American Airlines is asking its shareholders to approve a rights offering to prevent any significant hostile ownership changes and lock in a multi-billion dollar tax advantage. The news comes as some financial analysts question the amount of debt the airline is carrying and the threat the omicron variant could pose to American's short-term future earnings.
American's US$16.5 billion losses can offset future tax liabilities
On Wednesday, American's board confirmed it had adopted a tax benefit preservation plan to help preserve the value of its net operating losses and other tax attributes.
The Dallas-based airline estimates that its cumulative US federal net operating loss carried forwards exceed US$16.5 billion. American Airlines can utilize this in certain circumstances to reduce future US corporate income tax liabilities.
"The tax benefit preservation plan was adopted to protect an important asset of American Airlines that may have meaningful value to all American Airlines stockholders," says American Airlines in a statement.
"These tax benefits can include the offset of tax liability arising from future taxable earnings or gains. The value of these tax benefits would be substantially limited if American Airlines were to experience an 'ownership change.'"
What constitutes an 'ownership change'? Technically, this would occur if shareholders who own 5% or more of the outstanding American Airlines common stock increased their cumulative ownership in American Airlines by more than 50 percentage points over their lowest ownership percentage within a rolling three-year period.
American's core business is to make money
The board's move on Wednesday implies any significant changes in the American Airlines investor base would limit future use of the airline's tax benefits. The board says if significant ownership changes did occur, it would significantly impair the value of the benefits to all stockholders.
Many people think publicly-listed airlines exist to benefit the traveling public, but that's strictly a fringe benefit. Like all publicly listed companies, publicly listed airlines primarily exist to make money for their owners, or shareholders.
Everything else - employing people, getting people from A to B, paying taxes, and being a good corporate citizen is just icing on the cake. The real business is all about the money-making cake.
Since the travel downturn, American's cake has failed to rise. Earlier this year, American Airlines reported a 2020 loss of US$8.9 billion. In October, the airline reported a Q3 2021 loss of $641 million.
Since 2019, total debt at American Airlines has increased by 40% (excluding government assistance programs). Since January 1, Seeking Alpha reports the airline has added $6.5 billion in debt, $3.5 billion in a revolving facility, $6.8 billion in financial assistance from the government through the payroll support program, and 26.5 million additional shares via secondary offerings to its balance sheet.
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American's rights issue to fortify against any hostile takeover
Going forward, American Airlines is burdened by debt and a carrying loss. While the debt will eventually get repaid, the carrying losses have the benefit of reducing future tax liabilities and preserving some value for shareholders.
As part of Wednesday's announcement, American Airlines will also issue a dividend of one preferred stock purchase right for each outstanding share of American Airlines common stock and payable on January 5, 2022.
The shareholder can exercise the purchase rights and buy the stock at a 50% discount. However, they can only do so if another person buys a stake of 4.9% or more in American Airlines without the board's approval. This slick move fortifies the airline against a hostile takeover and preserves the existing tax benefit.
The rights offering will expire next December if there is no shareholder approval. Otherwise, it will remain valid until December 2024.