Can American Airlines Afford $15 Billion Worth of New Planes?

Top aircraft carriers in the US are looking to overhaul their fleets. In the face of high gas prices, these carriers are planning to replace their old fuel-guzzling planes with newer more fuel-efficient aircraft.

Not to be left behind, American Airlines parent AMR (NYSE: AMR  ) is planning to shell out close to $15 billion to reinvigorate its fleet with narrow-bodied craft.

Re-fleeting the hangars
The nation’s four largest carriers are all looking to add more aircraft to their hangars. Media reports quoting sources said American is planning to buy close to 250 narrow-bodied planes, splitting the $15 billion that it plans to spend between aircraft makers Boeing (NYSE: BA  ) and Airbus.

Even the world’s largest aircraft carrier Delta (NYSE: DAL  ) is planning to add close to 200 new aircraft by the end of the year. To complete the list, Southwest (NYSE: LUV  ) and United Continental Holdings (NYSE: UAL  ) are also mulling over adding new planes to their fleet.  

The airline industry in the US is currently coming out of a long year in which it has had to face the pressures of high gas prices, capacity cuts, and consolidation in the industry. These factors led to a drop in American's revenues and bottom line and weighed on its financial position.

A look at the numbers
Unfortunately, AMR’s numbers don’t make for pretty reading. Though LTM revenues have increased by 12% to $22.63 billion, costs have shown a simultaneous jump, rising 7% to $17.44 billion. No wonder then that American reported losses of $402 million in the last twelve months.

From a balance sheet perspective, American’s free cash flow stands at a negative $622.3 million. American’s current ratio stands at 0.9 times, which means that it is not in a comfortable position to pay off its short term liabilities. Its interest coverage ratio stands at 1.9 times, hence the company is reasonably placed to pay off its obligations but is not in a comfortable position to assume further debt. The burden clearly can be understood, when we see that American’s total debt has risen to $12.1 billion in the last twelve months.

A string of losses have taken their toll on the balance sheet and the company needs help to finance this huge, $15 billion endeavor. Hence, the deal would require substantial financing from the manufacturers or leasing companies. Just where will the money come from? Given the industry’s volatile nature, I’m not going to be the first one to jump in line to finance this massive project.

Bidding war!
The major question here is whether or not American Airlines will choose Boeing or Airbus aircraft? According to reports, American first approached Airbus without informing Boeing (who currently supplies planes to American) and was happy with the offer it had made. Later, it approached Boeing, possibly throwing down the gauntlet by asking it to better Airbus’ offer.

Airbus has struggled to penetrate the US markets, with US Airways Group (NYSE: LCC  ) currently being its biggest customer. Winning the deal would be a huge boost for Airbus. This would be an important step forward as the global passenger airplane market is expected to be worth $4 trillion in the next 20 years.

The future
Despite the deals’ massive price tag, it’s a necessary one. The purchase should eventually translate into lower costs. It should mean lower maintenance costs and considerably lower fuel costs. Plus, planes just need to be replaced.

The Foolish bottom line
If American Airlines can work out the finances and the deal goes through, it will help position the company for the next decade of transcontinental business. As an investment, however, this is not the type of news that gets me excited. Show me a few quarters of strong financial performance and then maybe we can talk.

Shubh Datta doesn’t own any shares in the companies mentioned above. Motley Fool newsletter services have recommended buying shares of Southwest Airlines. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (8) | Recommend This Article (19)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 08, 2011, at 4:57 PM, karmatourer wrote:

    "aircraft carriers".LOL! That's a ship.It's an air carrier or airline-what a laugh.Does anyone here edit these laughable articles?

    Plus,this isn't news at all-it's been out for nearly a month.

  • Report this Comment On July 08, 2011, at 4:59 PM, karmatourer wrote:

    Shubh Datta- is a Fool for writing this.

  • Report this Comment On July 08, 2011, at 5:18 PM, brightatop wrote:

    what a junk!!! the author even didn't check fact before put it together, AA is third largest airline, not fourth, Delta is not largest one, United is the largest one now. Did anyone really read this piece of junk.

    this article like chewed foods split out by other and the author chewed it again, what a laugh.

    Is that really the quality of Motley Fool?

  • Report this Comment On July 09, 2011, at 11:03 PM, elem316 wrote:

    Shubh Datta, United is the largest airline in the world not Delta. And to answer your question AA can't afford the purchase of all these planes. Its great for there business as there the airline to not post profits last year.

  • Report this Comment On July 09, 2011, at 11:05 PM, elem316 wrote:

    Also United Continental has been purchasing new planes for the last 3-4yrs. All brand new 737's, 777's and Continental is first US airline to order and will receive the Boeing 787's.

  • Report this Comment On July 10, 2011, at 9:26 AM, gad13 wrote:

    Who is this hack? Delta is an aircraft carrier? Adding 200 new planes by the end of the year? What are you smoking?

  • Report this Comment On July 10, 2011, at 7:56 PM, modfigueroa wrote:

    There's two reasons why they will get this loan. #1 They will keep charging baggage fees and #2 They won't give it's employees the pay raise they deserve!!!

  • Report this Comment On July 12, 2011, at 2:38 PM, Bonanza3050 wrote:

    I've never seen such a collection of factual errors in one article concerning the airline business. Wrong on just about every count.

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