American Air Focuses on U.S. Aid While Rivals Sell Bonds, Equity

(Bloomberg) -- American Airlines Group Inc. is doubling down on government aid even as rivals expand their funding sources with sales of shares and bonds.

The largest carrier based on passenger traffic has been absent amid a recent flurry of activity in debt and equity markets tapped by Delta Air Lines Inc., United Airlines Holdings Inc. and Southwest Airlines Co. Instead, American is focused on negotiating a $4.75 billion loan from the U.S. Treasury Department. Like other carriers, American has already gotten U.S. payroll aid, taking $5.8 billion in grants and loans.

Airlines have been devastated as fear of the highly contagious virus and government-imposed traffic restrictions have erased 95% of passenger traffic compared with a year ago. American, already burdened by industry-leading debt of about $30 billion, is burning through about $70 million in cash each day, a figure it expects to decline to $50 million in June.

“American’s liquidity position is dependent on government aid, bucking the trends we’ve seen from other airlines,” Helane Becker, a Cowen & Co. analyst, said in a note Thursday. The carrier “will likely have to raise more cash given current demand, cash burn level, and 2021 refinancing needs.”

American fell 5.6% to $11.92 at 2:22 p.m. in New York. The shares tumbled 56% this year through Wednesday, the second-worst performance among a Standard & Poor’s index of the five largest U.S. carriers.

Grave Situation

“The uncertainty about the future weighs on everyone, and for good reason,” Chief Executive Officer Doug Parker and President Robert Isom said in a letter to employees as the carrier reported first-quarter results Thursday. “There is no way to overstate the gravity of the situation for the airline industry and the difficult decisions that are ahead of all of us.”

American already has trimmed $12 billion from operating and capital spending this year by slashing flying capacity 80% this month and next, parking aircraft and speeding up the retirement of older planes, freezing hiring and cutting executive pay. Nearly 39,000 workers have taken leave, retired early or accepted reduced hours.

Now the carrier’s “sole focus is to insure we have sufficient liquidity,” Chief Financial Officer Derek Kerr said. Securing the Treasury loan will bring American’s available funds by the end of this quarter to $11 billion, “which is going to compare favorably to anyone,” Parker said.

That number includes both the $5.8 billion in payroll aid and the pending federal loan. American’s three largest competitors also received some amount of a combined grant and loan from the U.S. Treasury Department to help offset labor costs in addition to other options for raising cash.

Efficient Option

Parker said he views the government loan process as the most efficient way for American to improve its liquidity at this point. “We could do some other things, but what we think the right way to sequence it for us is to get the $4.75 billion from the government,” he said.

American has about $10 billion in unencumbered assets, excluding the value of its AAdvantage loyalty program. An unspecified portion of those assets will be used to secure the federal loan. The carrier isn’t considering an equity sale at this time.

Delta secured $5 billion this week, including a $3.5 billion offering of senior secured notes originally intended to raise $1.5 billion, and a term loan agreement, according to a regulatory filing. Delta will have $12 billion in liquidity by the end of this quarter. While it’s submitted an application for a $4.6 billion Treasury loan, the airline has until September to decide whether to accept the funding. Delta has said it doesn’t plan an equity offering at this time.

Issuing Stock

Southwest tapped the bond market Wednesday for $2 billion of new debt, just one day after raising about $4 billion by issuing stock and convertible notes. Southwest has said it will apply for a $2.8 billion government loan, but will defer a decision on accepting it. United raised $1 billion from the sale of new shares on April 21, the first equity offering by a major carrier during the coronavirus pandemic. United also wants to apply for a U.S. loan, but hasn’t said if it will take it.

Parker acknowledged that American will be smaller coming out of the pandemic, echoing executives at Delta and Southwest. American won’t close any of its airport hubs, but it will be evaluating whether employee furloughs will be necessary, executives said. Parker expects a “long, drawn-out recovery” but reiterated he believes the crisis has bottomed.

“It’s hard to imagine any lower demand for air travel than we’ve seen the last few weeks,” he said. There have been recent glimmers of improvement.

American has seen an uptick in bookings for travel within seven days, although not a significant amount, as well as for bookings 90 days ahead of travel, he said.

The carrier reported a first-quarter adjusted loss of $1.1 billion, or $2.65 a share -- it’s first since emerging from bankruptcy and merging with US Airways in December 2013. Revenue fell nearly 20%.

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