Can The Financial Wizards Explain?

[Decision 2004]

I notice there are several corporate finance wizards on this bulletin board.

I have often wondered, how is it that American was on the brink of Bankruptcy with appx. 1.3 Billion cash on hand.

The Unions all gave sweeping concessions to avoid Bankruptcy filing.

Since that time, AMR has posted loss after loss quarter after quarter. Yet, the cash on hand increased to over $3 Billion.

I would like to know how this happens?

 

[flyhigh]

Debt financing. They sold bonds, etc. to get cash. Doing that however, was not possible before the new agreements were in place. Under AA's old labor agreements, creditors were looking at the plan and saying it doesn't work. Fix these issues and we'll give you cash. Not only were labor agreements changed, but so were contracts with lessors and vendors. The combination of those savings made it a more attractive investment.

Even though they are still losing tons of money (some of which is not cash) they are much better off than they were before the changes.

 

[FWAAA]

Net losses include non-cash expenses like amortization and depreciation, which don't deplete the cash balance; AA has been cash flow posititve nearly every quarter since the concessions, which has allowed the cash to grow to over $3 billion.

"Non-cash expenses" doesn't mean they represent things for which cash is never paid, of course, they are just the regular write down of long-lived assets like airplanes and other capital items.

 

[Connected1]

These are all good explanations.

I would also add that $1.3B in cash is not very much because our insurance policies require a portion of that cash to be set aside and left untouched ("restricted cash" in insurance lingo). The rest of the cash is used to try to pay the bills - most importantly, payroll and debt service obligations.

That said, bankruptcy is declared both because of the raw level of cash and the rate of cash burn. Pre-concessions, our cash burn rate would have necessitated bankruptcy. We would not have had enough cash to repay our creditors and that would have put us into default.

BTW, thanks for asking these types of questions. I would love to see more discussion of issues that are more closely related to business strategy and management. Seniority lists, layoffs, work rules, pay rates, and union representation all have their place in the puzzle, but they aren't the only thing that matters.

 

[Albatroz]

"

I notice there are several corporate finance wizards on this bulletin board.
I have often wondered, how is it that American was on the brink of Bankruptcy with appx. 1.3 Billion cash on hand."




1.3 Billion is not a lot of cash on hand for a company of AA's size. It is about what is needed to pay daily bills. I believe it was more or less what UA had when they declared bankruptcy. Of course, they had bills coming due, (that were going to eat up that reserve), that AA probably does not have. Or that AA, one form or the other, generates enough cash that allows them to meet obligations. But for a company the size of AA, DL or UA 1.3B is about what is necessary...less then that and trouble will start. That is about the magic figure, (1,2B), I have been reading about over the past couple of years.

 

[Decision 2004]

Thanks for the reponses do far.

I must not be a finance wizard.

Is there a way for me to make family cash reserves rise while operating my household in the red?

I would love to apply this type of math and finance to my personal bank account if possible.

Of course I would not be playing this game with Billions or Millions, but I would love to operate my household in the Red and still generate cash on hand, all the while claiming that my bottom line is improving.

Isn't this really a process of robbing Peter to pay Paul?

Is the Corporate debt climbing beyond the $22 Billion in exchange for cash in hand?

 

[FWAAA]

Is there a way for me to make family cash reserves rise while operating my household in the red?

I would love to apply this type of math and finance to my personal bank account if possible.

Of course I would not be playing this game with Billions or Millions, but I would love to operate my household in the Red and still generate cash on hand, all the while claiming that my bottom line is improving.

Isn't this really a process of robbing Peter to pay Paul?

Is the Corporate debt climbing beyond the $22 Billion in exchange for cash in hand?

[post="264796"][/post]​

Sure. Borrow money like crazy. Your checking account will have plenty of cash and you'll still be able to pay all the household help (after demanding and winning pay concessions, of course). Hope you have enough cash coming in to keep the scheme going.

Whether you like it or not, that's exactly what AA has done. It demanded and got pay concessions so it would not run out of cash in early 2003. Then it went back to the lenders who agreed to loan more cash (since their demands for concessions were granted). AA is doing what it can to avoid filing for Ch 11, despite Mr Owens' claims that bankruptcy would actually be the better option.

Total AMR debt is currently over $29 billion, not $22 billion.

 

[Decision 2004]

That is an honest answer FWAAA.

And one that should strike fear into all employees.

I'm betting this plan doesn't work!

WHY? Would NOT filing Chapter 11 be better for Corporate?

Please explain how the Corporation would not benefit from filing?

I see the clear evidence the damage it does to the worker, but it seems to really favor the fat cats.

It appears to me that AA will be at a major cost disadvantage when the dust all clear.

 

[FWAAA]

Fair questions. Mr Owens says that AA's AMTs are paid less than even UAL's remaining AMTs, so Ch 11 looks favorable to some employees from that standpoint.

