AMR Sets Better Debt Course

American Air's parent plans to prepay $545 million in Q4, moving it closer to a debt-to-capital ratio sought in the industry.
Marie Leone and Stephen TaubOctober 1, 2007

AMR Corp., the parent of American Airlines, took steps to get its debt structure back on course.

AMR said it plans to prepay $545 million in aircraft debt in the fourth quarter, continuing its long-standing effort to reduce its leverage and improve fundamentals in an embattled airline industry. The prepayment is expected to eliminate about $25 million of annual net interest expense and release 16 aircraft that are now used to secure the loan. The loan has been outstanding since December 2002 and is scheduled to mature in December 2012.

“With our improving financial performance, we have bolstered our liquidity position and we have opportunistically strengthened our balance sheet by reducing debt,” said Thomas W. Horton, executive vice president of finance and planning and CFO. “While we have more work to do, our recent decisions not only improve our balance sheet, but also reduce our interest burden going forward and give us more financial flexibility for the future.”

AMR said the prepayment is in addition to the company’s $1.3 billion in scheduled principal payments in 2007.

It also said that its wholly-owned subsidiary, American Eagle Airlines, made a $32 million aircraft debt prepayment in the third quarter, bringing AMR’s prepayment of debt on its Canadair regional jets to $159 million this year. Those prepayments, too, were in addition to scheduled principal payments. The final payment in July released 10 CRJ-700 aircraft that were used to secure the debt and which are operated by American Eagle Airlines.

In the first half of 2007, debt prepayments, bond refinancings and the lowering of the interest rate on a credit facility combined to eliminate an incremental $27 million of annual net interest expense.

As a result of scheduled principal payments as well as other efforts to strengthen its balance sheet, the company estimates that its net interest expense for the nine months ended Sept. 30, 2007 will be roughly $130 million lower than its net interest expense for the same period in 2006.

AMR said it expects to end the third quarter with about $5.7 billion in cash and short-term investments, including a restricted balance of approximately $450 million, which compares cash and short-term investment of $5.5 billion and a $464-million restricted balance a year earlier. The company expects to end the third quarter of 2007 with total debt of $16.6 billion, down from about $19 billion a year ago and from $20.1 billion at year-end 2005.

The company said it expects to end the third quarter of 2007 with net debt of about $11.3 billion down from $14 billion a year ago and from about $16.3 billion at year-end 2005.

Analyst Ray Neidl of Calyon Securities called AMR’s debt action no surprise. “It’s a good thing, and it has the cash flow to do it.” The company has been overly leveraged since 9/11, he said, “and now they are bringing their balance sheet back into balance.”

The analyst noted that “CFOs of airline companies tell me that the debt-to-capital ratio should be 75 percent, including off balance sheet leases. This is a big step toward getting there.” Currently, using AMR’s total debt number of $12.56 billion, the company’s debt-to-capital ratio is roughly 96 percent.