• Evan Ryan

Emergency! American Airlines Lays of 19,000

All right, everyone, emergency Seconds and Cents. Today actually yesterday, American Airlines announced that they're going to layoff or furlough. 19,000 people come October. And this is something that

to be honest with you, I think the American people should be absolutely pissed about. So here's what happened a couple months ago. COVID hits, right? We passed cares act, Congress passes, the cares act like this 2.2 $2.3 trillion bill.

It has PPP in it. It has the

unemployment insurance, and it has 400 and $50 billion under Treasury Secretary minuchin in it. And part of that $450 billion is to bail out the airlines. I believe the airlines in total got something like 50 billion or $25 billion a major airlines like American, Southwest and united and delta. So that seems like

all well and good. I'm sitting there I'm thinking to myself what's probably good that we bail out the airlines because they're going to see kind of this like, unexpected and sort of, to be honest with you from their perspective, unwarranted loss in loss in revenue loss and customers. And on social I heard somebody talk about how this is just a ridiculous piece of legislation for the airlines. He said, quote,

for bailing out the hedge funds in the family offices here, and he's talking about unsecured debt and all these different things

that basically, point towards the airlines should not be bailed out by the government. The airlines should not be bailed out by the taxpayers, the airlines should be allowed to fail because failure in the airlines will not have the airlines actually go out of business. What it will do is it'll force the people who made really bad decisions inside of the business, it'll force the people who took advantage of the American people inside of the business to kind of ante up and pay. So here's what

What's happening within the airlines, this happens with a lot of publicly traded companies, a lot of companies with lots of assets, like the airlines, in particular have tons of assets, those assets being bigger planes, right. So these airlines take on unsecured debt. Now, the unsecured debt is just bad debt that's not backed by collateral. So what that means is that if I am the bank, right, and I loan American Airlines a billion dollars, and it's unsecured debt, if American Airlines defaults on that debt, I can't go back and collect using the airplanes. Basically, I can't seize ownership of the airplanes. If they can't pay, they just can't pay they have to file bankruptcy, but I don't get to own the airplanes. American Airlines as a corporation, still owns the airplanes. So basically, here the creditor which would be the bank or the hedge fund, or the family office, or whoever actually wrote the loan to American or to delta or to United, I'm picking on American but this applies to all because delta will announce layoffs and furloughs. So

United will as well,

they can't the creditor, the person who wrote the loan cannot take the assets in the event of a default. Now, what does the creditor get in the event or because they can't actually seize the assets? Well, what they get is they get a higher interest rate. So maybe instead of charging 1.5% interest on their billion dollar loan, they charged which would be 10 and a half million dollars in interest, they charge 2.7%, which now takes that 10 and a half million dollars in interest on a billion dollar loan to $27 million on a billion dollar loan. So we have a much higher interest rate. But ultimately, here, you have a creditor that's taking on a lot of risk. You have a hedge fund or a family office or a bank, or pension plan that's taking on an enormous amount of risk giving American Airlines a billion dollars, and American Airlines doesn't really have to pay it back because of chapter 11 bankruptcy, because of what chapter 11 states so what is chapter

11 chapter 11 is very different from chapter seven bankruptcy, which is what people are familiar with. Chapter Seven bankruptcy basically says that the business has gone bankrupt, the owners of the business are bankrupt and the business is now out of business, which chapter 11 says it says we're going to reorganize the business, we are going to reorganize the debt. And it's because a business that's as large as American Airlines or large as United Airlines or delta, right, they see this unexpected drop in sales. But really the business was was fairly well run. And we want to keep this business in business. So we're going to have them go through chapter 11 bankruptcy, which will reorganize the debt and it will allow the business to continue to function even though the business cannot currently be profitable and pay interest on the loan. So the key here is can they pay their loan interest? If you can pay your loan interest? It's fine. If you can't pay your loan interest. Now, you

Start to have problems. So chapter 11. What happens? First of all, there's going to be kind of an independent committee that's brought in that will watch over.

All this is decision making processes of the business.

Then you'll have the government in the Securities and Exchange Commission, you'll have the Department of Justice that will kind of help in making the the large financial decisions inside of the business. And you'll have different creditors

that get ranked in order. And so people have secured debt debt paid back faster than people who have unsecured debt. The government gets paid back faster than everybody. So in the case of the cares Act, which was passed in April or March,

the government which gave

American Airlines four and a half billion with a B dollars

will get paid back first by American Airlines. And then second, it will be anybody that has secured debt. And then third, it will be anybody that has unsecured debt. Now, this is where the problems start. So American Airlines was already being spoken about and the fact that they had over $30 billion in debt, most of it unsecure, so $30 billion in debt, I mean, my goodness, that's a ton of debt. 2011 American Airlines filed for bankruptcy. So they filed chapter 11 bankruptcy in 2011, credited the creditors the people who owned the who had actually written the loans, largely ended up getting equity into American Airlines, instead of getting their debt paid. Now, for those of you who don't really understand complex financial accounting, what this means is that if JP Morgan and I'm just picking on JP Morgan, I have absolutely no idea if they wrote if they wrote a loan to America.

JP Morgan writes a billion dollar loans from American Airlines and American Airlines filed chapter 11 bankruptcy. What that means is that American Airlines or JP Morgan just got a billion dollars American Airlines stock

a billion dollars in American Airlines stock. But instead now JP Morgan owns a bunch of owns a bunch of equity in the company, they just don't get their debt repaid. Now the share price will move sometimes it'll move up and sometimes it'll move down most of the time it moves down because the companies haven't clearly having operational issues. They're clearly unable to be profitable and the share price is based off of future earnings. Now in the case of companies like hertz hertz is in the kind of the same boat as American Airlines. The hertz share price when they declared bankruptcy back in May actually went up. So JP Morgan or any creditor files are ends up getting equity instead of

Instead of their debt repayments, the share price will move sometimes are up or sometimes down. But now the American Airlines profit and loss statements look a lot better because they don't have interest expense. They don't have debt repayments. So their balance sheet, their profit and loss, they have more ca