Amr Debt And Bankruptcy

[Bob Owens]

Yep. A huge chunk of the profits we were bringing in during the late 90's were going to pay off the debt from the early 90's. Assuming AA returns to profitability at some point in the next few years, we'll be doing the same -- paying down debt instead of paying out profit sharing.

[post="253491"][/post]​

Thats right, didnt they do a stock buy back that pumped up the price just in time for Crandall to cash out?

Wasnt that $2 billion? AA doesnt pay dividends so why buy back stock?

They also spun off Sabre.

Then they went on a spending spree. I remember one full page ad that bragged about the $7 billion in "improvements" that AA was making.

Profit Sharing? Well with a $500 million threshold not too many people were counting on it anyway.

 

[mweiss]

AA doesnt pay dividends so why buy back stock?

To reduce dilution.

They also spun off Sabre.

And this was a bad idea because...?

 

[FWAAA]

Thats right, didnt they do a stock buy back that pumped up the price just in time for Crandall to cash out?

Wasnt that $2 billion? AA doesnt pay dividends so why buy back stock?

[post="253782"][/post]​

To understand why stock buybacks were so popular in the 1990s (even for non-dividend paying companies), you have to remember tax rates.

Prior to Pres Bush's dividend tax cuts, capital gains rates were much lower than the ordinary income rates applicable to dividends. Most investors preferred stock buybacks because they didn't have to participate (receiving the cash became optional) and if they did choose to sell their stock, they would pay lower capital gains rates rather than higher ordinary income rates.

Thus, many companies bought back stock rather than declaring dividends with their surplus cash. Another example of the tax code influencing corporate decision-making.

Recently, some non-dividend paying companies have begun paying them, in part because of the now favorable effective dividend tax rates.

 

[Bob Owens]

And this was a bad idea because...?

[post="253797"][/post]​

Because it consistantly generated profits.

 

[Bob Owens]

To understand why stock buybacks were so popular in the 1990s (even for non-dividend paying companies), you have to remember tax rates.

Prior to Pres Bush's dividend tax cuts, capital gains rates were much lower than the ordinary income rates applicable to dividends. Most investors preferred stock buybacks because they didn't have to participate (receiving the cash became optional) and if they did choose to sell their stock, they would pay lower capital gains rates rather than higher ordinary income rates.

Thus, many companies bought back stock rather than declaring dividends with their surplus cash. Another example of the tax code influencing corporate decision-making.

Recently, some non-dividend paying companies have begun paying them, in part because of the now favorable effective dividend tax rates.

[post="253859"][/post]​

So? The point is that they spent $2 billion buying back the stock.Thats potentially $2 billion that they would not have had to borrow when things went south.

 

[mweiss]

Because it consistantly generated profits.

[post="254014"][/post]​

Consistently generating profits is not enough of a reason to keep a division. It can be more sensible to sell or spin off the division, in part because the money you get from doing so would reflect the net present value of projected future profits, with an allowance reflecting the risk of future unforseen events.

 

[Connected1]

One of the interesting things that I found going through the 2004 annual report was the discussion about the $834 million credit facility that was refinanced last December. It contains some covenants that would be violated well before AMR "runs out of cash." Should AMR not satisfy these covenants they would be in technical default of the loan. They wouldn't necessarily have to file for bankruptcy, but they would have to do something to satisfy their creditors. You can probably use these covenants as a rough estimate of the numbers that management expects (or at least aspires) to make over the next several years.

Here are the covenants:

* AMR must maintain unrestricted cash, unencumbered short term investments and amounts available for drawing under committed revolving credit facilities of not less than $1.5 billion for each quarterly period through September 30, 2005 and $1.25 billion for each quarterly period thereafter. AMR had about $2.9 billion of unrestricted cash and short term investments at the end of 2004, as well as positive operating cash flows. This covenant probably isn't the one to watch.

* AMR must maintain a ratio of EBITDA (less rentals) to fixed charges (comprising interest expense and rentals) of at least the amount specified below for each period of four consecutive quarters ending on the dates set forth below:

December 31, 2004 - 0.90:1.00
March 31, 2005 - 0.85:1.00
June 30, 2005 - 0.85:1.00
September 30, 2005 - 0.90:1.00
December 31, 2005 - 1.10:1.00
March 31, 2006 - 1.20:1.00
June 30, 2006 - 1.25:1.00
September 30, 2006 - 1.30:1.00
December 31, 2006 - 1.30:1.00
March 31, 2007 - 1.35:1.00
June 30, 2007 - 1.40:1.00
September 30, 2007 - 1.40:1.00
December 31, 2007 - 1.40:1.00
March 31, 2008 (and each fiscal quarter thereafter) - 1.50:1.00

AMR was at about 1.25 on this metric for the year ended 12/31/2004. That may seem like a lot of wiggle room, but just a 10% increase in the fuel price would bring that ratio down to 1.00 very quickly. Then when you consider that the winter months are historically terrible for the industry, that 1.10 number at the end of 2005 starts to look a bit steep. The hurdle starts to creep up slowly after that.

