US Airways Said to Seek $1.6 Billion of Term Loans to Refinance
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WorldTraveler
Corn Field
- Dec 5, 2003
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part of the incentive for US to pursue the AA merger was precisely because much of the debt that US took on = or refinanced in BK - is coming due in the next few years. It is not realistic for US to have to repay so much of the debt that is coming due in the next few years so close to the merger or at the very time that AA's business plan involves taking on tens of billions of dollars in new debt as part of their fleet modernization.
There will be a stark divide in the US airline industry; some carriers are reducing debt and deleveraging their balance sheets while the new AA and UA will be taking on tens billions of dollars of new debt in the next few years.
It doesn't take too much to realize that debt payments are a cost that some carriers will have to a much greater degree than others and that there are clear differences in the success of some companies and even countries based on the level of debt they carry.
There will be a stark divide in the US airline industry; some carriers are reducing debt and deleveraging their balance sheets while the new AA and UA will be taking on tens billions of dollars of new debt in the next few years.
It doesn't take too much to realize that debt payments are a cost that some carriers will have to a much greater degree than others and that there are clear differences in the success of some companies and even countries based on the level of debt they carry.
traderjake
Veteran
Overall, long-term, you're probably correct. Thing is, the cost of money has never been cheaper than it is right now. Interest rates are at historic lows. If you borrow billions at variable rates, then obviously you're vulnerable in the case of a slowdown or higher interest rates. But if you can sell bonds or lease planes at relatively low fixed rates for 10-20 years, this might be the borrowing opportunity of a lifetime. And if management at UA and AA guess wrong and debt service is an unsustainable burden, then so what? Chapter 11 is always an option.
AA's 2011 Ch 11 filing wasn't necessitated because of crushing debt. AA was not running low on liquidity and was able to service its debt and pay/refinance its debts as they came due. As the AA employees have loudly lamented over the past 17 months, this Ch 11 was primarily to force more efficient, lower-cost labor contracts. Sure, some airplane debt was renegotiated but debt relief wasn't the focus. AA's POR proposes paying all unsecured claims in full and even provides a small dividend to the existing equity holders - unprecedented in airline Ch 11 cases. Of course, that tells me that AA didn't shed enough debt - if the new equity is sufficient to pay everyone in full then creditors weren't harmed enough.
If new AA finds itself crushed by its debt load in a few years, it can always file another Ch 11 petition.
I've said it before - you can either buy fuel for old, inefficient planes or you can lease new planes with cheap money. The effect on the income statement is the same whether it's interest or fuel - both are subtracted in computing net profit or loss.
Fuel prices are highly volatile and right now, somewhat expensive, while generally, rates on money can be fixed for a period of years. Right now, AA's new plane lease payments on 738s are covered by the fuel savings and maintenance savings. Richard Anderson said the exact same thing about DL's 737-900ER order. DL has cornered the market on available fuel efficient 717s and MD-90s, so it's not as if AA could take the same path as DL on those ~100-120 relatively efficient used planes. With no real supply of 717s or MD-90s (beyond the ones that DL scooped up), that leaves AA with either buying far more fuel, at expensive prices for its older planes or leasing new planes.
It's similar to the gamble that people and utilities are making with solar panels. if electricity prices continue to escalate, then those solar panels on the roof will look like a brilliant decision. If electricity prices decline long-term, then those solar panels (like AA's new fuel efficient fleet) will look like an expensive luxury.
When all is said and done, AA may spend $1 billion or more on new plane lease payments every year above and beyond what DL spends. But if AA's fuel costs are $1 billion less than DL's fuel costs, then I don't see a dire future for AA. I don't see a big disadvantage. A gamble? Sure. Airline executives gamble all the time on the future.
WorldTraveler
Corn Field
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"Gamble" is saying that "if it doesn't work out we can just file C11 again."
