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American Airlines gets nearly $3 billion in new financing Print E-mail
Thursday, 17 September 2009

By Matthew Quinn

AMR Corp. announced big moves on Thursday that netted the parent company of American Airlines $2.9 billion in fresh financing.

While the funds should keep the carrier out of bankruptcy in the near term, they don't do much to address American's biggest problems: flagging revenues and balance sheet littered with debt and few remaining unencumbered assets.

The new financing includes $1.3 billion in new liquidity, of which $1 billion comes from the advance sale of frequent flyer miles to Citigroup. The rest is a $280 million loan facility from General Electric's aviation services unit. The loan is secured by aircraft.

Additionally, AMR reached a $1.6 billion sale-leaseback arrangement with GE for planes previously ordered by the company.

The new financings will bring the company's cash balance to roughly $3.7 billion by the end of the third quarter. AMR had $2.8 billion of unrestricted cash as of June 30, 2009.

While the news was welcomed enthusiastically by investors - AMR's stock price was up as much as 25 percent in morning trading -- the airline is still expecting some turbulence ahead. The company's management noted in a regulatory filing on Thursday that American has "significant debt, lease and other obligations in the next several years, including significant pension funding obligations."

AMR chairman and CEO Gerard Arpey admitted as much in a letter to employees about the new financing, as well as changes to the airline's flight schedule.

"The fact is, we cannot borrow our way to prosperity," he wrote. "We have to keep working toward sustained profitability because in the end, that alone will ensure our long term future."

Total revenues at AMR dropped 18 percent in the first six months of 2009, compared to a year earlier. Its operating loss narrowed, from $1.5 billion to $420 million in that time. But that improvement was largely due to lower fuel prices.

Another major issue for AMR is that it has very little by way of unencumbered assets. The company estimated that it currently only has about $2 billion in assets that could be used as possible financing sources and noted that many of them may be difficult to finance.

Among its financing options are a limited amount of additional secured aircraft debt or sale leasebacks of aircraft; debt secured by other assets; securitization of future operating receipts; the sale or monetization of certain assets; unsecured debt; and the ever-popular issuance of equity.

Besides unencumbered aircraft, American's most likely sources of cash include the financing of takeoff and landing slots, spare parts, and the sale or financing of certain of AMR's business units and subsidiaries. One contender: AMR Eagle Holding Corporation, American's no-frills regional carrier.

AMR has made strides in reducing its debt, lowering the tab from $21 billion in 2002 to about $14 billion at the end of the second quarter. Regardless, Standard & Poor's placed the ratings of AMR and American Airlines on CreditWatch with negative implications due to concerns about revenue generation and liquidity following second quarter earnings.

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