I am not predicting bankruptcy because the company is producing cash for the moment and has a decent safety stock. The company definitely needs to turn profitable within the next couple of years if it wants to replace aircraft or even grow a bit. If it does not, it could become the incredible shrinking airline absent some other means of raising capital such as spinning off a couple of units.

 

[Bob Owens]

Consistently generating profits is not enough of a reason to keep a division. It can be more sensible to sell or spin off the division, in part because the money you get from doing so would reflect the net present value of projected future profits, with an allowance reflecting the risk of future unforseen events.

[post="254020"][/post]​

Was that the case here? Sabre is still giving dividends. Still making money. How much did AA net from the spin off? How much do they now pay for the service they used to own?

 

[FWAAA]

Was that the case here? Sabre is still giving dividends. Still making money. How much did AA net from the spin off? How much do they now pay for the service they used to own?

[post="254465"][/post]​

In post #17 of the thread linked below, Former ModerAAtor said that the proceeds were used to pay down debt from the early 1990s and to pay profit sharing to the employees. Maybe AA used some of the proceeds to invest in Orbitz and Hotwire, both of which turned out to be fantastic investments.

http://www.usaviation.com/forums/index.php?showtopic=19020

What about AMR Combs (Charter jets) or SkyChefs? Mistake to jetison those two divisions as well?

 

[Bob Owens]

FWAAA,Mar 10 2005, 11:44 PM]
In post #17 of the thread linked below, Former ModerAAtor said that the proceeds were used to pay down debt from the early 1990s and to pay profit sharing to the employees. Maybe AA used some of the proceeds to invest in Orbitz and Hotwire, both of which turned out to be fantastic investments.

Maybe?

http://www.usaviation.com/forums/index.php?showtopic=19020

What about AMR Combs (Charter jets) or SkyChefs? Mistake to jetison those two divisions as well?

Maybe.

 

[mweiss]

Sabre is still giving dividends. Still making money.

So what? The concept is similar to a reverse mortgage.

How much did AA net from the spin off? How much do they now pay for the service they used to own?

[post="254465"][/post]​

I don't know. Do you?

 

[Boomer]

As far as AMRs' stock price goes when comparing it to the industry; look back on a 10 year big chart set for yearly intervals and marked on closing price. Set the reporting events for all.
You will see that unlike most other carriers(except LUV and UAL) AMR has split over the time frame 4.25:1
At todays close of around 6/share the split adjusted price is 26.
I'm a mechanic not a financial analyst but that sounds fairly competitive with the other Network carriers. Of course, LUV has outperformed on a split adjusted basis but AMR is still not doing too shabby.
As far as why the price is where it is; that seems to be linked to the question regarding the value of AMR stock derived from AE. During the first quarter of 2001, it was widely rumored that AE would be spun off and would bring around 15/AMR share. The tanking of the market since that time would leave me to believe that the current split adjusted price of about 26/share has that factored in. Absent AE and the synergies it creates with AA, 11/share on a split adjusted basis would still compare favorably with the other Network carriers.
The question remains as to the extent that AMR will be disadvaantaged by the Chpt. 11/ATSB applicants leveraging their cost structures down.

[post="19557"][/post]​

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My question is why would AMR be buying back stock over the same time frame that they were performing stock splits? It seems that one counters the other.

 

[FWAAA]

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My question is why would AMR be buying back stock over the same time frame that they were performing stock splits? It seems that one counters the other.

[post="255255"][/post]​

Nope, stock splits have no effect on stock buybacks.

Splits simply increase the number of outstanding shares together with a corresponding decrease in price.

For instance, assume 10 million shares at $100. A 2 for 1 split results in 20 million shares at a price of $50. Like exchanging your hundreds for two fifties. No difference in your net worth (unless the moneychanger is dishonest or careless). No money leaves the company with a stock split. Neither the shareholders nor the company are any better or worse off as a result of a split, since no cash changes hands.

Some companies think stock splits help keep their shares "affordable." For many years, Warren Buffett was immune to this nonsense, but finally issued a new class of Berkshire at about 1/30 the value of the original stock (original is now trading at about $95,000/sh).

When a company buys back its stock, it pays real money for the shares outstanding, usually buying them on the open market. That reduces the cash balance of the company, and reduces the number of publicly traded shares.

 

[mweiss]

There's one additional subtle effect of buying back shares. When issuing new shares, the company has to jump through a number of hoops. When a company buys back shares, the company owns them in the same way that any investor owns them. The company can then sell those shares on the open market at a later date without jumping through those hoops.

 

[Bob Owens]

mweiss,Mar 11 2005, 03:17 PM]
So what? The concept is similar to a reverse mortgage.

Well a reverse mortgage may make sense to someone who will likely die before its exhausted but corporations are immortal.If something is appreciating in value and you are not desperate for cash why get rid of it?



I don't know. Do you?

No. Thats why I asked.