American Airlines Group: Is The Debt Really A Problem?

[Overspeed]

Despite a year of record profits American Airlines Group (NASDAQ:AAL) has had a rough year of share price performance. Among the concerns surrounding the airline is its debt load and a debt management strategy that has debt increasing rather than decreasing.
 
http://seekingalpha.com/article/3602046-american-airlines-group-is-the-debt-really-a-problem

 

[AANOTOK]

Doug and his $4 million plus automatic monthly stock exchange said debt was fine, so it's fine.

 

[jcw]

there is many articles on this topic - at today's interest rates it's not a burden in a different rate environment that's a different story

 

[dfw gen]

thats why we should start negotiations NOW so in five years when they enter bankruptcy again we at least saw some benefit.

 

[commavia]

Parker and Kirby have addressed this topic multiple times on earnings calls.  They have expressed that with debt as insanely cheap (both in absolute terms, and by historical standards) as it is these days, it's actually a better source of capital than shareholders.  Put another way, AA today (as per the 3Q15 earnings call) is able to raise debt in the 2-4% range, and as long as it believes that the assets its buying with that cash can generate >2-4% returns, then that debt is attractive because AA is making money on that spread.
 
Plus, as with all things, context is critical.  First, AA is paying off debt - namely, high-cost debt (an estimated $2.2B in total debt payments in 2015).  AA has trumpeted over and over that in the last 18 months, and up through this past quarter, it has continued to opportunistically turn over high-cost debt that was a holdover from AA's pre-bankruptcy period, in some cases at literally 2-3 times less interest than before.  In addition, debt is only one part of the equation - cash is another.  It's true that AA has about $20.5B in long-term debt and capital leases on its balance sheet, but it also has $9.6B in cash and cash equivalents (that's more than Delta and United combined).

 

[AANOTOK]

Debt is debt, and who do you think that debt will fall on the backs of if suddenly something catastrophic happens...The shareholders may foot part of the bill, but as witnessed in this last BK, they were made whole. The employees are the ones, and I'm not talking about Parker, Kirby, Isom. Just as Horton did, they will escape with parachutes, packages...miliions. The front line employees will have to sacrifice as is always the case when a company carries "B"illions of debt on the books and things go south. You make a comparison to AA vs Delta in cash and cash equivalent, how about a side to side comparison of debt vs debt.

 

[FWAAA]

Well put, commavia.

High debt can be a problem, especially if you're paying high interest rates. But as you and the article (and management) have pointed out, AA is reducing its high-interest debt and issuing very low-interest debt.

You don't pay down your 3% mortgage if you can earn more than 3% on the money, and AA is practicing that, in much larger scale.

Debt has always been (and will always be) an important part of corporate finance.

The third quarter balance sheet shows that AA's pension liability is substantially smaller than at some of its large competitors, and while not typically included in long-term debt, it's a very real drain on cash when the pension funds require contributions. If you compare net debt plus the pension liabilities of the big three legacy airlines, their total obligations aren't all that different.

 

[WorldTraveler]

no it is not well put because this statement is completely false.

 

Plus, as with all things, context is critical.  First, AA is paying off debt - namely, high-cost debt (an estimated $2.2B in total debt payments in 2015).

Articles have specifically noted that AA is taking on debt, not reducing it.

and when much of the debt is for refleeting which makes a whole lot less financial sense at low fuel prices, the justification for debt is harder to maintain.

Further, the context is that other carriers in the industry ARE reducing debt and AA's indebtedness is measured against what other peers are doing. that is the nature of a competitive industry.

Finally, it is fine to say that AA can borrow money cheaper than get it from investors but investors not banks set the market cap.

AA's market cap has fallen relative to the industry specifically because investors see AA's debt as a significant distinguishing factor between AA and other peers.

when other carriers generate better revenues, have lower costs, and do it with less debt, then AA's debt is very much a part of AA's problem.