C11 is an admission that the business is broken and can only be saved by taking drastic action including wiping out the people who have invested in the company, a class you have frequently spoken of as having been cared about.... if you leave the option to "just file C11 again" as if it is no more than getting a wart removed, then you are leaving out the option of failure.
Further, it is far from certain that the primary objective of cutting labor costs can be repeated since AA/US will still have pay rates below its peers even if actual labor costs are not lower because labor costs must consider seniority, benefits, and productivity. IT is far from certain that new AA could run a viable operation if it paid its employees well below average rates for an extended period of time...remember that a large reason why AA labor jumped into Parker's arms is because he promised pay raises which AA could not... even if Parker has yet to demonstrate that he can meet all he has promised with pay raises and revenue increases.
Even if loans are record low levels, those rates aren't available on all types of loans and aircraft loans have not dropped to the same level as other loans, esp. consumer related.
It is precisely because DL is replacing over 300 aircraft in its combined mainline/regional fleet w/ current-technology aircraft between the 739ER, 717, and M90 that AA just isn't going to get the fuel advantage that some here think they will; UA and DL are replacing enough older aircraft, in part because of age as much as fuel efficiency, that AA isn't going to be significantly more fuel efficient.
Since UA and AA aren't generating profits of a size necessary to pay for the aircraft they are taking on, they will be taking on new debt. DL has already said they expect to pay cash for the aircraft they will take this year including the first batch of used 717s and 739ERs and DL's commitments in years to come are well within the amount of cash they have been generating.
Debt, no matter the interest rate, is still debt - and obligation that has to be paid. The simple fact is that in a shock, owned and low cost aircraft can be parked w/ little impact on finances while financed aircraft will have to be paid for regardless of whether they are flown or not. The simple fact is that AS, DL, and WN with much lower debt profiles will be better positioned to handle shocks to the industry and the global and US economy than will AA and UA - and the first three also will be lower CASM operators which means they will be able to use their financial strength against AA and UA in two ways.
I don't want another airline employee to be subjected to the threat of C11 or the very high likelihood that their pay, benefits, or scope will be eroded because the company had a bad business plan or allowed the possibility to get out of their commitments if it all didn't work out the way mgmt. planned.
C11 is an admission that the business is broken and can only be saved by taking drastic action including wiping out the people who have invested in the company, a class you have frequently spoken of as having been cared about.... if you leave the option to "just file C11 again" as if it is no more than getting a wart removed, then you are leaving out the option of failure.
Further, it is far from certain that the primary objective of cutting labor costs can be repeated since AA/US will still have pay rates below its peers even if actual labor costs are not lower because labor costs must consider seniority, benefits, and productivity. IT is far from certain that new AA could run a viable operation if it paid its employees well below average rates for an extended period of time...remember that a large reason why AA labor jumped into Parker's arms is because he promised pay raises which AA could not... even if Parker has yet to demonstrate that he can meet all he has promised with pay raises and revenue increases.
Even if loans are record low levels, those rates aren't available on all types of loans and aircraft loans have not dropped to the same level as other loans, esp. consumer related.
It is precisely because DL is replacing over 300 aircraft in its combined mainline/regional fleet w/ current-technology aircraft between the 739ER, 717, and M90 that AA just isn't going to get the fuel advantage that some here think they will; UA and DL are replacing enough older aircraft, in part because of age as much as fuel efficiency, that AA isn't going to be significantly more fuel efficient.
Since UA and AA aren't generating profits of a size necessary to pay for the aircraft they are taking on, they will be taking on new debt. DL has already said they expect to pay cash for the aircraft they will take this year including the first batch of used 717s and 739ERs and DL's commitments in years to come are well within the amount of cash they have been generating.
Debt, no matter the interest rate, is still debt - and obligation that has to be paid. The simple fact is that in a shock, owned and low cost aircraft can be parked w/ little impact on finances while financed aircraft will have to be paid for regardless of whether they are flown or not. The simple fact is that AS, DL, and WN with much lower debt profiles will be better positioned to handle shocks to the industry and the global and US economy than will AA and UA - and the first three also will be lower CASM operators which means they will be able to use their financial strength against AA and UA in two ways.
