American Airlines' most extensive debt-reduction program is right on track, and the company will have a more balanced approach to capital, the airline’s new Chief Financial Officer (CFO), Devon May, has recently said
Deleveraging is critical
The US carrier American Airlines is looking to obtain a higher credit rating and deleverage in the next few years, aiming to better navigate the cyclical nature of the airline business, particularly in this post-COVID environment.
In an interview with Bloomberg, Devon May said that what the people will see from American Airlines over the next decade is just a more balanced approach to capital.” In the past decade, the carrier spent around US$24 billion to upgrade its fleet in the run-up to the pandemic, but it also had a bankruptcy process and merged with US Airways. All of this has made American Airlines US’ most-leveraged carrier.
These factors have made American Airlines have a B in its credit rating, making it more expensive for the airline to pay when it borrows. It also makes American’s shares a little less attractive compared to other US airlines, given how massive the company’s debt burden is.
To address this, American Airlines’ management has set the goal to reduce total debt (including operating leases and pension) by US$15 billion by the end of 2025. Bloomberg reported that, by the end of this year, the carrier is looking to bring a key leverage metric –net debt to earnings before interest, taxes, depreciation, amortization, and restructuring– to the lowest since 2017 and pay down up to US$3 billion in debt using free cash flow.
American Airlines financial results in 2022
Last year, American Airlines reported a net income of US$127 million, fueled by strong operational performance and recovery. In the fourth quarter alone, the airline reported a 16.6% increase in revenue compared to pre-pandemic 2019, despite flying at 6.1% less capacity.
In the future, American’s substantial debt load and relative weakness compared to other major US airlines expose it to a broader range of outcomes economically, according to an analysis published on Seeking Alpha. Helane Becker, an analyst at TD Cowen, added that the biggest concern is the recession is deeper and longer than people think it may be. Spikes in fuel costs well over a hundred dollars per gallon would hurt the company.
Nonetheless, American Airlines saw strong bookings over January gave the company “a lot of confidence that our high-level demand forecast was a fair and accurate view of how this year could shape up.”
Strong performance this year
Despite the economic uncertainty, US airlines expect strong travel demand to continue into 2023. According to a report from Reuters, airlines are cashing in as consumers acquire tickets following a pandemic-induced slump. The airline industry has become a rare bright spot as markets grasp with inflation, rising interest rates, and uncertainty. American Airlines Chief Executive Officer (CEO) Robert Isom said in January,“ We expect a strong demand environment to continue in 2023 and anticipate further improvement in demand for long-haul international travel this year.”