything you want.

What's he's trying to say is AA can now hose the hell out of her employees .... and he can keep buying his tickets on the cheap ... and resume being the " WorldTraveler" he is ...... on your back!

 

[WorldTraveler]

What's he's trying to say is AA can now hose the hell out of her employees .... and he can keep buying his tickets on the cheap ... and resume being the " WorldTraveler" he is ...... on your back!

except that you have the players confused....I am not the one that has been arguing about how much AA can cut in BK... I argued for years about what AA needed to do TO STAY OUT OF BK.
Now, FWAAA and others, after arguing for years about how noble it was of AA/AMR to have avoided BK are now arguing that AMR will write down owned aircraft or reject leases on over 400 aircraft in the mainline fleet and hundreds more in the owned fleet and leave BK with virtually no vestiges of its former fleet - and at the same time argue why the creditors will find that this is an acceptable plan - a plan good enough that Doug Parker can be kept at bay.
Of course, he would rather see the aircraft debt holders and lessors take a hair cut instead of the employees - and we all want to see the pain spread around - but the financial institutions are not going to take a disproportionate amount of the cuts and let the employees off the hook....
.
The simple reality is that it is FWAAA and others who will find out that BK does have only as much power as the creditors are willing to accept... beyond a certain point, it is no longer worth them participating in AMR's reorganization and it IS worth more to them to see the company sold to others - in whole or part.
.
Further, all of this discussion about the older aircraft misses the point that most of the owned M80 fleet and large portions of the 757 fleet are close to or more than 20 years old and they likely were at the end of the original mortgages anyway. The greatest opportunity to reduce leases and write down owned aircraft is on those aircraft that are typically 10-15 years old... beyond 15 years, there is value but not a whole lot anyway.
.
Bottom line is unfortunately that AA won't be reducing its fleet costs as much as some here think they can... but they aren't in a position to get rid of 400 aircraft over the next 18 months anyway... realistically, AA needs to phase its old fleet out over the next 5 years while the new fleet is delivered.

 

[eolesen]

After years of arguing about now noble AA was in not filing for BK, there is now an exuberance at what AA can accomplish in BK... history shows that AA has enormous power to clean itself up but you never get everything you want.

Ironic that WT is accusing others of being a flip-flopper... A few months ago.... Nah, not worth bringing up...

I wouldn't call any of the AA employees or non-airline employee participants here exuberant. That said, the facts of the process are just that options are now available that AA would be foolish not to use.

There are also some who say DL and UA left money on the table in their respective bankruptcy processes. AA has the benefit of not repeating DL & UA's mistakes.

 

[NYCDelta]

You're right, most airlines will report decent profits this year (other than AA, which had numerous reasons for its loss). After I typed my response, I thought about it and you make good points.

But even the profitable carriers are cutting flights for next year because they fear that fuel is going to stay where it is or go higher, like all of DL's European flight cuts announced lately. One reason that AA was filling the planes at lower fares the competitors is that UA and DL have captured a fair amount of the higher revenue traffic in NYC and CHI and LAX from AA, and AA needed the cash, as all desperate companies on the verge of filing Ch 11 tend to do.

If fuel keeps going up and hits $4/gal or $5/gal, then more capacity will have to be removed unless everyone magically agrees to pay much higher fares. For airline employees' sake, I hope that fares can be increased without a large drop in quantity demanded.

I agree 100%. I certainly hope that doesn't happen. Airline employees have given up a ton and don't deserve to be taken to the cleaners again. If fuel goes up, airlines will remove marginally profitable flying, so in that sense capacity will be removed. Many analysts (take it with a grain of salt) believe that RJ's will be parked more and more and many smaller stations will lose service altogether. People will have to get used to driving further to bigger stations that still have service. Thanks for your well thought posts, it's nice to have respectful discussions without name calling.

 

[WorldTraveler]

I wouldn't call any of the AA employees or non-airline employee participants here exuberant. That said, the facts of the process are just that options are now available that AA would be foolish not to use.

There are also some who say DL and UA left money on the table in their respective bankruptcy processes. AA has the benefit of not repeating DL & UA's mistakes.