And whatever Parker wants to say, he and Parker used the exact same strategy of high leverage at US and debt service does cost money. Further, AA is buying back stock just as other carriers are doing so the argument that they can focus on debt service isn't true because they are spending money on BOTH stock buybacks plus debt service.

ultimately debt service competes with other uses for earnings and AA will have no choice but to cut costs somewhere else - and just as it was at US, the chances are very high that it will be employees who will help balance AA's finances.

Given that Parker is already telling FAs and pilots who are watching the contracts they signed be surpassed by other carriers, but they will have to wait until their contract becomes amendable to improve on them while other workgroups are nowhere close to gaining industry leading compensation but may very well have to make significant concessions, Parker is well on the way to using the same leveraged balance sheet, below industry pay strategy that he used at US.

Why anyone thinks he would change his stripes at AA is beyond mind-boggling.

 

[commavia]

Actually, what I said was completely accurate.  AA is, indeed, paying off debt.  That doesn't the company isn't also, simultaneously, opportunistically taking on new debt at substantially lower borrowing cost.  Indeed, reading comprehension would have helped call attention to precisely that fact all the way back in my reply #5 (but why let peoples' actual, as opposed to imagined, words get in the way of a good anti-AA narrative?).
 
But, alas, what would I know, anyway?  I only have two business degrees and - unlike some people - don't think that goodwill can just be created and put on a balance sheet.  So don't believe me - believe AA's own Chief Financial Officer, who nine days ago said:
 
"In terms of capital expenditures, we expect total gross aircraft capex to be approximately $5.3 billion in 2015, of which approximately $1.3 billion will occur in the fourth quarter. In addition, for the full-year 2015, we expect to invest $900 million in non-aircraft capex, which includes many investments to improve our product. And we also expect to make $2.2 billion in debt payments."
 
Some people never learn to quit while they're behind when it comes to financial accounting - you'd think they would learn their lesson from past embarrassments.
 
Reality.

 

[WorldTraveler]

Debt is increasing. If you can't do basic math and realize that $5.3 billion in new debt minus $2.2 billion in debt payments is increased debt, then you shouldn't be commenting on the issue.

The fact that AA pays off some and takes on more than they paid off is not debt reduction.

that is debt restructuring.

If you have two business degrees and don't know the difference between debt reduction and debt restructuring, then you should ask for your money back - with interest.

It costs money to service debt and Parker is well on the way to using the same strategy he used at US - high leverage, low and/or stagnant pay.

 

[autofixer]

The bean counters always leave the debt = risk equation out of the mix.   

 

[Buck]

Perhaps if all of the labor contracts were settled, Wall Street would be kinder to AAL....

 

[commavia]

Once again your lack of reading comprehension - and desire to craft words for others that fit the narrative, rather than the other way around - has led to embarrassment.  I never said AA was engaging in "debt reduction," but rather that AA was "paying off debt" - which of course is entirely factual, as evidenced by the fact that AA's own CFO said it, verbatim, on the last earnings call.
 
The executive leadership of AA clearly believes it is behaving in an economically rational way by balancing risk and reward, issuing debt that is so cheap (again, sub-4%) that the expected future returns from the assets purchased with that debt - which are, notably, almost all modern, fuel-efficient jets - far exceed the cost.  Nevertheless, in recognition of the risk of assuming such long-term liabilities, AA has explicitly linked this level of debt with the decision to also maintain a massive amount of cash (again, more than Delta and United combined).  Parker and Kirby have essentially said as much in multiple fora in recent months.
 
And one thing is for absolute certain - Doug Parker and Scott Kirby know infinitely more about this than the Delta internet forum P.R. division.

 

[WorldTraveler]

AA is INCREASING DEBT no matter what words you want to quote.

The level of debt and the fact that it is increasing IS the problem.

 

[bob@las-AA]

 

 

 

+ 100 for each of you!!
Thank you both for your post, and to think that the "Association negotiating team", are just a bunch of clerks and mechanics dressed up in blue jeans and a wrinkled dockers shirt claiming now to be experts after the one-week training not too long ago. The insight the two of you brought from this article is what I have been trying to convey. Let's see if the ANT has enough for thought to consider the future financial state of the airline when drafting a TA.