With the crisis subsiding and American Airlines steaming toward profitability, the carrier has started to repair its balance sheet. One of the big endeavors the airline is taking over the next few years is paying down its debt. Paying off a $950 million term loan just last week, the airline is making plans to pay down approximately $15 billion in debt by the end of 2025.
American Airlines has begun to pay down its debt
On Thursday, American Airlines reported its second-quarter 2021 financial results. Reporting a very small net profit, the carrier is also sitting on an enhanced liquidity position of over $21 billion. Expecting to continue generating cash on its own, the airline has looked at ways to use that cash efficiently and smartly.
On Thursday, the airline announced a prepayment of a $950 million spare parts term loan. This was scheduled to mature in April 2023, but American found it beneficial to pay it off ahead of time and start deleveraging its balance sheet.
The $950 million figure comes on top of the $985 million of debt amortization and prepayments made during the second quarter.
Further plans to free up assets and paying down more debt
“During the third quarter, we will also free up 20 Boeing 777 aircraft that will be released out of the 2013-2 and 2013-1 EETC transactions, further improving our unencumbered asset base. The deleveraging of American’s balance sheet has begun, and we are committed to significant, steady and continuous debt reduction over the years ahead.”
Enhanced equipment trust certificates (EETCs) are a way for airlines to finance fleet acquisitions. The aircraft serve as collateral, and it is just one way carriers can finance new fleet acquisitions or use the cash for other pressing financial needs.
Heading into the crisis, there was a lot of speculation about what would happen concerning American Airlines’ debt position. The carrier entered 2020 with total long-term debt of over $23 billion or under $21 billion net of current maturities.
At the end of 2020, American Airlines had total long-term debt in the amount of $32.8 billion. It did make a few more debt-related transactions, including a large series of financing backed by the AAdvantage loyalty program to the tune of $10 billion in 2021. This pushed American’s total long-term debt as of June 30th to $39.9 billion. Note that this number includes current maturities and the spare parts term loan that was not paid down until after the second quarter ended. Factoring that, American has around $36 billion worth of long-term debt.
The plan is to continue paying down the debt. Mr. Kerr further discussed the carrier’s plan to pay down the debt:
“We now forecast reducing our debt levels by more than $15 billion by the end of 2025 by using excess cash and free cash flow to pay down prepayable debt, even though most of it is efficiently priced and by not adding to our debt levels by potentially using cash instead of debt for some future aircraft deliveries.”
Previously, American Airlines had planned to pay down $8 to $10 billion worth of debt by the end of 2025. The plan to accelerate the reduction of debt came as a result of American’s need to take on more debt during the crisis, but it still wants to deleverage the balance sheet as much as possible.
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Why paying down debt is important
American Airlines spent much of the last decade investing in its future. A large portion of the carrier’s debt was to help pay for new and fuel-efficient aircraft to accelerate the modernization of the fleet. Taking on debt to pay for the aircraft helps reduce the carrier’s cash commitments in the near term, giving more flexibility to the carrier and making it easier to take on new jets.
Paying down debt has a lot of benefits. First and foremost, with more cash available on hand that it will not need to pay off interest or meet loan payment obligations, it can turn to own more aircraft outright, whether it be by paying cash for new aircraft deliveries or buying planes off lease. This increases its available pool of unencumbered assets that it can use later on, say during another crisis, to raise much-needed liquidity.
A deleveraged balance sheet will also help American Airlines improve its credit ratings and financial standing. So, when it does decide to order more jets, or if it needs to make investments in its fleet, or modernize its infrastructure, or whatever other large cash needs it may have, it can be in a better financial position to be able to raise debt to finance those kinds of investments.
Are you glad to see American Airlines start to pay down its debt again? Let us know in the comments!