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Airlines hide out in bankrupcy court article

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Well-known member
Nov 27, 2001
from the Washington Post:

Airlines Hide Out In Bankruptcy Court

By Jerry Knight

Monday, September 19, 2005; Page D01

US Airways of Arlington is on Runway 11, revving its engines to fly out of bankruptcy.

Dulles-based Independence Air is circling the same field, getting ready to land.

U.S. Bankruptcy Court is an all-too-frequent stop for the nation's airlines, a routine refueling and refinancing station on the way to whatever may be the final destination for the embattled industry.

The airlines would become what they want to be -- a strong, profitable industry -- a lot faster if they stopped flying through bankruptcy court and made some tough decisions on their own.

But they can't resist. They're like Dad, driving down the interstate with a carload of squirming kids demanding, "Are we there yet?" He sees a sign that says "Cheap Gas & Snack Bar" and pulls right in.

Bankruptcy court is so irresistible to airlines that this week, about half the travelers flying in America are riding on planes of companies operating under the protection of Chapter 11 of the federal bankruptcy law, the provision that gives companies that can't pay their bills time to work out deals with their creditors.

In a first even for the bankruptcy-prone airline industry, Delta Air Lines and Northwest Airlines filed for Chapter 11 on the same day, last Wednesday. Among the big carriers, they joined US Airways, which won a judge's approval Friday to merge its way out of bankruptcy, and United Air Lines, which at 38 months and counting is the Cal Ripken of Chapter 11 airlines.

Chapter 11 is so irresistible that Northwest Airlines flew into it last week even though it is not broke or even close to it. Northwest had more than $1 billion in cash and credit lines it could tap when it filed the paperwork.

In fact, Northwest says it doesn't need to borrow money to keep operating, which is what most companies operating under Chapter 11, including Delta, are forced to do.

Northwest's finances were so strong that on the morning of the day it filed for Chapter 11, five Wall Street firms issued research reports pooh-poohing reports that the filing was imminent, keeping their "buy" recommendations. Merrill Lynch, Morgan Stanley, Prudential Equity Group, J.P. Morgan and Fulcrum Securities all had egg on their faces by sundown. Just one analyst, Raymond E. Neidl of Calyon Securities, cut Northwest to "sell."

That may tell you as much about the reliability of Wall Street research as it does about the airline business, but still it's clear that something has gone wrong.

Chapter 11 has become a strategic tool for airlines, said St. Louis University finance professor Michael J. Alderson, who has studied the system for two decades.
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part 2

"When your competition starts working under Chapter 11, you have an incentive to join them," he said. "You won't be competitive if you don't."That's what's happening now. Going into Chapter 11 gave United and US Airways obvious advantages over their healthier competitors, advantages that were too tempting for Delta and Northwest to pass up.

For starters, companies in Chapter 11 can cancel contracts at will. They can tear up their catering contracts to save money on food. They can tell employees that their union contract is canceled: Take a pay cut or take a hike. They can renege on promises to pay pensions and throw their workers to the mercies of the government's Pension Benefit Guaranty Corp.

PBGC estimates that Delta is $10 billion short of meeting its eventual pension obligations. Northwest is nearly $6 billion short.

The day before it filed, Northwest stiffed Mesaba Airlines for $19 million. Mesaba is a longtime partner that flies feeder flights from smaller cities into Northwest's hub at Minneapolis and on other short-haul routes. In bankruptcy court, Mesaba will get only a fraction of what it is owed.

Ducking your debts is what Chapter 11 is all about. Credit-rating agencies estimate that holders of bonds issued by Northwest and Delta will get less than 10 cents for every dollar they're owed, which is about par in airline bankruptcy cases.

The ability to break promises, become a deadbeat debtor and still stay in business turns Chapter 11 into what economists call a "moral hazard." It gives companies an incentive to do the wrong thing.

And it encourages healthier airlines to take the same route.

"When competitors enter Chapter 11 and default on their financial obligations, including their employees' hard-earned pensions, it puts us at a cost disadvantage," Continental Airlines lamented in a statement issued after Wednesday's dual filings.

Continental, which went through a successful Chapter 11 reorganization in 1990, and American are the two old-line airlines left operating outside Chapter 11. Neither is expected to file, but obviously they are tempted. As Mae West once said, "I generally avoid temptation unless I can't resist it."

