Wed, Nov 16, 2011
Fitch Ratings Calls Pilot's Demands 'Unsustainable'
(The following article originally appeared as a post on the
Fitch Wire credit market commentary page. All opinions expressed
are those of Fitch Ratings, which released the article to the
The absence of progress this week in contract talks between AMR
Corp. management and the Allied Pilots Association (APA) raises the
risk that American Airlines will be forced into a Chapter 11
bankruptcy filing. Fitch Ratings sees agreement on terms similar to
those proposed by management as essential if the carrier is to move
toward a sustainable operating profile in 2012 and beyond.
After five years of unsuccessful bargaining for new contracts,
American's pilots appear committed to proposals that would drive
AMR's unit labor costs still higher at a time when the airline's
margin performance continues to lag significantly behind that of
competing U.S. carriers such as United and Delta.
While AMR's liquidity position ($4.3 billion in unrestricted
cash and investments at Sept. 30) is adequate to allow the company
to avoid a bankruptcy filing in the short run, we regard the
achievement of competitive pilot wage and benefit levels as key to
American's long-term survival.
In addition to an unsustainable cost profile, AMR faces heavy
debt maturities and cash pension funding requirements over coming
years that necessitate the generation of positive free cash flow
(FCF) and a gradual but consistent reduction in lease-adjusted
debt. Another year of substantial operating losses would likely
drive AMR's liquidity toward unmanageable levels, despite the
carrier's success in accessing debt markets earlier this year and
the potential for scheduled current maturities of $1.4 billion to
Although the industry revenue environment has remained healthy
in the face of broader weakness in the global economy, persistent
fuel cost pressure in 2011 and the labor cost gap have placed AMR
in a fundamentally unsustainable financial position.
While management has repeatedly emphasized a desire to avoid an
in-court restructuring, Chapter 11 would provide room for the
carrier to transform its long-term operating profile. Restructuring
steps would likely include a termination of defined benefit pension
plans and a significant reduction in the size of American's
uncompetitive MD-80 fleet through the rejection of certain aircraft
A downgrade in AMR's 'CCC' issuer default rating (IDR) to 'CC'
or 'C' is likely in the event that a break down in labor
negotiations signals a continuation of significantly negative FCF
in 2012 and a likely re-assessment by management of the need to
pursue a near-term reorganization in bankruptcy.
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