but once again, the process can only be taken as far as creditors are willing to be given a haircut.... there is a limit to how much you can get in BK and still keep the company independent.
Cash is an asset and because AA had more of it going into BK, that is one more asset that ultimately could be used to offset creditor claims - or at least the amount of debt that AA might need to take on shortly after leaving BK.
.
But it doesn't change the fact that AA has far more aggressive plans to dump its fleet than any other carrier has had and that those fleet changes will load up the company with an enormous amount of debt in the future... thus, there is no room for making any miscalculations on the amount that AA can save with its new fleet relative to the debt it takes on... and it still doesn't change the fact that AA will have debt levels 2-3X higher than DL or UA, its comparable network peers - and the savings AA will get won't offset the costs associated with the new fleet.... specifically because DL, UA, and WN aren't replacing their fleet and will price their product at levels necessary to return a profit based on the fleet they operate. If AA loses a signficant amount of pricing power - as is happening very rapidly with the increase in competitive incursions into AA markets - then the other carriers will price markets and whatever savings AA might have doesn't really matter if they can't price their own product.
.
BK is a tool that AA should use now that they have it... they will learn from others, just as DL/NW learned from UA/US and CO before. But it still doesn't mean that there are no limits - that AA can get everything it wants and the other carriers won't be able to overcome those advantages even w/o being in BK.
Remember, AA really limped along fairly well until a couple years ago even with much higher costs. The paradigm could be flipped this time that those other carriers could succeed quite well even w/ higher costs.
If other carriers control much more industry revenue and have locked up the business which AA has lost, then low prices don't translate into much more than being a low fare/low cost carrier - but still missing the highest revenue in the market.
.
None of us know how it will turn out but the notion that AA will come out smelling w/ a rose, ready to pick up right where it left off is more than a bit fanciful.
.
And yes it is true that regional jets will become less and less significant to the industry - but it also says that those carriers who have the broadest AND deepest networks will win. Having one or two strong hubs in the central US won't allow a carrier to compete against other carriers that will have 3-4 large hubs... the notion of how many hubs are too many will be very critically examined in the years to come... but multiple healthy functioning large hubs will be an advantage in moving capacity away from RJs to mainline jets for those carriers that have multiple hubs.
In addition, more and more traffic will be moving to point to point non-hub routes, which interestingly is a reversal of AA's current strategy of flowing traffic through its current cornerstones.

 

[FWAAA]

Further, all of this discussion about the older aircraft misses the point that most of the owned M80 fleet and large portions of the 757 fleet are close to or more than 20 years old and they likely were at the end of the original mortgages anyway. The greatest opportunity to reduce leases and write down owned aircraft is on those aircraft that are typically 10-15 years old... beyond 15 years, there is value but not a whole lot anyway.

At 12/31/00, AA's long-term aircraft debt was $2.6 billion (mainline AA, not AMR; AMR's debt included the Eagle RJ debt of about $1.5 billion). At 12/31/10, AA's (mainline, not including the Eagle debt) long-term aircraft debt was $6.1 billion (and that was down from earlier balances in the decade). I may be mistaken, but I do not believe that the older 757s or MD-80s were encumbered by original purchase money debt at that time. Immediately following September 11, 2001 and thru 2003, AA added billions of dollars of long-term debt secured by airplanes that had been unencumbered earlier in 2001. Some of that debt has matured and has been paid/rolled over. I do not know how much of AA's current long-term debt is secured by older MD-80s or 757s. We do know that nearly every AA plane is encumbered and we do know that MD-80s had higher market values in 2001 than they do now. I may be wrong, but most reasonable people would agree that MD-80s, regardless of age, have very little market value and early delivery 757s (now 20 years old) have much less value than they did 10 years ago.

Nearly every mainline delivery in 1999 and 2000 was paid for with cash and not mortgaged, but that changed beginning in late 2001 thru 2003 as AA borrowed against every available plane. Operating cash flow in 1998, 1999 and 2000 totaled about $8.0 billion.

The owned (and encumbered) MD-80s and older 757s and older 763s (now 25+ years old) may not comprise very much of the secured debt, but to the extent they do, the bankruptcy code will enable AA to reduce that secured debt to market value of the collateral.

 

[WorldTraveler]

I agree, FWAAA. Only relatively new aircraft in 2000 which are now "middle-aged" are likely to be worth much. Aircraft that already had 5-10 years at 2001 had their values set at that time which determined the amount of debt AA could take on mortgaged by those assets.
.
The M80s were relatively low value airplanes even in 2000 so I don't really think we are talking about huge volumes of aircraft.
.
The biggest opportunity to write down leased aircraft is on the newer 757s and M80s.
.
AA can and should do as much as it can within the ability it has to return value to the creditors for their cuts....
.
E,
go ahead w/ your previous statement. If you believe there are logical disconnects, let's discuss them.

 

[damajagua]

How Good Companies Use Bankruptcy to Their Benefit
By Tamara Rutter | More Articles
December 8, 2011 | Comments (0)

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By now you're aware that American Airlines parent company AMR (NYSE: AMR  ) filed for Chapter 11 protection. As the latest major U.S. carrier to file for bankruptcy protection, American faces significant challenges to keep its business flying. Let's look at rival carriers, and how their respective restructuring plans helped them become more competitive after emerging from bankruptcy.

Before we delve in, it's important to understand that shareholders at the time of bankruptcy usually lose everything. Businesses operating under Chapter 11 protection will generally be delisted from major stock exchanges.

When these companies go public after bankruptcy, new stock is issued as part of their reorganization plan. It's essential to understand that the old stock and new stock usually have no relation, even if they share the same ticker symbol.

An industry trend
American joins competitors Delta (NYSE: DAL  ) and United Airlines in seeking help from the bankruptcy courts. United filed for Chapter 11 protection in 2002, after the company was unable to secure a government loan guarantee to avoid bankruptcy.