Of course, UAL no longer performs heavy airframe maintenance, but that doesn't bother him, since he works the line and believes he could never be replaced by some "desperate for income" mechanic.

The downside of bankruptcy? Loss of control. Management has to ask the court and creditors for permission before implementing major decisions. Management doesn't want to ask you for permission to do anything, so you can imagine how attractive it becomes to have to ask the judge and creditors before acting. <_<

Then there's the hundreds of millions of dollars that UAL has paid and will pay to the assorted parasites like lawyers, investment bankers, consultants, accountants and others who get paid off the top in Ch 11. Everyone knows where that money comes from: workers, the easy source. And from the creditors.

AA demanded concessions (and got them) from lenders and lessors following the massive pay cuts imposed on the employees, accomplishing large savings without the costs and pain of bankruptcy. Some proof of that fact is that UAL's costs are still higher than AA's costs, and UAL has the legal ability to reject many of its debts. AA management may be stupid, but on this point they were highly successful. And the creditors and lessors knew it - they would rather deal with AA outside bankruptcy than inside Ch 11.

AA's numbers are better than UAL's numbers even though AA is still contributing to the pensions, something UAL hasn't done in over a year. I keep hearing about UAL's $5 billion in cuts, but their 10-Ks don't show anywhere near that much success at trimming costs.

And yesterday, Mr Owens confirmed my long-standing statements that spending on employee retirement is much higher at WN than at AA, when measured as a percentage of revenue or employee compensation. AA's DB plans require less cash right now than do WN's DC plans. Where's the cost advantage? UAL will have to replace its DB plans with some kind of DC plans, and those cost money. Lots of money.

Bankruptcy would allow AA to escape some of its unsecured debts, but unsecured debt isn't the problem right now - most AA debt is secured.

Ch 11 would probably cause the stock to be canceled, harming the "fat cats." The new stock would be issued to creditors who get reamed and to those willing to inject new equity. But who would be that stupid? Mesa? Air Whiskey?

Lately, people are criticizing Tilton and his high pay at bankrupt UAL. But it's not like he can be given equity; his only possible comp is high cash pay now. And it's not like people are lining up to try to manage a dying airline like UAL.

Not filing Ch 11 allows AA to be ready to pounce on UAL's Pacific assets when UAL finally gives up the ghost. And no other airline (other than WN, which won't be a competitor for the Pacific) has anywhere near the cash required to buy UAL's Pacific assets when the inevitable finally happens.

Fares need to increase, and the glut of domestic capacity (according to every airline CEO, airline analyst and many others) must be corrected thru capacity reductions. Change is painful, but it's gotta happen.

 

[Fly]

See you in bk FWAAA. AA won't be able to sustain this and will NEVER get UAL's pacific routes.

 

[aafsc]

People need to understand the difference between accounting profit and cash flow. Almost all corporations like AA use accrual based accounting. Cash flow is relatively simple, cash in cash out, like your checkbook or bank account. However, in accural based accounting there are basic concepts that are governed by rulings from the FASB, the financial accounting standards board. They issue pronouncements called Statements of Financial Accounting Standards. Under accrual based accounting, revenues are recognized when earned and expenses recognized when incurred to produce those revenues. A couple of examples. A person books a trip on AA in January (first quarter) for a trip April (second quarter) he pays when he books the trip. So now AA has his cash (debit cash) but owes him a trip (credit air traffic liability). When the person takes the trip in April, AA recognizes the revenue (debit air traffic liability) and credits revenue. Another example is prepaid expenses. Say AA pays $100 million a year for insurance. but since there are 4 quarters in a year, they expense $25 million per quarter. These are two simple examples. With a company the size of AA, it gets very complicated due to corporate tax rules, pensions, etc. The finance department at AA is mainly concerned with cash flow. Their job is to see to it that AA has cash (and access to cash) to fund all it's liabilities thus keeping it out of bankruptcy.

 

[Connected1]

Regarding the "choice" of bankruptcy...

Let us recall that the Board of Directors and management is hired to be the agents of the shareholders. If management were to willfully guide the company into bankruptcy, shareholders would likely lose 100% of their investment and then file suit against management and the Board of Directors. As we have seen in the cases of WorldCom and Enron, shareholders have set the precedent of going after the personal assets of those responsible for ignoring their fiduciary duties.

The Board has skin in the game. Management has skin in the game. That's why you won't see them purposely bankrupt their bosses.

 

[410OhOne]

Some of the best reading I have seen on this board yet.

 

[lpbrian]

Yeah, anything that turns off the TWU-AMFA crowd is worth reading.

 

[DECISION 2007]

Yeah, anything that turns off the TWU-AMFA crowd is worth reading.

[post="264861"][/post]​

Turns off? Go ahead and fill us with your brilliance. You set the values so well.