AMR to Mortgage Planes, Raise $728 Million

Discussion in 'American Airlines | AAdvantage' started by Titans26, Sep 27, 2011.  |  Print Topic

  1. Titans26

    Titans26 Silver Member

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    FORT WORTH, Texas (AP) -- American Airlines' parent AMR Corp. plans to raise $726 million and might seek an extra $232 million by issuing debt backed by 43 airplanes.

    AMR disclosed the offering Tuesday in papers filed with the Securities and Exchange Commission.

    Concern has grown recently about continuing losses and high debt at AMR. It was the only major U.S. airline company to lose money in 2010 and is expected to lose more in 2011 and 2012. The company burned through $1.1 billion in cash in the 12 months that ended June 30 and expects to have $4.7 billion in unrestricted cash left by Sept. 30.

    Moody's Investors Service, which lowered its outlook on AMR to "negative" last week, gave a "Baa3" rating to the pass-through certificates on Tuesday.

    J.P. Morgan said a successful offering is critical for the company to manage its way through the winter, a slow period for airlines.

    Speculation that AMR may seek bankruptcy protection “weighs on the entire sector, along with, of course, the natural market fear of a recession and the potential impact from an economic slowdown on an improved but still vulnerable sector,” the JPMorgan analysts wrote. “We remain in the minority camp that AMR will continue to tread water and avoid an in-court restructuring.”



    "The bottom line is that this deal makes us feel better about the AMR near-term credit story," J.P. Morgan analysts said.

    The certificates will be backed by Boeing 737, 757 and 777 aircraft with a combined appraised value of $1.59 billion, AMR said. The 757s and 777s are used heavily on American's international routes while the 737 is replacing McDonnell Douglas MD-80-series planes on domestic routes.
     
  2. garyst16
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    garyst16 Silver Member

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  3. Travelsavant
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    Travelsavant Gold Member

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    Not good news at all.
     
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  4. NYBanker
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    NYBanker Gold Member

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    Sounds like they pledged 75Ls.
     
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  5. Microwave
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    Microwave Silver Member

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    I'd be interested to know how many more domestically-configured 757s are used for international routes (Caribbean, Central America, northern South America, etc.) versus internationally-configured 757s flown to Europe. I'd bet that they actually fly more domestically-configured birds to points outside the US than they do with 75Ls.
     
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  6. Mike Reed

    Mike Reed Gold Member

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    This may actually be a good move. With rates so low, they're probably betting that they can get a better return on this money than the interest they're paying, and they're amortizing the debt against planes they're likely to get rid of as their new purchases come in. There's certainly risk in increasing their debt load in terms of EBITDA and EPS, but weighed against a Chapter 11 restructuring, this may be a very strategic move.
     
  7. Lufthansa Flyer
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    Lufthansa Flyer Gold Member

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    not a good sign to issue "plane equity loans". just piling up the debt even further. Reminds me of the home owners who took out Home equity loans to buy their toys, just to watch them lose their homes. I guess AMR did not learn from the lessons many went through and are going through right now. Adding debt is never ever ever a good idea. Not too many examples of these moves paying off.

    beginning of the slide into reorganization IMHO.
     
  8. Mike Reed

    Mike Reed Gold Member

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    This simply isn't true when the cost of capital is lower than the projected return, or when there are better tax consequences for paying off debt, or when you don't want to (or can't) offer equity. See this article for a decent 50,000 foot view (no pun intended) explanation.
     
  9. Lufthansa Flyer
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    Lufthansa Flyer Gold Member

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    The problem is the assumption on the projected return. If they're wrong, hello bankruptcy court.
    Had AMR done a better job of projecting, they wouldnt be in this situation. My concern is what is going to be different re: their fiscal policy and it management. I just hope it doesnt compound its problem.
     
  10. Mike Reed

    Mike Reed Gold Member

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    Getting rid of Arpey would be a good start.
     
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  11. NYBanker
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    NYBanker Gold Member

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    Fair point.
     
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  12. DeacFlyer1
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    DeacFlyer1 Silver Member

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    It doesn't matter how much cash they raise today if they don't change the way they run the airline, which it doesn't seem like is going to happen...AA just always seems to put band-aids on things that they need to be making fundamental structural changes to.

    The irony in all of AA's financial woes over the past few years is that in retrospect, they're really at a competitive disadvantage now because they didn't go through chapter 11 like every other legacy airline. While declaring chapter 11 would've wiped out shareholder value (in addition to other negatives), it would've also provided an opportunity to reduce their sky-high labor costs, which are one of the primary drivers of their current financial situation.
     
  13. HaveMilesWillTravel
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    HaveMilesWillTravel Gold Member

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    The home owners spent the money on toys (as you said) while AA is presumably investing it into their business (keep the business going/enhance products, ....), to earn more than they pay interest. I'd say that's a significant difference in the two cases. Many businesses need loans in order to run the business -- that isn't unusual.

    In 2009 and 2010, UA issued bonds worth $175 million and $500 million secured by aircraft spare parts and routes respectively.

    http://www.marketwatch.com/story/united-airlines-raises-175-mln-in-bond-sale

    http://www.bloomberg.com/apps/news?pid=newsarchive&sid=ay_Rr5lX0QUs
     
  14. Lufthansa Flyer
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    Lufthansa Flyer Gold Member

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    i just hope they know what there doing. Something has to change from what they've done up til now. I hope its not simply putting off the inevitable.
     
  15. DestinationDavid
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    DestinationDavid Milepoint Guide

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    I think we can all agree with that! It's not looking pretty and a solution is needed. What that solution will be is up the to AA management.
     

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