American Airlines goes all-in on its $15b debt-cutting plan

BLOOMBERG

The new chief financial officer of American Airlines Group Inc has a message for skeptical voices in the credit community as the company seeks to secure a ratings upgrade: The $15 billion debt-cutting plan is on track.
After spending around $24 billion to upgrade its fleet in the run-up to the pandemic, following a bankruptcy and the merger with US Airways, the nation’s most-leveraged carrier is halfway through its biggest ever debt-reduction program.
Two months into the job, CFO Devon May is upbeat about the carrier’s ability to generate sufficient revenue through 2025 to raise its credit standing from B- to BB, in what would be the strongest rating since the merger about a decade ago.
High costs for labour and jet fuel — not to mention the threat of a severe recession — may yet throw a wrench into the plan. But with the US economy still firing on all cylinders, profits are returning to the business, helped by diminished capacity across the airline industry and higher fares.
“What you’re going to see from us over the next decade or so is just a more balanced approach to capital,” May said in an interview with Bloomberg News.
The company is signalling a new era of budgetary restraint is a priority, against the backdrop of higher interest rates, a $12 billion capital-expenditure program through 2027 and big debt payments on the horizon in 2025.
It will also pay $2.1 billion in interest expense in 2023 using current rates and capital structure, according to an analysis by Bloomberg Intelligence. That’s up from about $1 billion in 2019.
“That is a huge bite,” said Philip Brendel, senior distressed credit analyst at Bloomberg Intelligence. “And from an operating perspective, they don’t get better food, more Wifi, or more comfortable seats for that money. Deleveraging is critical to free up capital for the business.”
Cutting leverage will help the company improve its credit rating, which should allow it to pay less to borrow. By the end of the year, the carrier is aiming to bring a key leverage metric — net debt to earnings before interest, taxes, depreciation, amortisation, and restructuring or rent costs — to the lowest since 2017. It also plans to pay down $2 billion to $3 billion in debt using free cash flow this year, according to May, 47.
Airlines like American are benefiting from a recovery in demand for travel, especially among higher-end consumers.