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American Airlines Seeks Debt Restructuring

by Mike Godfrey, Tax-News.com, Washington

12 October 2012


American Airlines has filed a request with Southern District of New York's Bankruptcy Court to borrow USD1.5bn to enable the airline to refinance its debt under historically low interest rates.

In a motion filed on October 9, 2012, AA said that recent deals negotiated by other domestic airlines had demonstrated an opportunity for AA to take advantage of the present low interest rate environment, to cut the crippling finance costs attached to its debt. It noted two refinancing deals negotiated by Continental Airlines on October 3, 2012, and on March 22, 2012, in which the operator managed to secure financing worth more than USD700m, first at a rate of 4.15%, and most recently at a 4% rate. Delta Air Lines in a similar deal worth USD353.7m in July, secured an interest rate of 4.75%.

Presently, American Airlines is paying rates of 13% and 8.63% on USD1.32bn in debt, under deals negotiated in 2009 and 2011.

In its filing, AA said: "Time is of the essence because there can be no assurance that current market conditions will continue. If the Debtors are able to take advantage of the existing low interest rate environment and issue the new Enhanced Equipment Trust Certificates (EETC) at rates comparable to the recent financings described above, the interest expense savings by the Debtors would be well in excess of USD200m."

The debt would be secured against a total of 75 aircraft from AA's fleet, mainly Boeing aircraft purchased around the millennium but also 18 737-800s purchased recently.

On November 29, 2011, AMR Corporation, AA's parent company, filed for Chapter 11 bankruptcy protection. At the time, AMR explained that AA would continue to operate as normal, but said that the company needed to restructure and find immediate operational cost reductions to make its operations financially viable. American Airlines faces the challenge of replacing a substantial, ageing fleet.

In a bid to make its operations sustainable, AA announced in August 2012 that talks were advanced with US Airways towards a possible merger. More recently, the airline announced that it would be gradually reducing the size of its operations in September and October, and 11,000 workers were notified of potential job losses as the restructuring rumbles on.

TAGS: aviation

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