This morning, AMR Corporation ("AMR"), and its subsidiary American Airlines, Inc. filed for bankruptcy protection in the Southern District of New York. For those looking for the docket, it can be found here:
We cannot afford to retain all the aircraft currently in the American and American Eagle fleets at their current rates, and so we have no choice but to make substantial reductions in the cost of the aircraft which we retain. Moreover, in view of the large number of aircraft we have on order from Airbus and Boeing, we also seek to accelerate our fleet renewal strategy and, as a result, we do not require the use of all aircraft currently in our fleets. Additionally, to conserve our liquidity, subject to the requirements of the U.S. Bankruptcy Code, during the 60-day Section 1110 period, we plan to make payments when due of aircraft rent and mortgage principal and interest payments only on certain aircraft in our fleets.
- Reject old, fuel inefficient airplanes (MD 80s) that will be replaced by the 737-800 family (not all will be rejected, but most will)
- Renegotiate every labor contract out there to make yourself more cost competitive with the industry. In fact, AMR actually put in a graph in the aforementioned affidavit displaying how weak their margins are to competitors
- Rationalize your network in terms of routes and gates (i.e. leave Chicago for instance). This may require asset sales in addition to flat out defaulting on municipal debt.
- Reject the pension and put it to the PBGC
- Will they accept or reject these planes? Maybe they accept a few and continue paying interest on the underlying equipment notes and reject all the rest. As every one of these MD 83s are owned by Boeing, it is more likely they reject than accept (airlines, for various tax reasons, are somewhat reluctant to reject planes they own). But if you believe they will accept a lot of this collateral, you would be more bullish all else being equal
- If they do reject planes, how much are those planes worth after they pass maintenance tests and monies are spent for re-marketing (you could also melt the planes for steel value)
- If the amount of debt is not covered by the asset sale process, you would have a general unsecured claim to the AMR estate. You then need to figure out how much that claim is worth and add that to your recovery.
- A smaller, but important consideration: Interest will be paid on this EETC for 18 months via the liquidity facility. This paid interest becomes a super senior claim over your A-tranche (i.e. if the liquidity facility provider pays out $100 dollars in payments, $100 dollars of debt is now ahead of you in the waterfall). This can be important in very low dollar price bonds as you are creating a very cheap option after deducting the present value of interest payment
- Type of structure the equipment note backing the plane is a part of. For instance, an airline may be less likely to reject a plane backed by an equipment note in a EETC that has cross default provisions, all they could lose all planes in that structure
- The important of the plane in relation to the overall fleet and future fleet build out plans. As noted above, AMR is purchasing a significant number of 737-800s, meaning they are less likely to reject these planes.
- The unique aspects of a plane in terms of its range and capacity. If an airline used to have significant need for wide-body planes, and now doesn't because of route / slot / gate changes, they may be more likely to reject those planes
- The maintenance schedule of a particular plane may be onerous in the coming years and be a cash flow drain on the airline which means its more likely to be rejected
- Cost of financing the underlying equipment note versus market rate. This can be extended to the overall EETC structure - i.e. could AMR go out in the market today and get a better deal for some of their high coupon EETC structures?
- What is exactly the pension underfunded status and how large an unsecured claim will the PBGC put to the estate? What effects do recent changes to pension legislation as it pertains to airlines have on this number?
- If the liens backing the 7.5% were not perfected, do the unsecured's make a case that they should see benefits from that collateral? What really is the value of that collateral? $20M per slot pair according to Air Canada's recent valuation for Heathrow. But what about Japanese, where AMR is weak, and China routes?
- The 13% Notes, while not a traditional EETC structure, kind of scare me. Does it make sense to reject slightly older 737-800s to restructure a small, but very high cost piece of paper? The 10.5% Notes are a slightly different story - and with such a large contingent of 757-200s in the structure, which AMR has admitted they are rationalizing next year, are equally frightening
- Who is going to own the equity in this thing when all is said and done? A hodge podge of unsecured creditors including the PBGC? How does this affect the NOL, which I believe is around $8 billion dollars.