I don't want another airline employee to be subjected to the threat of C11 or the very high likelihood that their pay, benefits, or scope will be eroded because the company had a bad business plan or allowed the possibility to get out of their commitments if it all didn't work out the way mgmt. planned.
WorldTraveler
Corn Field
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No, there are indeed airlines that pay cash for airplanes whether you realize it or not.
There are also airlines that manage to reduce their debt faster than the cost of their capital expenses.
AS, DL, and WN have all managed to buy aircraft within the limits of their ability to generate cash which is probably why they actually have "owned" aircraft on their books and also why their debt levels are not going up even though they are taking on debt.
It also partly explains why their market caps are higher than their peers when adjusted for their size.
You're not going to find too many articles telling you that a more leveraged company is a better investment than another that is less leveraged, all things being equal.
There are also airlines that manage to reduce their debt faster than the cost of their capital expenses.
AS, DL, and WN have all managed to buy aircraft within the limits of their ability to generate cash which is probably why they actually have "owned" aircraft on their books and also why their debt levels are not going up even though they are taking on debt.
It also partly explains why their market caps are higher than their peers when adjusted for their size.
You're not going to find too many articles telling you that a more leveraged company is a better investment than another that is less leveraged, all things being equal.
WorldTraveler
Corn Field
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There are indeed airlines that pay cash for airplanes whether you realize it or not... I would suggest you read a few 10Ks or their foreign equivalents before you make such broad, sweeping statements.
There are indeed people and companies who don't buy what they can't afford...
Here is a citation from ALK's 2012 annual report on 10K.
"In 2012, we took free and clear delivery of four
B737-900ER, three B737-800 aircraft, and two
Q400 aircraft."
and
"We expect to pay for the firm future aircraft
deliveries in 2013 with cash on hand."
BTW, how much has LCC reduced its total debt since it emerged from BK?
There are indeed people and companies who don't buy what they can't afford...
Here is a citation from ALK's 2012 annual report on 10K.
"In 2012, we took free and clear delivery of four
B737-900ER, three B737-800 aircraft, and two
Q400 aircraft."
and
"We expect to pay for the firm future aircraft
deliveries in 2013 with cash on hand."
BTW, how much has LCC reduced its total debt since it emerged from BK?
- Thread Starter
- #10
LCC wasnt in Chapter 11, US Airways was, America West wasnt.
Company's debt amortization reduced by approximately $92 million annually from 2008 - 2010 and $1.234 billion in 2011. In addition, interest expense will be reduced by approximately $14 million in 2007 and $13 million in 2008.
http://seekingalpha.com/instablog/9910091-guy-kosov/1772141-us-airways-high-expectation-for-2013
Company's debt amortization reduced by approximately $92 million annually from 2008 - 2010 and $1.234 billion in 2011. In addition, interest expense will be reduced by approximately $14 million in 2007 and $13 million in 2008.
http://seekingalpha.com/instablog/9910091-guy-kosov/1772141-us-airways-high-expectation-for-2013
WorldTraveler
Corn Field
- Dec 5, 2003
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yes, you are correct. LCC was created by the merger post emergence.
US' interest expense is going down because of low interest rates, not because they have reduced their debt.
There is a chart on page 82 of LCC's annual report that shows that the debt they have paid off has been replaced by new debt.
LCC's cash position is about $400M better, mostly due to improved operating results but about 10% of which came from the slot transaction.
US' interest expense is going down because of low interest rates, not because they have reduced their debt.
There is a chart on page 82 of LCC's annual report that shows that the debt they have paid off has been replaced by new debt.
LCC's cash position is about $400M better, mostly due to improved operating results but about 10% of which came from the slot transaction.
