American Air Buckles Seatbelt Ahead of Financial Turbulence
Posted on: Wednesday, 14 May 2008, 21:00 CDT
By Trebor Banstetter, Fort Worth Star-Telegram, Texas
May 14--American Airlines and several other carriers are buckling their financial seatbelts as the airline industry heads into increasingly turbulent skies.
AMR Corp., American's Fort Worth-based parent, said it has negotiated relief from restrictions on nearly $700 million in debt, an adjustment that will help keep the airline from defaulting on the loans and give it more breathing room over the next year.
The move suggests American sees no letup in the difficult financial environment that led to a $328 million loss in the first quarter. It follows a decision by Dallas-based Southwest Airlines earlier this week to mortgage 21 Boeing 737 jets to borrow $600 million from several European banks. And United and Northwest airlines have also renegotiated loan covenants.
"It's no secret that industry wide, airlines are facing increasing pressure because of record fuel prices," said American spokesman Andy Backover. "This will give us more flexibility, and we were able to get the waiver on terms we thought were sensible."
The debt in question includes a $439 million term loan and a $255 revolving loan arranged in 2006 by Citicorp and J.P. Morgan. The revolving loan was paid off, and remains an open line of credit for American.
Under the original terms of the debt, the company was required to show cash flow of $1.40 for every $1 in fixed charges, a ratio that was going to increase to $1.50 per $1 in June 2009.
The lenders agreed to waive the cash flow requirement entirely until June 2009. At that point, new restrictions begin but on easier terms.
In a filing with the Securities and Exchange Commission earlier this year, American warned that it might not be able to meet the loan restrictions. That could result in a default on other debt and lease obligations, the kind of cascade that could land the airline in bankruptcy court.
Backover pointed out that American could have paid off the entire loan rather than default, if it had been unable to obtain the waiver.
"This shouldn't come as a surprise to anyone," he said.
American will pay the lenders "certain fees" in connection with the waivers, the airline disclosed in a financial filing. It did not specify how much it would pay for the relief.
Most analysts are predicting that the major airlines will post substantial losses this year and next, primarily because of crushing fuel prices. Oil prices are up nearly $11 per barrel since the end of the first quarter alone.
According to Backover, a $10 increase in price per barrel costs American $800 million in extra expenses annually.
Shares of AMR Corp. (ticker: AMR) rose 47 cents in trading Wednesday, finishing at $9.11 per share.
TREBOR BANSTETTER, 817-390-7064
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Source: Fort Worth Star-Telegram (Fort Worth, Texas)
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