American to keep Eagle's 2 billion plus debt

[furp]

http://www.bloomberg.com/news/2011-08-04/amr-said-to-plan-on-american-keeping-eagle-s-debt-to-aid-spinoff.html?cmpid=yhoo

 

[odie01]

http://www.bloomberg.com/news/2011-08-04/amr-said-to-plan-on-american-keeping-eagle-s-debt-to-aid-spinoff.html?cmpid=yhoo

The way this reads to me is they (AA), will be leasing back to Eagle the Airplanes/Debt that they are acquiring. Another money maker that will do nothing for the bottom line until contracts are settled.

 

[FWAAA]

AMR has no real choice but to "keep" Eagle's debt. AMR was forced to guarantee most of Eagle's debt as Eagle bought airplanes and to get out of those guarantees, AMR would unddoubtedly have to pay the creditors some very large piles of money. So it makes sense that AMR will keep the debt (and the planes) and lease them to Eagle.

Yet another reason I don't think throwing Eagle out of the nest is the best move. Plenty of management mistakes over the years, and my feeling is that spinning off Eagle joins that list. AMR waited several years too long to shed Eagle. CO made tens of millions (maybe even hundreds of millions) when it sold off XJET - that was the time to do it, when the market thought that regional commuter airlines had value.

 

[WorldTraveler]

let's do a little math here...
$2B of debt comes out to $300 to $400 million in interest payments per year alone and that doesn't touch paying down the principal.
Since the principal is on 50 seat regional jets which have very low resale values, it is possible that within a few years, the assets will have no value. I don't know how close to being paid for the regional jets are, but it is very possible that AMR will have paid $4 billion or more to get rid of Eagle.
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In the latest financial quarterly results, DAL spent $2.7 billion for the last 6 months on regional carrier capacity purchase agreements which includes fuel but which doesn't include their owned regional capacity (Comair). UAL spent $1.2B in the past 6 months for its regional carrier capacity purchase agreements but it does not say that it includes fuel although the increase in costs was similar between DL and UA. Not sure the total size of the regional carrier purchased capacity between AA, DL, and UA but DL's regional RPMs are similar to UA's and both of which are a bit more than twice the size of Eagle.
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Based on a similar size scale and assuming that DL and UA are getting the best capacity purchase agreements (which may or may not be true) and given that DL and UA also have alot of 50 seat RJs in their capacity agreement, it would appear that AMR would have to come up with savings on the order of more than $750M per year - about one-third of what UA spends on capacity purchases for an operation that is about twice the size of Eagle - in order to break even on the interest payments and the debt which they will likely write off.
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I don't know if AA can find that kind of savings - but it isn't out of the realm of possibility.
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It still would appear that the bigger issue for AA in adding larger RJs is the APA contract with APA which I believe - correct me if I am wrong - limits the number of larger RJs can fly.
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So the potential benefit from an Eagle divestitute might be limited by AA's ability to add more large RJs.

 

[FWAAA]

let's do a little math here...
$2B of debt comes out to $300 to $400 million in interest payments per year alone and that doesn't touch paying down the principal.

I'm pretty certain that the interest rate on this debt is not 15% to 20% but is instead probably averages more like 8% to 10%

At 12/31/10, AMR had $10.5 billion of long-term debt with interest rates ranging from 1% to 13% and in 2010, AMR paid $823 million in interest on that debt. That's about 8% or so.

 

[WorldTraveler]

you are right that the interest payments are probably not that high... but if you factor in that the $2b will likely be written off, then it isn't hard to assume a $500M cost per year within 5 years. Of course, accounting doesn't necessarily work that way... you take a big charge in order to restructure to levels that allow lower operating costs. Still, based on UA's regional carrier expenses, AMR would need about a 25% reduction in costs in order to make the deal work financially.
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Based on DOT reports, AE's costs for 145s is 11.4 cents/ASM compared to an industry average of 9.6 for a bunch of CR2 operators most of whom fly under contract... not quite a 25% savings.
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However, if you look at CR7 costs between AE and other carriers, AE's CASM is right at 25% higher than other operators - but a big chunk of that increased cost is fuel related - which probably has to do with the way costs are shared between the regional carrier and the mainline that buys the capacity. SO, I'm not certain that other operators could bring AA's costs down by 25% or more.....
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the biggest factor in reducing regional carrier costs appears to be the ability to use larger RJ's.... the CR7 has an average CASM of 6.9 and the CR9 is below 6 cents.... comparable to some mainline aircraft. But again, AA's ability to get access to those kinds of costs is related to the AA-APA contract.
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So, I would agree that even with the difficulty in looking at regional carrier finances because of how they are shared with the mainline carrier, I'm not sure if there really is enough financial benefit to AA... but perhaps the bigger issue is that if they break the AE connection now, they will be in a position to choose the lowest cost carriers down the line....

of course, if the intention is for AMR to file for bankruptcy then this step makes it very easy for AA to dispose of AE.... they spin it off before the BK, file for BK and then reject the leases on the aircraft and the associated debt - and with no aircraft left to fly, AE is history - and AA is free to contract with whoever they want for regional flying....
or
AE can reduce its own costs, reassume the aircraft it wants to keep flying - and thinks it can make money doing so, and become quite a successful "new" airline.
AMR makes money on AE's newly issued stock if AMR gets rid of the "old" aircraft and associated debt and AE is then able to purchase equipment that is compatible with the industry's needs today....perhaps even flying for AA again.
The industry and AA could both benefit from a wholesale rejection of hundreds of 50 seat and smaller aircraft.
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let's let this play out.. it may or may not turn out to be such a bad deal....

