AMR Under Pressure, But No Bankruptcy Yet

October 4, 2011

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American Airlines may be the most likely big US airline to go bankrupt, but the sum of its hardships -- high staff costs and weak cash flow -- do not add up to an imminent Chapter 11 filing, according to analysts who study the carrier's finances.

Shares of American's corporate parent, AMR, shed 33 percent of their already low value on Monday amid a selling spree triggered by signs that the company might not weather a weak travel season.

The stock bounced up 20 percent to USD$2.39 on Tuesday as the market began to shrug off the bankruptcy speculation.

"The key thing is that their position is weakening faster than anyone else's," said Bill Warlick, analyst at Fitch Ratings.

Warlick said recent debt refinancing by AMR suggests the company is not preparing a bankruptcy filing in the near future. He also said that while AMR's cash balance is low, that does not signal a situation so dire that the company needs court protection to restructure its obligations.

"If they're still in the game of refinancing -- and there looks to be opportunities to do more of that in 2012 -- then my view is that management probably tends to fight on," he said.

As of June 30, AMR had USD$1.3 billion of debt coming due this year, USD$1.8 billion in 2012, USD$1 billion in 2013, USD$1.5 billion in 2014, and USD$771 million in 2015.

Last week, the company sold USD$726 million in bonds backed by aircraft to offset a portion of the 2011 debt maturities. It undertook two other refinancing measures earlier this year.

Basili Alukos, an equity analyst at Morningstar, said he does not expect an AMR bankruptcy filing in the near term. But he said high labour costs impede the company's cash flow and therefore increase its reliance on refinancing to push its debt repayments further down the road.

"If capital markets don't enable the firm to roll over its debt, I don't think AMR can generate free cash flow without further cost cuts," Alukos said. "At the end of the day, it's bad to be the high-cost producer in any industry, but it's immensely worse when you operate in such a marginal sector as the airline industry."

Airlines have been hoarding cash in recent years to avert bankruptcy or other deep restructuring.

AMR said in a regulatory filing last month that it expected to end the third quarter with unrestricted cash of USD$4.2 billion. Warlick said that is well above the $3 billion level that might portend bankruptcy.

AMR's larger rival United Continental expected to have USD$8.4 billion of unrestricted cash at the end of the third quarter.

AMR had a second-quarter net loss of USD$286 million, while rivals showed profits. Airlines are scheduled to report third-quarter results later this month.

HIGH COST TURBULENCE

Staff costs are a big headache for American. Wages and benefits for its unionised work force are generally higher as a percentage of operating expenses than for employees of its rivals who restructured in bankruptcy.

This raises questions about AMR's ability to compete in a weak economy with soft demand amid stubbornly high fuel costs.

For instance, No. 3 American reported operating expenses of USD$6.2 billion in the second quarter, with labour accounting for nearly a third of the costs, or USD$1.8 billion. United reported USD$9 billion in expenses for the same period with staff comprising about 20 percent, or USD$1.9 billion.

United's former parent, UAL, used bankruptcy to slash labour costs and jettison worker pensions during its 2002-06 reorganisation. Lower costs helped it survive and eventually left it better positioned for its Continental merger in 2010.

AMR was on the verge of Chapter 11 in 2003 when unions agreed to steep concessions. But the carrier remains the only major airline that still must fund worker pensions.

American estimates its 2011 minimum required contribution to its traditional pension plans to be about USD$520 million. The company paid USD$188 million to those accounts during the first six months and USD$99 million on July 15.

While these burdens may support the case for a bankruptcy, experts remain skeptical.

"First, if AMR really was contemplating a Chapter 11 filing, history tells us we'd know," said Daniel McKenzie, an analyst at Rodman & Renshaw, in a research note. "Management would first go to labour and publicly ask for concessions and then plant its lawyers on the courthouse steps. That isn't the case today."

"We believe any Chapter 11 filing would be well-telegraphed ahead of time." he said. "No telegraphing exists today."

The most recent rumours of potential bankruptcy surfaced as AMR and its pilots wrestle through a fourth year of contract talks. The union wants improved wages and benefits, while some industry analysts believe American has to sharply cut those costs to be competitive on its own or find a merger partner.

US Airways, which has long-standing problems with its pilots as well, has long been eager for a merger with another big carrier. But whether it would go after American without AMR lowering its costs -- possibly through Chapter 11 -- is unclear.

(Reuters)