Is a bankruptcy filing on the horizon for AMR Corp.?
The b-word is starting to swirl around the parent of American Airlines after the question was raised during a recent investor conference and the treasurer didn't completely dismiss the possibility.
The Fort Worth-based carrier has had only two profitable years in the past decade, its stock has slipped to a one-year low near $3 and credit-rating agency Moody's downgraded AMR's outlook to "negative" last week.
Some industry analysts think that the company is running out of cash and that a bankruptcy filing is possible. But others say the airline still has another year or two to turn its finances around.
"They have a mess on their hands when it comes to their operating costs and their financial commitments," said Bob Herbst, an industry consultant who runs AirlineFinancials.com. "They are just in bad shape right now."
Herbst said AMR needs to reorganize because its current business model is uncompetitive and unsustainable. He puts the odds that American will file for bankruptcy in the next year at higher than 50-50.
The company's assets look adequate. AMR expects to have $4.7 billion in cash and short-term investments at the end of the third quarter.
But it's also facing some large debt payments. AMR said that as of June 30, it had $1.3 billion in debt payments due by the end of 2011 and $1.8 billion due by the end of 2012. The total debt at the end of the second quarter was $11.8 billion. And when $7.9 billion in underfunded pension benefits and $2.5 billion in other long term liabilities are added, the company has over $30 billion in debt and other long-term obligations.
In downgrading its outlook, Moody's said it expects the company's cash position to drop in the medium term as debt payments and investments in new aircraft exceed operating cash flow.
But Maxim Group analyst Ray Neidl said that the cash levels are still strong and that AMR may be able to stem "the cash bleed" by cutting capacity and trimming other nonlabor and nonfuel costs.
"AMR is in no immediate danger of forced bankruptcy or under great pressure from its board of directors so management seems to be in no great rush to solve the challenging problems facing the company," Neidl wrote in a research note to investors. But Neidl was very critical of management for not being innovative in addressing the financial issues andfor hiding from investors.
In response to questions about the bankruptcy rumors, American spokesman Andrew Backover said: "That is certainly not our goal or our preference. We know we need to improve our results, and we have a sense of urgency as we work to achieve that."
AMR executives have acknowledged that the company needs to improve its financial performance and often point to an $800 million labor cost disadvantage when compared with other carriers like United Airlines and Delta Air Lines.
At an investor conference Sept. 13, AMR Treasurer Beverly Goulet was asked about a possible Chapter 7 liquidation or Chapter 11 reorganization. She dismissed the idea that the company was discussing Chapter 7 but avoided talking about Chapter 11. Instead, she answered by discussing the steps management has taken to cut operating costs.
And in a recent interview, Chief Financial Officer Bella Goren said the carrier continues to drive up revenues and evaluate operating costs.
"Our No. 1 financial priority and where we are laser-focused is to improve our financial results, because that's what matters," Goren said.
But critics say recent moves, including a "cornerstone" strategy focusing on five major hub cities and the announcement in July that AMR will buy 460 aircraft from Boeing and Airbus over the next decade to replace old planes in its fleet, may be too little too late.
AMR's stock has already dropped 57 percent this year, and it's the only carrier that is expected to lose money this year.
J.P. Morgan analyst Jamie Baker said investor concerns about a possible AMR bankruptcy are weighing on the entire sector. And while Baker believes that AMR may be able to refinance some of its aircraft-related debt in the fall and improve its cash liquidity, he is concerned that operating margins will continue to lag behind those in the rest of the industry.
"Our conviction in AMR's ability to tread water and avoid a court-supervised restructuring is indeed waning," Baker wrote in a research note Friday. "If trends don't reverse in terms of operations and forecasted liquidity (especially if our recession-based modeling unfortunately materializes), then the current market bankruptcy fear embedded in the prices of AMR equity and debt may prove prescient."
Hunter Keay, an analyst at Wolfe Trahan, does not forecast an imminent bankruptcy filing for AMR but said its cash could reach a critical level in 2013.
"We believe AMR's recent massive aircraft order will produce more harm than good, with operational efficiencies coming too late to close the gap on the company's [profit and loss] deficiency relative to peers … with or without new labor contracts," Keay wrote in a note to investors this month. The aircraft order included $13 billion in financing from the manufacturers for the first 100 Boeing aircraft and the first 130 Airbus aircraft.
In 2003, AMR avoided bankruptcy by getting its labor unions to agree to major concessions. Those contracts have since become amendable, and the carrier has been negotiating with pilots, flight attendants and ground workers unions for several years without reaching any tentative agreement. Unlike its peers that entered bankruptcy in the last decade, AMR still has pension obligations and more costly labor contracts.
Avondale Partners analyst Bob McAdoo said that airline executives in the past gladly entered bankruptcy to break labor contracts but that AMR's current executives and board of directors are unlikely to do so.
"They talk with pride about how they made it through much more difficult times without bankruptcy," McAdoo said. "They have plenty of cash. They aren't going to run out of money to be able to pay their bills."