bidnessetcnews:
American Airlines is said to take initiatives to reduce its long-term debt that remains at its all-time high by end of second quarter 2016
With the aim to remain the US number one airline in terms of traffic, American Airlines Group Inc. (AAL)
has been expanding its flight operations through an aggressive aircraft
fleet renewal plan. In addition to this, the company is also focusing
to satisfy its shareholders through share repurchase program along with
payments in the form of dividends. However, these strategies have been
hitting its cash flows and have been weighing on its long-term debt that
is now at its all-time high.
The increase in American Airlines
long-term debt has been denting its balance sheet as well as the cash
flows. According to the second quarter 2016 earnings release, the
airline reported long-term debt and capital leases, net of current
maturities at $21.13 billion – the all-time high – increasing its total
non-current liabilities to $31.8 billion.
Review of the long-term
debt over the last five years, shows that the airline has been
increasing its dependence on borrowings instead of funding the projects
through its own operations. The strategy might have worked for the
airline over these years, but it is expected to hurt the company’s
credit rating in the long run. The airline has been borrowing more as
compared to payments made to lower the debt over the last few years.
Most
recently during the second quarter 2016, the company reported proceeds
from issuance of long-term debt at $4.5 billion versus payments on
long-term debt and capital leases of $2.16 billion. The two highest
payments that usually eat out of American Airlines’ cash flows are the
Capital Expenditure and Aircraft Purchase Deposits and the Treasury
stock repurchases.
How the Airline Plans to Reduce Long-Term Debt
American
Airlines management has also realized that its long-term debt should be
lowered despite its aggressive aircraft fleet renewal plan. However,
the airline may not reduce the cash returning to its shareholders in
order to maintain their confidence amid fierce competition and tough
market conditions.
American Airlines CFO, Derek Kerr announced the
strategy in the earnings transcript by saying: “Going forward, our peak
capital spending for aircraft will occur in 2016 and decline going
forward. As we see it today, we expect our total net debt to follow the
same path, peaking in 2016 and improving each year thereafter.” Mr.
Kerr’s comment can be attributed to the company’s decision to defer
deliveries of Airbus Group SE (EADSY) A350 commercial aircraft by an average of 26 months that will save around $1 billion cash in capital expenditure.
Mr.
Kerr further stated that the airline will invest around $4.4 billion in
capital expenditure this year that will be reduced to $4 billion next
year. The investment will stand at $2.1 billion, $2.5 billion, $2.5
billion through fiscal years ’18, ’19, and ’20, respectively. “So the
significant reduction in the CapEx will help all those leverage ratios
out,” commented Mr. Kerr in the earnings transcript.
Furthermore,
as per its share repurchase program announced in fiscal year 2014,
American Airlines returned approximately $8.4 billion to the
shareholders. The airline has only $1.2 billion more to complete the
strategy after which it will be able to save cash in investing
activities that can be used to repay the long-term debt.
The
current downturn in the international flight operations might not be
good for the airline’s international unit revenues; however, it might be
good for the airline’s balance sheet as through the decline in
international travelling, the airline has the option to reallocate its
aircraft fleet to temporary eliminate the demand of new jets. The Brexit
vote resulted in decline in US-UK travelling and the airline can now
reallocate the jets used on those routes. Based on the same concern, the
airline deferred deliveries of Airbus’ A350 jets.
Conclusion
American
Airlines long-term debt seems to touch its peak by the end of this
year. However, going forward, the company has plans to lower its capital
expenditure and share repurchase program that is expected to support
the airline in lowering its long-term debt. The reduction in capital
expenditure might slow down the unit revenues in future, but it is
expected to improve the airline’s balance sheet and cash flow position.
For more information on
American
Airlines
financial performance and history, refer to our
American
Airlines
Data Analysis section.