American Airlines Group - Second quarter earnings overview (Part 8 of 11)
American’s debt had almost doubled to $16,894 million in 2013 after the merger from $8,535 million in 2012. U.S. Airways added $6,043 million debt to American’s $10,851 million debt balance in 2013. For more details on debt increases after merger refer Overview: Does American have funds to pay debts and expansion? .
During 2Q14, the company repaid $502 million debt obligations, prepaid $113 million associated with aircraft debt and $51 million of special facility revenue bonds. American’s debt balance as on June 2014 was $16,795 million which is almost 80% of its total capital. American has the highest debt to capital ratio followed by United (UAL) with 78%. Delta (DAL) and JetBlue (JBLU) have 45% and 50 % debt, respectively and Southwest (LUV) has the lowest debt of just 26%. American whose debt doubled after merger has managed to reduced it by prepaying $420 million debt since the merger closed, and plans to prepay $2.8 billion by the end of the year.
Debt is important source of capital as cost of debt is lower than cost of equity. Higher amounts of debt however have to be supported by adequate amount of liquidity. American had a negative free cash flow during the first half of the year. As on June 2014, the S&P local issuer credit rating was B which means the company currently has the capacity to meet its financial commitments. However adverse economic and business conditions may impair its ability to meet future obligations. In the next article more details on American’s liquidity position and future contractual obligations is provided.
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