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Thomas Horton, CFO of American Airlines's parent company, laments the state of his highly leveraged industry.
Sarah Johnson, CFO.com | US
September 17, 2009
With just a couple of weeks left to its third quarter, American Airlines is reaching above its head for the metaphorical oxygen mask that hurting companies have particularly needed during the downturn: a cash infusion.
The airline's latest round of finance help, totaling $2.9 billion, is coming from two directions — Citigroup and General Electric — and involves the company putting up more aircraft as collateral to give itself more liquidity and finance the purchase of new airplanes.
As the airline's balance sheet is already weighed down by previous capital-raising deals, Thomas Horton, CFO of AA's parent company, AMR Corp., acknowledged that the agreements announced Thursday morning are short-term solutions to its money problems. "While we're pleased we can put the liquidity questions behind us, we fully understand that raising financing does not equate to fixing the business," he said during a conference call with analysts.
Indeed, Horton noted that the entire airline industry is sitting on too much debt — but is stuck until the companies can bring in profits. "You'll see us laser-focused on making this company profitable again because we can't — and our industry can't — borrow our way to success," he said.
To get instant cash, AMR is selling its frequent-flyer miles to Citi for $1.3 billion and putting up aircraft to get a $280 million loan facility from GE Capital Aviation Services. For the deal with Citi, AMR will account for most of the advance sale of the miles, which Citi can use between 2012 and 2016, as a loan.
In terms of the GE facility, AMR has already taken $225 million in cash from it, secured by 10 of its aircraft. The airline will get the rest later this fall when it can put up 3 more aircraft as collateral.
In effect, after factoring in other financing deals AMR has made this year, Horton said the company has $3.7 billion in cash and cash equivalents. AMR previously raised nearly $1.3 billion this year through private and public financings. Last quarter, AMR reported $3.3 billion in cash and short-term investments, down 40% from the second quarter of 2008.
AMR is also using GE's aircraft leasing and financing arm for a $1.6 billion sale-leaseback financing deal. The funds will be used toward financing 68 Boeing jets that AMR had previously ordered and expects to be delivered within the next two years.
Considering all that American Airlines has offered as collateral for its recent liquidity needs, what's left when the company needs more financing help to make good on its debt? In a regulatory filing, AMR acknowledges that the majority of its aircraft assets are encumbered, but it estimates that about $2 billion worth of spare parts, real estate, and other assets could be used as a backstop for borrowing. However, with only a small number of aircraft that could be used as collateral, "it's fair to say that accessing cash from those assets will be more challenging than the deals we've completed so far this year," said Horton.
AMR began working to "build flexibility back into the balance sheet" three years ago, said Horton, adding that it reduced its net debt from nearly $19 billion in 2002 to about $11 billion at the end of last quarter.