WorldTraveler
Corn Field
- Dec 5, 2003
- 21,709
- 10,662
- Banned
- #121
FWAAA,
Americans have become accustomed to “let’s buy the newest model just because it can do a lot the old couldn’t do” for years – and that is why the US is in the financial shape it is in.
AA’s mindset of “let’s replace 75% of our fleet over the next 5 years” doesn’t make economic sense and won’t fly with the creditors who do in fact have a great deal of control over AA’s future. Here’s why
1. Do you realize that even if you give AA a 50% discount on every airplane it has on order, the cost of its order book exceeds $25B over 5-7 years? In contrast, even if UA/CO orders a couple hundred new narrowbodies, the value of their order book will be about half of what AA has. ON the other end, DL has about $5B worth of aircraft on order, none of which are international aircraft (again 5-7 year perspective). WN has a couple billion dollars at best. AMR already has one of the highest debt ratios in the industry and it consists largely of aircraft in service today and yet AA thinks they can throw twice as much debt on over the next five years, leaving them with debt levels that will be three times what its competitors have – and it can create a viable business level.
2. Most of AA’s current aircraft assets have value and are also used to secure debt. In order to take on all of the aircraft AA wants to take on, it has to get rid of assets which have value and which are also securing debt which AA accrued funding its operations over the past several years. I’m quite interested in seeing how AA can convince their creditors that AA will be better off throwing away existing assets in order to acquire new assets.
3. Of course there are operational cost advantages from a younger fleet but no airline that has survived has ever obtained significant numbers of new aircraft with the intention of replacing viable existing aircraft. AA might want to get rid of its 757 and M80 fleet well ahead of its competitors – perhaps to compensate for not getting reducing its M80 fleet sooner – but other carriers can make money using aircraft older than 1st generation – and creditors will look at what competitors and AA can do with the same assets. Many of the costs that AA has because of having older aircraft in its fleet are related to its labor contracts. Needless to say, AA’s maintenance costs for older aircraft go down a whole lot if it starts sending them overseas for overhauls. Suddenly the advantage of buying new aircraft isn’t near as large – yet the financial risks for taking on that debt remain just as high.
4. New assets cost money – lots of it… not just in terms of paying for the actual asset but also for the interest on borrowing that kind of money. Interest on $25B even spread over the usual 20 year life of aircraft is a whole lot of money.
5. Then you have metrics like return on investment and return on invested capital which measure how well a company does in using the assets it has. Given AA’s much higher indebtedness level, it would have to obtain much higher levels of revenue in order to provide similar levels of debt coverage. Investors and lenders look at these metrics as indications of how well AA could potentially service even more debt. If you can’t generate acceptable levels of asset use, the chances of being able to obtain more debt and the associated assets are slim.
6. Finally, being mortgaged to the hilt is a dangerous position to be when strategic opportunities arise. If key industry assets become available that AA could really use to round out its network, AA would find it much harder to bid for those assets against a competitor with lower debt levels. For example, what would AA’s future look like if DL decides to bid for Alaska and AA has no financial ability to respond? The same scene could be repeated many times over the next few years as consolidation begins to cross international boundaries… and it could put AA or any other highly leveraged company – at a huge strategic disadvantage.
AA does have 18 months to get out of BK w/o things getting really messy. The first new aircraft should start to arrive about the time AA emerges. AA’s creditors do have a great deal to say about the plan AA develops to run the business for the future beyond BK. Once AA emerges, it can make changes but if the creditors do not believe it is in their best interests for AA to park a lot of viable, working assets in order to take on new aircraft at high debt levels which would create risk to AMR’s creditors long term, they could indeed reduce and slow down the size of AA’s fleet replacement plans.
Yes, DL and UA and WN (who really is now the 4th man in the 4 way nationwide airline battle) could all be greatly harmed if AA becomes a very efficient low cost carrier.... but the simple fact is that AA cannot get out the costs on top of having to reduce capacity and reduce the revenue gap which already exists between AA and the other 3 without labor costs being reduced to levels that are so low that the employees just decide to shut the company down - which is exactly what has happened to companies in the past.... when your labor is paid so low in order to compensate for other parts of the business plan that are vastly out of line with the rest of the industry, there is no incentive to make the company work.
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For the benefit of AA's future and AA employees' willingness to work to turn the company around, AA's grandiose fleet replacement plans will have to be slowed down. The creditors and AA's competitors know that.
