AMR Corp.'s (AAMRQ) American Airlines is leveraging the strength
of its Latin American network with plans for a $3.25 billion
financing secured by its routes and airport assets in the region,
ahead of its planned emergence from bankruptcy protection.
American's international network lags behind that of rival
United Continental Holdings Inc. (UAL) and Delta Air Lines Inc.
(DAL), except on flights between the U.S. and Latin America, where
it's the market leader.
U.S. airlines have previously used international route rights
and valuable slots and gates at congested airports as loan
collateral, but American's move comes ahead of the full
liberalization of flights between the U.S. and Brazil, the region's
most important market.
The U.S.-Brazil market will be fully opened in October 2015,
allowing airlines from either country to operate routes of their
choosing, and they may also price those routes as they choose.
One remaining restriction, however, will be access to Sao
Paulo's Guarulhos International Airport. While the airport is
included in the open skies deal from 2015, severe congestion makes
takeoff and landing slots and access to gates held by existing
operators a prized commodity.
The $3.25 billion that AMR, the parent of American Airlines, is
looking to borrow would be secured by its right to operate direct
flights between the U.S. and South America and its airport slots in
those countries.
AMR said it may decide later to use its slots, gates and route
authorities in Mexico and Central America as additional security
interests in order to boost the amount of the financing that's
available to it.
In bankruptcy-court papers filed Thursday, AMR said the funding
will allow it to take advantage of historically low interest rates,
pay down existing bond debt and ensure it has "ample liquidity" to
fund its exit from bankruptcy by way of a merger with US Airways
Group Inc. (LCC).
Major banks have lined up to provide the financing, like
Barclays Bank PLC, Citigroup Global Markets Inc., Goldman Sachs,
J.P. Morgan Chase and Morgan Stanley.
The financing, which a Manhattan bankruptcy judge will review at
a May 9 hearing, would include a $2.25 billion term loan that AMR
can borrow on during and following its bankruptcy case. Another $1
billion revolving loan would only be available to AMR after its
exit from Chapter 11.
AMR can borrow on the term loan for up to six years and the
revolver for up to five.
Webster O'Brien, a vice president with airline consulting firm
ICF International, said it is common practice for airlines to use
their slots, gates and routes to secure financing.
Some of AMR's slots, gates and routes in Europe, China and Japan
already secure bonds due 2016, for instance. And AMR pointed to
such other examples as United Continental, which last month
arranged $1.8 billion in financing secured by these assets, and
Delta, which arranged $1.95 billion in such financing last
fall.
"They're assets. They might be intangible assets, but they're
unquestionably assets because they are the units of production
supply for an airline," Mr. O'Brien told Dow Jones Friday. "Like
any other asset that a company would carry, you can borrow against
it."
According to the proposed financing terms, the loan collateral
includes AMR's slots, gates and routes in Argentina, Bolivia,
Brazil, Chile, Colombia, Ecuador, Paraguay, Peru, Uruguay and
Venezuela, and any other South American country in which AMR may be
operating nonstop scheduled flights to the U.S.
South America has been a key target for American's expansion in
recent months, particularly Brazil, which will be inundated by
visitors from around the world for next year's World Cup. It has an
existing alliance with Latam Airlines Group SA (LFL), Latin
America's largest carrier, providing access to domestic markets in
Brazil and Chile.
Chuck Schubert, American's vice president for network planning,
has previously said strong customer demand makes Brazil an
"extremely important and growing market" for American.
According to data provided by ICF International, American
Airlines increased the capacity of its flights to South America by
nearly 9% between 2011 and 2012 and by nearly 46% between 2002 and
2012. All U.S. carriers, including American, increased their
capacity to the region by 7.3% between 2011 and 2012.
All told, American currently offers more than 900 weekly flights
to 49 cities throughout South and Central America as well as
Mexico.
AMR sought Chapter 11 protection in November 2011. It hopes to
close its merger with US Airways, which remains subject to
regulatory approval, by the end of August.
The combined airline would keep the American name and create the
world's largest airline by traffic.
(Dow Jones Daily Bankruptcy Review covers news about distressed
companies and those under bankruptcy protection. Go to
http://dbr.dowjones.com)
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