Investors fear American Airlines cash crunch after coronavirus travel ban
American Airlines is suffering its worst financial turbulence since the September 11 terror attacks, with Wall Street traders increasingly betting the No. 3 U.S. airline might be not be able to repay lenders due to growing economic damage from the novel coronavirus.
The latest hit to the carrier — and the travel industry in general — came on Wednesday night when President Donald Trump announced a surprise ban on nearly all in-bound flights from much of Europe to the U.S.
Shares of American Airlines tumbled 26% on Thursday. Its shares are down more than 50% so far this year. Worse, the price of buying debt insurance that would pay out if the company were to default has soared to $1,353 to cover a loss of $100,000 of American Airlines debt, according to FactSet. That's up 5,700% from just $23 a month ago.
Brandon Oglenski, an analyst at Barclays, told clients on Thursday that American Airlines would have to raise as much as $3 billion in cash in the next few days to avoid a credit crunch.
In a video message to customers released late Wednesday, American Airlines President Robert Isom said the company is adjusting its routes and temporarily suspending its fees for changing tickets. He also said the carrier is focused on dealing with the fallout from the coronavirus pandemic.
American Airlines CEO Doug Parker told analysts at an airline conference on Tuesday that the company was planning for a 10% reduction in international flights through the summer. The number of flights from the U.S. across the Pacific Ocean could drop by as much as 55%, he said.
But Parker expressed confidence the company would survive the coronavirus. "Fact is, our industry is exponentially more resilient today than it's been in the past," he said, adding that "the U.S. airline industry will manage through this."
American Airlines did not return a request for comment.
Not just one company — an entire industry
Investor concerns about American and other airlines offer a window into just how much damage the coronavirus pandemic could wreak on the travel industry and the broader economy.
The nation's four largest airlines — American, Delta, Southwest and United — had combined sales of nearly $160 billion last year. According to the U.S. Bureau of Labor Statistics, just over 500,000 Americans work in the air travel business. In all, nearly 4 million Americans work in the travel industry, which also includes travel agents and hotel workers.
The credit-default insurance on other airline and travel companies is soaring as well. Cruise operator Royal Caribbean has seen its debt insurance spike nearly 850% from a month ago, to about $780 per $100,000 in losses this week, according to FactSet.
But American Airlines' debt insurance has risen the most — a sign investors fear it might have the toughest time navigating the coronavirus slowdown. Delta's credit insurance, for instance, was still trading for less than $400 as of Wednesday night, according to FactSet.
American Airlines generates about $5 billion a year in revenue from trips to Europe, or about 11% of its overall sales, according to analysts from brokerage Raymond James. That's actually slightly lower than both United and Delta, which get 14% and 13% of their sales, respectively, from Americans traveling to Europe.
The problem is American has the most debt — nearly $30 billion, or about double the amount owed by Delta and United combined.
Last year, American produced just over $3 billion in cash flow after operating expenses. It had to pay $1 billion in interest. That gave American the least leg room to cover its debts heading into a recession and a sales plunge. Delta, by comparison, had $8 billion in cash flow last year and $300 million in interest expenses.
Consider a $750 million bond deal that American will have to pay back in June 2022. Most bond deals begin trading at $1. The price for the American bond has fallen to 88 cents, according to FactSet. The yield on the bond (which moves inversely to prices), rose to just over 10%. That suggests American would have to pay double-digit interest rates if it wanted to borrow more money. This is at a time when overall interest rates have been plunging.
"American has been the most aggressive of the airlines in buying back shares and adding debt in the past few years," said Barclay's Oglenski on CNBC. "That's why the most concerns are there. But I don't see any of the airlines going bankrupt at this point."
Taxpayers to the rescue?
The biggest potential source of protection for American and its lenders and investors could be the federal government. Treasury Secretary Steven Mnuchin this week raised the possibility the government would "backstop" distressed airlines and other travel companies.
But what that would cost and whether lawmakers would go for it is hard to answer. Highlighting the political hurdles, Mnuchin said he wouldn't called the government assistance "bailouts."
"The president feels very strongly that we need to protect industry, not bail out but provide relief to small and medium-sized businesses," Mnuchin told Congress earlier this week.
Mnuchin said the president was thinking debt guarantees, but would use "whatever powers we need to make sure our airlines and travel industry can get through this."