 

[TWU informer]

But what if soon after the fact, the idea was to liquidate Eagle in short order and all commuter flying actually becomes under the AA banner once again?

It would then make all the sense in the world to keep the debt and lease the aircraft, and gone would be Pilot Scope issue. 😛h34r:

Maybe everyone here is so negative that they cannot see the potential.

AMR leadership is complete dumbass, but never under estimate the idea of an outside consulting firm.

 

[WorldTraveler]

I don't think the economics of flying 70 seaters will ever work at mainline pay rates for any US carrier but perhaps the new generation C series or E jets would... and that could give APA the willingness to allow AA to add more 70 seaters....
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either way, I think you are right that it might be premature to write this deal off but it might also be that the divestiture is just part of the process of restructuring regional carrier operations.

 

[Bob Owens]

I'm pretty certain that the interest rate on this debt is not 15% to 20% but is instead probably averages more like 8% to 10%

At 12/31/10, AMR had $10.5 billion of long-term debt with interest rates ranging from 1% to 13% and in 2010, AMR paid $823 million in interest on that debt. That's about 8% or so.

Its very much possible that the Eagle debt interest is 15% to 20%. Lets not forget that just because the overall rate on all the AMR debt looks to be around 8%, according to you, that the debt is probably not a single payment, just as we have mortagage debt and credit card debt, (at much higher rates). We could be paying 5% on our mortgage, which has a home as collateral, or over 20% on credit card debt which doesnt have anything. Lets face it, those RJs are about as valuable as the Shorts they replaced. Nobody wants them and nobody likes flying on them. Pilot shortages, high fuel costs, conjested airspace, makes 50 seaters a waste. I hear AA it discontinuing RJ service between BOS and LGA in a few months, putting in 737 service instead. Makes sense, they also have a fair chance of picking up a few mechanics, if JETBlue doesnt scoop them up first. Eagle Pilots have already been told to get ready to go to AA.


A billion for JAL, the largest aircraft order in history and now another $2 billion that AA can spring for, only hardens my resolve to get what we need or sink the whole enterprise.

 

[Frank Szabo]

Its very much possible that the Eagle debt interest is 15% to 20%. Lets not forget that just because the overall rate on all the AMR debt looks to be around 8%, according to you, that the debt is probably not a single payment, just as we have mortagage debt and credit card debt, (at much higher rates). We could be paying 5% on our mortgage, which has a home as collateral, or over 20% on credit card debt which doesnt have anything. Lets face it, those RJs are about as valuable as the Shorts they replaced. Nobody wants them and nobody likes flying on them. Pilot shortages, high fuel costs, conjested airspace, makes 50 seaters a waste. I hear AA it discontinuing RJ service between BOS and LGA in a few months, putting in 737 service instead. Makes sense, they also have a fair chance of picking up a few mechanics, if JETBlue doesnt scoop them up first. Eagle Pilots have already been told to get ready to go to AA.


A billion for JAL, the largest aircraft order in history and now another $2 billion that AA can spring for, only hardens my resolve to get what we need or sink the whole enterprise.

I believe that Centrepork's plans trump your resolve, Bob. Of course, AMR couldn't rid themselves of Eaglet's debt so they take it on and, to me, it's just another signal re: the upcoming shitstorm of a Chapter 11 filing.

Bully! Git 'er done!

 

[FWAAA]

Its very much possible that the Eagle debt interest is 15% to 20%.

No, it's not "very much possible," it's practically impossible.

AMR's debts are detailed on pages 63-65 of the AMR 10-K (pages 65-67 of the .pdf). As I pointed out above, the secured long-term debt carries effective rates ranging from 1% to 13% instead of WT's 15% to 20% uninformed guess.

Lets not forget that just because the overall rate on all the AMR debt looks to be around 8%, according to you, that the debt is probably not a single payment, just as we have mortagage debt and credit card debt, (at much higher rates). We could be paying 5% on our mortgage, which has a home as collateral, or over 20% on credit card debt which doesnt have anything.

The 8% approximation is according to AMR, not me. I haven't yet bought into the "every number in the 10-K is fabricated lies" but you're free to do so. AMR's secured aircraft debt (of which this Eagle debt is a part) is like mortgage debt and carries rates of 1% to 13% while AMR's unsecured debts (including the debt convertible into stock) ranges from 6.25% to 10.55%. The bulk of the existing Eagle debt was incurred in the late 1990s as all of those 50 seat (and 37 seat and 44 seat) RJs were delivered. The Eagle debt isn't like unsecured credit card debt. The airplanes were valuable when acquired even though the planes have become virtually worthless. Decline in the collateral value doesn't enable the creditor to increase the interest rate to usurious-like 15% to 20% rates.

