AAL – CDS 871bps, Base Case iCDS 156bps, Negative Case iCDS 253bps, 2025 3.750% Bond YTW of 6.794%, iYTW of 3.064%, B2 Rating from Moody’s, XO- (equivalent to Ba1) Rating from Valens, Low Refinancing Need

March 8, 2022

  • Credit markets are grossly overstating credit risk, with a cash bond YTW of 6.794% and a CDS of 871bps, relative to an Intrinsic YTW of 3.064% and an Intrinsic CDS of 156bps. Meanwhile, Moody’s is overstating the firm’s fundamental credit risk, with its B2 credit rating four notches lower than Valens’ XO- (Ba1) credit rating.
  • Incentives Dictate Behavior™ analysis highlights mostly positive signals for credit holders. Specifically, AAL’s compensation metrics should focus management on all three value drivers: asset efficiency, margins, and growth, which should lead to Uniform ROA expansion and increased cash flows available to service obligations. Additionally, management members are material owners of AAL equity relative to their average annual compensation, indicating they are well-aligned with shareholders for long-term value creation. Moreover, all management members have low change-in-control compensation, implying they are not likely to accept a buyout or pursue a sale of the company, decreasing event risk for creditors.
  • Earnings Call Forensics™ of the firm’s Q4 2021 (01/20) earnings call highlights that management is confident they benefit from business and leisure travel rebounds in their short-haul networks and that fully utilizing their assets will get them close to pre-pandemic cost per available seat mile (CASM) levels. However, management is also confident they expect capacity to be down approximately 8%-10% from Q1 2019 levels. In addition, they may lack confidence in their ability to invest in chat and callback functions, upgrade fleet telecoms, and hire the best crewmates for their regional carriers. Moreover, they may have concerns about the impact of the 5G roll-out on airline communications, the labor imbalance among regional carriers, and the impact of the Omicron variant on demand and capacity levels. Finally, management may lack confidence in their ability to sustain cargo revenue growth, maintain flight volume, and improve available seat miles (ASM) levels.

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