Robert L. Crandall, the former chairman of American Airlines, made the same point in a Wall Street Journal op-ed piece and in an interview Friday. "You need to change the bankruptcy laws," he said. "You say, 'Look, if you fail, you liquidate.' If you look around the rest of the world, that's what they basically say. You get a very limited period of reorganization. When companies fail, they get liquidated."

The liquidation of Eastern Airlines in 1991 shows how the system ought to work, Crandall said. "The good assets," such as the shuttle service between Washington and New York, "were acquired by others, the assets without any real economic value just went away. You thinned out the industry."
part 3

Crandall called on Congress not only to reform airline bankruptcies but also to tackle the endless problems of the industry. "We don't have any aviation policy at all," he said.

The bankruptcy process does produce benefits, said James Corridore, the airline specialist at Standard & Poor's. It keeps employees employed. It keeps the flying public flying. It keeps cities from being stuck with empty airports and no transportation. But, he noted ,"it gives carriers their second, third and fourth chances" to get their acts together. Keeping weak airlines in business ultimately delays the weeding-out process that is the essence of free markets.

The primary problem of the airline business is that there are too many airlines flying too many planes on too many routes. Even the industry's trade association, the Air Transport Association, agrees that consolidation and capacity reduction are needed.

Chapter 11 puts off the pruning of the industry, a process that began in the 1970s when the airlines were deregulated.

Since then there have been close to two dozen Chapter 11 filings by airlines, but only a few major carriers have vanished. (Remember Pan Am and TWA?)

US Airways came close to joining that list, Corridore said, noting that the airline looked to be on its way to liquidation until America West came along. "What US Airways and America West are doing is pretty novel -- one airline that's fairly healthy merging with one in bankruptcy."

The merger will be completed by the end of the month. The penultimate step came Friday after Judge Stephen S. Mitchell of the U.S. Bankruptcy Court in Alexandria approved US Airways' plan for making peace with its creditors, which will get 3 to 17 cents for each dollar they are owed.

Calling the reorganization plan "viable and realistic," Mitchell said he has "every hope and confidence that the airline will prosper."

In two trips through bankruptcy court, the airline changed significantly. It started out flying 417 jets to 204 cities with 4,478 flights a day. Now there are 263 planes flying 3,148 daily departures to 183 cities. The workforce has been cut from 46,500 to just over 22,000.

Chapter 11 worked for US Airways, but it took two tries, wasted millions of dollars on legal fees and cost investorsbillions.

Stockholders were wiped out, as they almost always are. Creditors wound up owning about 10 percent of the restructured airline. Investors who poured in new money hold a 52 percent stake. America West will own 37 percent.

US Airways President Bruce R. Lakefield said joining America West will create the kind of airline that travelers have been asking for, "a global carrier offering full service amenities and simplified fares."

"Through our restructuring, we have reduced our debt, improved our liquidity and strengthened our balance sheet," Lakefield said. "With the financial position of other carriers deteriorating, we are pleased that we will have a strong cash position, a robust business plan, a low cost structure and a strong network."

The merger will cost the Washington area one of its best-known businesses because the corporate headquarters will move to Phoenix, with American West chairman and chief executive W. Douglas Parker running the show.

The Washington region still is the home of Independence Air. A spokesman for its corporate parent, Flyi Inc., said last week that the company is "continuing to consider all possibilities" to strengthen its finances. But it's No. 1 on almost everybody's schedule for the next flight into bankruptcy.

Jerry Knight's email is [email protected]
this article is right on. But, as long as CH11 is structured the way it is, frankly it would be irresponsible of a CEO to not take advantage of the BK laws the same way you would take advantage of any law that works to your favor.
Pension plans are worthless as t!ts on a boar hog. Better to bury money in jars.

Or stamp "Only As Long As We Want To" on every page of a pilot contract. That's the reality of this brave new market-based world.....
this article is right on. But, as long as CH11 is structured the way it is, frankly it would be irresponsible of a CEO to not take advantage of the BK laws the same way you would take advantage of any law that works to your favor.

Absolutely. It would be gross negligence not to take advantage. And we will get to see how effective the new bankruptcy laws that take affect next month are. If what I understand about the time limits is correct, it will be virtually impossible for a big corp like one of the legacies to be successful in Ch11. A lot of the limiting factors concerning time are with creditors.
Donald Trump has been to bankruptcy a few times, and he says it is good to do that if necessary. And look at him now....He sang a terrible rendition of "Green Acres" last night at the Emmys. Amazing.

Bye Bye---General Lee

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