At the time of filing, United's assets totaled $25.1 billion. In 2006, United emerged from what was the most expensive airline bankruptcy in history. The carrier was able to reduce its average annual costs by nearly $7 billion -- putting it back on the path to profitability. United parent UAL Corp. then merged with Continental in 2010 to become United Continental (NYSE: UAL  ) .

Over the past 12 months, United Continental has reported more than $33 billion in revenues, with a profit of $653 million. Compare that to American's $23.6 billion in revenues, and bottom-line loss of $982 million. Clearly, American needs to become more cost competitive if it wants to survive in the long term.

Delta flies into bankruptcy
Delta Airlines filed in 2005. One of the largest airlines in terms of passengers carried, Delta's assets totaled $21.8 billion at the time of its filing.

Two years later, the American Airlines rival emerged from bankruptcy stronger and more profitable. By restructuring much of its $20.5 billion hole of debt, Delta was able to remove unprofitable routes, reduce its fleet of aircrafts, and lower expenses -- eliminating about $2 billion in annual costs.

Additionally, by capitalizing on international routes with the highest profit potential, the carrier was able to successfully expand its global business. Delta now offers service to 351 destinations in 64 countries on six continents.

Clear for landing
In 2007, the airline emerged from bankruptcy having posted four straight quarters of profits. By the end of that year, Delta was able to reduce its net debt from $17 billion to $7.5 billion.

The airline left bankruptcy with $2.5 billion in exit financing from six leading banks including JPMorgan, Goldman Sachs, and Bank of America's Merrill Lynch. Delta used the financing to make payments for exiting bankruptcy and to boost its cash balance.

By taking these steps, Delta was able to lower costs and improve its capital structure -- issues that American Airlines hopes to tackle through the Chapter 11 process.

An unfair advantage
American Airline's costs have dramatically outgrown the costs of its rivals. Both Delta and United Airlines used the courts to reorganize their debt, while American was left at a disadvantage.

As American looks to restructure, the company could reduce its workforce and minimize travel on unprofitable routes -- similar to other airlines before it. However, it is business as usual for the airline, as operations remain on schedule heading into the holiday travel season.

Blue skies or a crash landing?
Luckily, the company had $4.1 billion in cash and short-term investments when it filed for protection. This cash hoard may help American retain more leverage during bankruptcy, as it won't have to rely as much on outside financing to keep its business flying.

The money is more than double the $1.5 billion Delta had when it filed in 2005, as well as the $800 million under United Airlines when it sought protection in 2002.

American hopes bankruptcy will help strengthen its balance sheet and build a foundation for long-term success. Tim Horton, the new CEO of AMR, has little doubt about the airline's eventual recovery. In fact, Horton confirmed a jet deal with Boeing (NYSE: BA  ) and Airbus to deliver American's new narrow-body aircrafts.

But don't worry; the contracts for new planes are hardly a splurge. The jets come equipped with General Electric's (NYSE: GE  ) new Leap X's engines, which should boost fuel efficiency by 15% -- ultimately cutting down fuel costs for the airline.

AMR faces significant challenges and tough competition going forward. However, it wouldn't be the first U.S. airline to exit bankruptcy as a stronger version of its former self. Click here to track AMR's journey to profitability with My Watchlist, a free Motley Fool service.

Add United Continental Holdings to My Watchlist.

 

[eolesen]

Tim Horton is in charge? Awesome. Donuts for all!

 

[JFK Fleet Service]

The coffee isn't too bad either...

 

[cokeorsprite]

i like the gingerbread donut

 

[BoeingBoy]

Now, FWAAA and others, after arguing for years about how noble it was of AA/AMR to have avoided BK are now arguing that AMR will write down owned aircraft or reject leases on over 400 aircraft in the mainline fleet and hundreds more in the owned fleet and leave BK with virtually no vestiges of its former fleet - and at the same time argue why the creditors will find that this is an acceptable plan - a plan good enough that Doug Parker can be kept at bay.

FWIW, AA has been writing down it's owned aircraft since getting them - it's called depreciation. What hasn't been "written down" (lowered) is the EETC payments, other than whatever little (if any) they were able to do in 2003. That's the problem the EETC holders face - the collateral for their EETC's has less book value than the payments reflect in many cases.

Now, who's been "arguing that AMR will write down owned aircraft or reject leases on over 400 aircraft in the mainline fleet and hundreds more in the owned fleet [presumably you mean Eagle fleet] and leave BK with virtually no vestiges of its former fleet?" I think what FWAA has been saying, and know that I have been saying, is that the older planes have lost enough value to get the EETC holders to agree to lower payments or, for any that don't agree reject the planes. Past bankruptcies show that most EETC holders will see lower payments as being preferable to taking an airplane - these are people in the financial business - even individuals - not airplane brokers. When they got the EETC, of a share of one, the last thing on their mind was getting an airplane. They just wanted the interest.

But it doesn't change the fact that AA has far more aggressive plans to dump its fleet than any other carrier has had and that those fleet changes will load up the company with an enormous amount of debt in the future...

Oh, now I see who's been saying that AA will exit BK "with virtually no vestiges of its former fleet." Seems it has been you.

Jim