Lets face it, those RJs are about as valuable as the Shorts they replaced. Nobody wants them and nobody likes flying on them. Pilot shortages, high fuel costs, conjested airspace, makes 50 seaters a waste. I hear AA it discontinuing RJ service between BOS and LGA in a few months, putting in 737 service instead. Makes sense, they also have a fair chance of picking up a few mechanics, if JETBlue doesnt scoop them up first. Eagle Pilots have already been told to get ready to go to AA.

No argument from me about the diminished value of 50 seat (and smaller) regional jets. Given a choice, passengers prefer them to the Shorts, ATRs and Saabs they replaced but of course, they don't hold a candle to the 70-100 seat larger RJs.

A billion for JAL, the largest aircraft order in history and now another $2 billion that AA can spring for, only hardens my resolve to get what we need or sink the whole enterprise.

I'm not sure what this has to do with anything, but AMR was only willing to invest/loan JAL money to keep JAL in Oneworld, but JAL refused the money and no investments or loans were ever made. Large aircraft order? Fuel savings will make the payments on those new airplanes unless fuel gets cheap again. Another $2 billion? AMR is already on the hook for that debt and I can't think of a cheap way for AA to free itself from that. Freeing itself from that debt would probably cost hundreds of millions of dollars.

Yes, get what you need or crash the entire operation. I wish you luck.

 

[will fix for food]

But what if soon after the fact, the idea was to liquidate Eagle in short order and all commuter flying actually becomes under the AA banner once again?

It would then make all the sense in the world to keep the debt and lease the aircraft, and gone would be Pilot Scope issue. 😛h34r:

Maybe everyone here is so negative that they cannot see the potential.

AMR leadership is complete dumbass, but never under estimate the idea of an outside consulting firm.

I'm sure the SEC and the shareholders would have an opinion about being issued stock just to have the company liquidated shortly after.

All the rumors at Eagle are starting to point in one direction and yes, this is a scope play, but it has nothing to do with American flying anything under 100 seats. When it's all said and done the APA may be wishing they accepted the company's unlimited 76 seater proposal.

We'll see how it all turns out. We have time to speculate, the BOD is supposed to give the final thumbs up or down in November.

 

[will fix for food]

I hear AA it discontinuing RJ service between BOS and LGA in a few months, putting in 737 service instead. Makes sense, they also have a fair chance of picking up a few mechanics, if JETBlue doesnt scoop them up first. Eagle Pilots have already been told to get ready to go to AA.

IIRC the BOS-LGA route can only be flown by American or a wholey owned regional affiliate per the APA scope clause. Since Eagle will no longer be that the route has to go back to AA.

The pilot flow to AA was a grievance resolution. In my opinion, it was a win-win. Some of the pilots will get to upgrade equipment and the company will get to shed itself of some top of scale pilots. I don't think it was intended to get rid of the pilots outright because Eagle is now advertising the flow to AA as an enticement to get new hire pilots at Eagle.

Of course the 10/11/11 cutoff date is in very fine print.

 

[WorldTraveler]

Whether the interest rate is 8 or 15% pales in comparison to the fact that AA will either write off the underlying debt because the aircraft have no market value or they will shed them in a bankruptcy filing which will have far larger consequences. When you are talking about writing down $2B, one hundred million dollars difference in costs doesn't change the outcome...
further, the real benefit of getting rid of Eagle comes in flying larger 70 seat and above aircraft because that is where the cost savings really come from - and there simply aren't enough large RJs available - nor can there be enough in 2-3 years - to replace AEs 50 seat and smaller operation. In that case, then AA will have to buy 50 seat capacity from other operators on at least an interim basis and if that is the case then the economics won't work.
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The question that should be asked is why AA mgmt did not have the foresight to put in staggered expiration clauses on the use of the 50 and smaller seat RJs - and AE still has a boatload of them.
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The frustration expressed here by labor highlights that all the strategic moves AA can come up w/ don't change the direciton of the company if labor and mgmt remain distantly separated..... and, yes, the long term implications of having a perpetually upset group of labor across the board does not bode well.

 

[fltguymk]

IIRC the BOS-LGA route can only be flown by American or a wholey owned regional affiliate per the APA scope clause. Since Eagle will no longer be that the route has to go back to AA.

The pilot flow to AA was a grievance resolution. In my opinion, it was a win-win. Some of the pilots will get to upgrade equipment and the company will get to shed itself of some top of scale pilots. I don't think it was intended to get rid of the pilots outright because Eagle is now advertising the flow to AA as an enticement to get new hire pilots at Eagle.

Of course the 10/11/11 cutoff date is in very fine print.

AE will cease ops out of BOS which cute service to YYZ, LGA and JFK. AA will begin flights to JFK 3X daily on the 737. Great news for commuters and pax connecting to JFK. Eagle cancels so often to JFK and our pax are stranded in BOS.