American Nabs New Funds, Bolsters Hub Flying

Posted by: Justin Bachman on September 17

American Airlines’ parent AMR Corp. (AMR) moved to shore up its balance sheet, announcing $2.9 billion in financing on Sept. 17. The company also said it will revamp broad portions of its network, expanding flights at its hubs in Chicago, Dallas-Fort Worth, and Miami, and in New York and Los Angeles, while further cutting back in St. Louis and Raleigh, N.C.

The money comes in part from $1 billion in frequent flier miles American sold to Citigroup (C), a deal that was long expected. The deal for miles, through 2016, also extends the companies’ credit card agreement. Still, many on Wall Street wonder why the miles sale did not occur earlier this year, when the market began questioning whether AMR had adequate funds to withstand what is expected to be a lean winter travel period. Another $1.6 billion is from a deal with General Electric Capital Aviation Services (GECAS) to sell to GE and then lease back new Boeing 737-800s American has ordered to replace its aged MD-80 domestic fleet. The GE unit will also loan American $280 million, involving 13 airplanes as collateral. As part of the finance deal, GE will supply engines for the 42 new 787 Dreamliners American has on order. The liquidity news sent AMR shares jumping more than 20% in trading Thursday.

Aside from the financing, American’s decision to shift large portions of its capacity to its major cities further underscores the financial weakness in much of the industry’s domestic flying. The AMR decision comes just weeks after four airlines – Delta (DAL), Continental (CAL), US Airways (LCC) and AirTran (AAI) swapped landing slots and gates at the crowded airports in New York and Washington D.C. to focus on improving fare performance. Even Southwest (LUV) is now contending with the network airlines for business traffic in New York, Boston and Minneapolis, hoping to improve revenues.

The biggest flight boost will happen at Chicago O’Hare, where American will add 57 new flights, including a dozen domestic cities and three international ones, including Beijing. American will also add Honolulu; Anchorage; and Vancouver from Chicago. DFW Airport will get 19 new flights, while Miami adds 23. JFK will see six new destinations on American, including Madrid; Manchester, UK; San Jose, Costa Rica; and Austin. LAX will have two new flights. American acquired the minor St. Louis hub with its 2001 acquisition of TWA and has been gradually dismantling it ever since. St. Louis will lose service to 20 destinations, keeping only nine with 36 daily departures. It has been a similar story in Raleigh, which will lose flights to three cities. American and American Eagle will fly 44 daily flights to eight destinations after the changes.

American also will install a first-class cabin on 22 new 70-seat regional jets it plans to buy from Bombardier, plus 25 it already flies. That new seating configuration will be introduced in mid-2010. The takeaway? Sorry, folks in the hinterlands: American is redoubling its efforts to prepare for the return of high-yield business traffic in the cities where business flies. "Where we need to be for our most important customers over time," as American CFO Tom Horton put it on a conference call. This also shows just how much of the “non-hub” parts of the nation discounters have truly claimed.