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American Airlines' "Show Of Strength”

AA raises $2.9 billion, will expand in Chicago, New York, Dallas and Miami

Sep 18, 2009

American Airlines, the world’s second-largest carrier, said it raised $2.9 billion in cash and financing in “a show of strength” and will expand at four U.S. hubs to prepare for a recovery in travel demand.

American parent AMR Corp. rose the most in 11 months in New York trading. Credit-card partner Citigroup Inc. paid $1 billion in an advance purchase of frequent-flier miles, and GE Capital Aviation Services provided $1.6 billion in jet-financing commitments, American said today.

The cash will bolster liquidity for Fort Worth, Texas-based AMR before winter in the U.S., when travel typically slows and carriers tap their reserves to fund operations. Higher-fare business passengers have cut back on flying in the recession, helping drag the biggest U.S. airlines to losses.

“There are signs of improvement in the revenue environment and in consumer sentiment, but the winter season is still potentially a challenging one,” said Douglas Runte, managing director at Piper Jaffray & Co. in New York, who doesn’t rate AMR. “This liquidity raising is an important move.”

‘Show of Strength’

“This is the time for a show of strength,” Chief Financial Officer Tom Horton said in an interview. “As capital flows in this industry, we believe it should flow to the strongest companies. Our company represents that.”

American’s ability to access capital while the airline industry struggles has “taken the liquidity question off the table,” Horton said.

The carrier also has about $2 billion in unencumbered assets should it need to borrow more. AMR expects to have about $3.7 billion in cash and short-term investments at month’s end, including funds for specific uses. It pared debt to $14 billion as of June 30 from $21 billion at the end of 2002.

Details of the mileage sale and aircraft financing weren’t disclosed.

“AMR likely conceded certain terms, potentially on underlying collateral, in order to close the deal as AMR enters its seasonal cash burn period,” said Hunter Keay, a Stifel Nicolaus & Co. analyst in Baltimore who advises holding the shares. “But the near-term benefit of new liquidity will likely far offset any longer-term concessions.”

Hub Flights

American said flights will increase from the hubs at Chicago, New York, Dallas-Fort Worth and Miami, and some regional jets will get first-class cabins. The carrier also will purchase 22 70-seat Bombardier Inc. planes.

Daily departures for mainline jets and regional carrier American Eagle will drop by 46 at St. Louis and 9 at Raleigh/Durham, North Carolina, American said. The carrier said it’s still assessing how many employees will be affected.

Seating capacity in American’s main jet operations will increase 1 percent next year over 2009, the carrier said. Domestic markets will be unchanged, while capacity on international flights, typically the most profitable routes for airlines, will rise 2.5 percent.

The GE Capital Aviation Services agreement will provide funding for Boeing Co. 737-800s being added through 2011 by letting American sell the jets to the General Electric Co. unit and lease them back. American is buying 84 737s, which are 25 percent more fuel efficient than the MD-80s they will replace.

GE’s Role

Boeing 737s use only CFM engines, built by GE’s jet-engine manufacturing venture with Safran SA of France. Fairfield, Connecticut-based GE is the world’s biggest maker of jet engines and the largest aircraft lessor by the number of planes.

The new GE financing also includes $280 million in cash under a loan accord. American put up 10 aircraft as collateral for $225 million of that funding, and will pledge 3 more planes as security next month to tap the remaining $55 million.

American is at least the fifth major U.S. airline since 2008 to raise funds by selling frequent-flier points to credit- card issuers. The miles are distributed as awards for purchases.

Citigroup can use the miles in equal monthly installments from 2012 through 2016. The agreement also extends the New York- based bank’s co-branded credit-card program with American.

The route changes for American and American Eagle will include the addition of 57 daily flights and 12 destinations in 2010 from Chicago’s O’Hare Airport. The airline will add 23 daily departures from Miami, 19 from Dallas-Fort Worth, 7 from John F. Kennedy airport in New York, 2 at New York’s LaGuardia and 2 at Los Angeles.

American didn’t disclose a cost to add first-class cabins to its fleet of Bombardier CRJ700s, allowing the carrier to charge more and compete with UAL Corp.’s United Airlines, which sells the premium tickets on its 70-seat planes from Chicago. American will begin accepting the 22 new CRJ700s in 2010.

“We’re really focused on where you want to be big in the U.S.,” Horton said of American’s emphasis on the four hubs and its base at Los Angeles. “It is a signal for the future as to where this company is going to place its bets.”

U.S.-based carriers slashed flight capacity in 2008 and this year, first in response to record fuel prices and then to better match supply as corporate and leisure business dwindled.

AA raises $2.9 billion, will expand in Chicago, New York, Dallas and Miami
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