American tells Boeing: “No finance, no planes”

American Airlines ordered 100 737 MAX and had taken delivery of 24.

With a cash strapped balance sheet as it struggles to balance operating costs against reduced passenger numbers, American is struggling.

Fighting a growing backlash against fully loaded aircraft with zero social distancing, in the middle of what is fast becoming the worlds worst COVID-19 outbreak sweeping the US, while the Trump Administration does nothing, American’s managers are on the brink of make or break decisions.

If they reverse the empty seat policy again, having just gone to full seating, which while it has little practical effect makes passengers considerably more willing to fly, it looses revenue. If it puts ticket prices up it risks loosing passengers. If it needs more flights to fulfil demand it puts up costs and the cycle goes round and round.

All of this, plus it’s already strapped finances have meant that its core plans to bring on more 737MAX with their improved economies and cost savings, while ditching old aircraft, are in danger. So much so the airline can’t afford the cash to buy the aircraft.

Boeing Capital, the manufacturer’s finance arm, is used to buying up new aircraft and then financing them in what amounts to hire purchase, but to do that it now has to borrow money on the open market, which it didn’t usually do. Boeing’s credit ratings are risky, it’s already borrowed as much as it can, and American Airlines stock is only at around $11 a share (United’s is classed as sub-junk by comparison). American too, is up to its neck in debt.

Boeing used to put part of its cash flow – which in the good days was vast, into Boeing Capital to finance the few airlines who needed it. That cash has dried up, as deliveries have collapsed and nobody is paying for aircraft. Boeing Capital doesn’t have the money to lend and American has said it now won’t take any MAX orders unless Boeing finances them over time.

Just to add to the pressure American has apparently told Boeing it’s going to cancel as many as 29 or more aircraft, potentially conditional on financing.

There is plenty of money in the system – unlike in 2008-9. Approximately US$1 trillion is said to be sloshing about in the global market with nowhere to go, but that’s just as dangerous, as it often gets lent to high risk businesses, which if they fail, means the money is lost, reducing the available credit.

Is Boeing high risk? Probably not in the long term, but in the short term it cannot afford to pay off more credit. American Airlines can’t afford to pay cash up front. And Boeing Capital’s actuaries will be seeing it as a risky client.

So what’s next? Boeing can afford to loose the order. It’s more likely that if they just called Americans bluff, two years down the line American will be back for more. But it’s a risk, and Airbus in Mobile would be happy to build the A320’s if American chose them.