American Airlines' parent company is making a potentially risky move in taking on significant new debt at a time when revenues are being hammered, but the $2.9 billion in fresh financing and flight schedule changes announced Thursday should quiet concerns -- for now -- that it is in danger of a cash crunch and a bankruptcy filing.
Passengers will see big changes from the nation's second-largest airline, including increased flying in Chicago, New York, Los Angeles, Dallas-Fort Worth and Miami, but fewer flights in Raleigh/Durham, N.C. and St. Louis, where American is giving up major ground to Southwest Airlines.
AMR Corp. said the extra funding it has received includes $1 billion in cash from an advance sale of frequent flyer miles to Citigroup. The company is treating that money as a loan.
The Fort Worth, Texas, company said it also has received $1.6 billion in sale-leaseback financing commitments from GE Capital Aviation Services, a unit of General Electric Co., and $280 million in cash in a loan from GE Capital Aviation Services secured by aircraft.
Of the $1.3 billion in new liquidity, all but $55 million will be included in the third quarter 2009 cash and short-term investment balance.
The transactions will increase the company's cash balance to roughly $3.7 billion by the end of the third quarter, which is Sept. 30. AMR had $14 billion in total debt at the end of the second quarter. It's unclear how much that figure will increase at the end of the third quarter. And AMR has $1.3 billion in debt maturities in 2010.
"The announcement today from our perspective takes the liquidity question off the table," Virasb Vahidi, American Airlines' senior vice president of planning, said in an interview.
Analysts generally agreed.
Standard & Poor's reiterated its "Hold" opinion on AMR shares.
The larger question that looms is what will happen in the future. Overall demand for air travel has shown some improvement in recent months, but yields are down because passengers are paying less for their tickets and are not flying as much in premium seats.
The ability to raise additional financing should AMR need it will be difficult.
AMR has about $2 billion in unencumbered assets remaining, including slots, routes, spare parts and its Eagle operations. But accessing cash from those assets "will be more challenging," Chief Financial Officer Tom Horton said during a conference call with analysts and reporters.
AMR said it will strengthen its flight network by increasing capacity in four hubs cities. Those cities, and Los Angeles, are key parts of the company's plan to benefit from closer cooperation with British Airways, Iberia and other partners.
The company said it will reduce operations at St. Louis and Raleigh/Durham, N.C.
American Eagle also announced plans to add a first class cabin to its fleet of 25 Bombardier CRJ700 regional jets and it signed a letter of intent with Bombardier Inc. for options to purchase 22 additional CRJ700 aircraft for delivery beginning in mid-2010.
The new CRJ700 aircraft will be fully financed.
"Today's announcement positions our company well to face today's industry challenges and allows us to remain focused on the future and on returning to profitability," said Gerard Arpey, chairman and CEO.
AMR said its mainline capacity for 2010 is expected to increase by about 1 percent over this year, with domestic capacity flat and international capacity up about 2.5 percent.
Excluding the impact of cancellations this year from the swine flu virus and the launch of Chicago-Beijing service in 2010 that was delayed from this year, mainline capacity in 2010 is expected to be roughly flat compared with 2009, the company said.
Employees affected by cutbacks will be allowed to relocate, the company said, although it expects the impact on employees to be minimal.
AMR will add 57 daily flights at O'Hare International Airport in Chicago, six new destinations from JFK International Airport in New York, two new daily American and Eagle flights at Los Angeles and 19 daily departures added to the airline's largest hub at Dallas/Forth Worth.
American and Eagle also will add 23 flights at Miami.
In St. Louis, American and its regional affiliates will reduce daily departures by 46 and discontinue service to 20 destinations. After the reductions, American and Eagle will provide 36 departures per day to nine destinations. In Raleigh/Durham, service to three destinations will be discontinued and a total of nine departures will be eliminated. Raleigh/Durham will continue to provide service to eight destinations with 44 departures per day.
AMR shares rose $1.46, or 19.9 percent, to $8.81 in morning trading Thursday.