American Airlines CFO on post-pandemic balance sheet adjustment

FORT WORTH, Texas – Derek Kerr has perhaps the toughest job in the airline business.

Kerr is American Airlines’ chief financial officer, and his job is to repair a balance sheet battered by the borrowing needed to survive the pandemic.

American has the highest debt of any US airline, more than $36 billion. The airline is trying to weather a bumpy travel recovery during which revenue is rising but so are costs like fuel and labour.

Kerr recently spoke to The Associated Press. Responses have been edited for length.

F. American comes out of his first profitable quarter, without state aid, since the beginning of the pandemic. Planes are full. What will happen to earnings after Labor Day when holiday traffic slows?

A. Free time is really, really strong. Small companies are also 100% back because those companies had to survive, they’re out. Corporate banking is about 65%, 75% back. Looking at bookings…we don’t see much change from a revenue perspective as we move forward.


Q. Jet fuel spot prices have been falling for the past few months, but they’re still double what they were before the pandemic. Why doesn’t American hedge against fuel spikes like Southwest does?

A. Hedging is insurance. It’s very expensive, and you can’t insure your entire fuel portfolio. The aviation industry is the second largest fuel consumer. If we all hedged fuel, we would shift the fuel price and actually drive up the fuel price. You also take a risk to the company (if oil prices fall). And the last thing is, you have a natural hedge today — if fuel goes up, the industry can increase revenue. We’ve pretty much passed on the fuel increases that are out there.

F. American is forecasting a 12% to 14% increase in non-fuel costs per seat per mile for the third quarter compared to the third quarter of 2019. Can you get the costs under control?

A. It’s not necessarily a cost issue, it’s a fleet usage issue. If we were to fly our entire fleet, the cost (cost per seat per mile) would only have increased by about 2%. We built these airlines to fly more because of the cost, and we’re not flying anymore because of the resources it takes to do it.


Q. How will you fly more? Need more pilots?

A. There is a pilot shortage on the (regional airlines) because the major airlines (like American, Delta and United) hire on the regional airlines. We will continue to work on that. This may take a few years to resolve on its own. The mainstream is more about training throughput. We can hire the pilots, we have to put them through training. I’m hoping that by early next year, mid next year we can work this through and have the full main fleet operational.

Q. When will your profit margins return to pre-pandemic levels?

A. It’s basically the same answer because obviously that growth will come back at a much lower cost because the cost is already there. That will improve margins over time.

Q. You have $15.6 billion in cash. When are you going to use this to pay off debt?

A. For now, we will hold onto this liquidity until we feel we have fully turned the corner. We had a profitable quarter. This is great, it’s great, I’m proud of everyone here who worked to get to this point, but we have to keep it going. We’re going to get ($15.6 billion in liquidity) into the $10 (Billion) to $12 billion range eventually – just not ready, but hopefully soon.


Q. Can you refinance your debt if interest rates rise?

A. We’re in really good shape with no outstanding debt. We repaid the $750 million unsecured (senior notes maturing in June). Our next big payment is a $1.2 billion term loan (for work at Reagan National and LaGuardia airports) that is due late next year. Second, we need to finance airplanes. Every plane we have is funded through the end of the third quarter. We are working hard to fund the second half and there are many good propositions, even in a rising interest rate environment.

Q. Where can you find sources for aircraft financing?

A. We can operate commercial banks. We may market EETCs (publicly traded securities known as Enhanced Equipment Trust Certificates). The market for EETCs is currently still open. It’s probably 100 or 200 basis points higher than what we’ve done in the past, but that’s still very attractive funding in this environment.


Q. Is a capital increase on the table?

A. It’s not currently on the table. We have enough liquidity to weather any downturn.

Q. What about share buybacks when the ban (a condition of federal pandemic assistance) expires on September 30?

A. There are no share buybacks planned. All of our excess cash is used to pay off debt.

Q. How would a recession change the way American finances are managed?

A. If this were affecting revenue, we would be holding liquidity longer than we have. That doesn’t mean we won’t hit our $15 billion mark (the goal for deleveraging by the end of 2025). It could mean that we don’t expedite the repayment of that debt. But I have every confidence that in a recessionary environment, given the $15.6 billion of liquidity we have, we’ll be able to weather something like this.

Q. American stock is shorted far more frequently than Delta, United, or Southwest stock. Why are these investors actually betting that the stock price will fall?


A. It doesn’t concern me, but it’s really driven by balance sheet and differences between airlines. We must continue to make profits. We must continue to stick to our plan, make the airline profitable again, restore the airline’s reliability, and everything will work itself out.

Q. You were CFO at America West immediately after 9/11, at US Airways during the 2008 financial crisis during the airline downturn, and at American since late 2013.

A. This COVID time has been the toughest ever. A recession is one where revenue is down 5% or 10%. When you get into a situation where you don’t have receipts and you don’t know when you’re going to get out of there, that was the most difficult time.

Q. Could American have survived without federal aid?

A. American had negative receipts in April 2020. They refund more money if you walk out the door than you came in. We’ve never seen anything like it. It would have been really hard for all of us to get through that.

Copyright 2022 The Associated Press. All rights reserved. This material may not be published, broadcast, transcribed or redistributed without permission. American Airlines CFO on post-pandemic balance sheet adjustment

Sarah Y. Kim

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