Investors are betting American Airlines will file for bankruptcy for the second time in a decade.
The price for the Fort Worth airline’s credit default swaps has risen since February and outstripped other big US carriers. Historically, paying more for swaps, a financial instrument to insure against corporate default on debt, has indicated a greater risk of that happening. Bloomberg data show that investors think the airline’s default probability in the next five years is nearly 100 per cent.
American’s five-year credit default swaps hit 6,659 basis points, according to IHS Markit data. The price has risen more than 4,000 per cent in the past three months. The market priced swaps for United Airlines at 3,677bp, for Delta Air Lines at 1,212bp, and for Southwest Airlines at 505bp.
American’s debt totals $34bn, well above the $23bn on the balance sheets at both Delta and United, and almost six times as much as Southwest. That reality is driving speculation that American, which filed for Chapter 11 nine years ago, could be headed back to court — what lawyers grimly call “Chapter 22”.
“It truly is just where their debt level is relative to others,” said Berenberg analyst Adrian Yanoshik. “I could give you other reasons, but when you peel the onion back on those sub-reasons, they tend to end up with: They have more debt.”
An American spokesman said the airline was “right sizing” and planned “to reduce our 2020 operating and capital expenditures by more than $12bn. We expect to end the second quarter with approximately $11bn in liquidity, and we have significant unencumbered assets — valued at more than $10bn excluding the (mileage) programme — at our disposal.”
Airlines around the world are taking huge hits to revenue as the pandemic shrinks demand for air travel to near zero. US carriers have parked hundreds of planes and are drawing on a $50bn aid package that the federal government approved in March.
David Calhoun, Boeing chief executive, said in a May 12 interview that a big US carrier would “most likely” file for bankruptcy this year. A spokesman said he was not referring to any particular airline, but the remark still raised eyebrows in aviation.
Capital expenditures and share buybacks both contributed to American’s debt burden. The airline spent $30bn between 2013 and 2019 to renew its ageing fleet, replacing nearly 500 aircraft. It spent $13bn on share repurchases between 2010 and 2019. The company also posted lower earnings in recent years than competitors.
S&P Global Ratings analyst Philip Baggaley recalled that American executives said when they prioritised buybacks over debt repayment that the airline’s balance sheet remained satisfactory according to their modelling.
“They were well prepared for a once-every-10-years hurricane, and unfortunately, they got a once-every-100-years hurricane,” he said.
American has raised new capital, but less than either Delta or United. Existing debt makes credit so expensive for American that it is harder to afford liquidity-boosting transactions like selling planes and leasing them back, Mr Yanoshik said. American received $5.8bn from the first portion of the US government’s $50bn bailout, which was meant to support payrolls. Chief executive Doug Parker said the company also will tap $4.8bn in loans at about 4 per cent interest, calling it “the most efficient financing out there for American Airlines”.
By contrast, United and Delta have applied for the loans but plan to wait until the government’s September 30 deadline before deciding if they will access the money.
American faces challenging circumstances, Mr Yanoshik said, and while the credit default swap markets are not infallible, they tend to be efficient. He would not “lean against the wind” to predict a low risk of default “because we kind of know what their options are, and their options are not good”.