With bankruptcy fears swirling again around American Airlines, some questions arise what happens to the orders AA has with Airbus and Boeing if the carrier goes into Chapter 11.
This hand-wringing piece paints a dire picture for Boeing. There is a lot to argue with over this particular writing, but the piece’s headline is particularly off-the-mark. (Note that the writer of the piece and the headline writer may not be the same person.)
Airbus and Boeing were well aware of American’s precarious financial condition before striking the deal last summer to lease and sell more than 400 aircraft (with options for hundreds more). American also had a pre-existing order with Boeing for 737-800s and a handful of 777s; and an MOU for 42+58 787s.
We understand that the deals with Airbus and Boeing for the A320 and 737 families somehow took into account the prospect of a bankruptcy filing. We don’t know how contracts would have been structured to protect the orders in the event of a bankruptcy, for under US law any contract may be voided (including labor contracts, under certain conditions). But here’s the reality: the likelihood of American voiding these contracts is, in our view, very remote.
What analysts fail to recognize is that typically the OEM contracts enable them to void contracts in case of bankruptcy by a customer–it’s not just a one-way street. Airbus and Boeing could void the AA contracts. But we think this unlikely as well. Airbus has great incentive to maintain its contract, having broken the Boeing monopoly. Boeing has great incentive to maintain last summer’s 737 deal because if it doesn’t, AA could simply up its A320neo order.
If American enters bankruptcy, we would expect some hard negotiating over the contracts and perhaps some adjustments but we expect them to remain. It is not unknown for Airbus in particular to participate in a reorganization by lending money to the airline. Boeing, through Boeing Capital, could easily do the same.
We can make an argument that American should enter bankruptcy. It can’t get a deal with its pilots. Its costs vs its peers are too high. It has a pension plan that others don’t have. Its debt is crushing. We acknowledge management’s antipathy to bankruptcy and appreciate that they don’t want to screw the pension, employees and lenders and lessors. But the pilots basically believe AA is fiddling with the books to make matters look worse than they are. (Of course, if this were true, a lot of AA’s officers could wind up in jail.)
We don’t know what will happen. But what won’t happen is a wholesale canceling of orders.