eurofenix                                                The journal of INSOL Europe                                      ...
I N S O LV E N C Y       US COLUMNAmerican Airlines:Who’s flying the plane?American Airlines’ Chapter 11 filing on 29 Nove...
US COLUMN             I N S O LV E N C Y                                                                                  ...
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Eurofenix Spring 2012


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Who's Flying the Plane

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Eurofenix Spring 2012

  1. 1. eurofenix The journal of INSOL Europe Spring 2012 Who’s flying the plane? SMALL, ALONE AND POOR A merciless portrait of insolvent French firms ESUG: German for “Modernising Bankruptcy Law” EUROPEAN INSOLVENCY LAWS: Convergence or Harmonisation? NEW RESTRUCTURING REGIME IN SPAIN Ground-breaking amendmentsISSUE 47 €30 ISSN 1752-5187 47 9 771752 518006
  2. 2. I N S O LV E N C Y US COLUMNAmerican Airlines:Who’s flying the plane?American Airlines’ Chapter 11 filing on 29 November 2011 may signal the reality thata formal insolvency proceeding is part of the airline industry business cycle merican Airlines’ four Pension Plans, for pilots, flight 50%, a burden which may be eased A Chapter 11 filing on November 29, 2011 may signal the reality that a formal insolvency proceeding is part of the airline industry attendants, agents, and ground crew, covering almost 130,000 employees and retirees. The Pension Benefit Guaranty Corporation (“PBGC”) estimated that the combined assets by increasing the premiums on other Pension Plans, but which is ultimately borne by the American taxpayer. The PBGC has brought political pressure to bear in its effort business cycle. The U.S. airline in the Pension Plans are $8.3 billion to oppose terminations of the industry has experienced substantial as of American Airlines’ filing date American Airlines’ Pension Plans. consolidation and many carriers and the combined liabilities are Specifically, George Miller, a have reorganized in Chapter 11. $18.5 billion, leaving the Pension Democratic member of the U.S. The U.S.’s largest carriers, Plans “underfunded” by House of Representatives from United/Continental, approximately $10.2 billion. By California, and ranking member of DAVID H. CONAWAY Delta/Northwest, and American comparison the Chapter 11 the House Committee on Education Airlines, each filed for Chapter 11 at “underfunding” for the Pension and the Workforce issued a public Shumaker, Loop & Plans of other major airlines was as letter to Joshua Gotbaum, Kendrick, LLP (USA) least once. Southwest Airlines is the only major U.S. carrier that has not follows: Chairman of the PBGC, to do filed for Chapter 11 protection. everything in its power to avoid the Typically a primary motivator for an pension plan termination by United Airlines - $7.4 billion - 2005 airline bankruptcy is to cut defined American Airlines. There has been US Airways - $2.7 billion - 2003/05 benefit pension plans (“Pension Delta Airlines - $1.6 billion - 2006 historical perception that the PBGC Plans”) for employees and/or to American Airlines’ pension bust has generally “rolled over” and reject or modify collective would be the largest in U.S. History. accepted corporate Pension Plan bargaining agreements. Although jet The PBGC has publicly terminations. fuel spot prices have risen 110% opposed American Airlines’ Clearly the stakes are high for from January 2001 to December proposed termination of its Pension American Airlines, the airline 2006, and 133% from January 2007 Plans. The PBGC is a quasi- industry in general, and the U.S. to July 2008, there is little airlines governmental U.S. agency government and the American can do to reduce cost of this (analogous to the FDIC) created to taxpayer. This presages a legal battle essential commodity, other than pass guaranty the benefits granted in over American Airlines’ ability to along those price increases to the Pension Plans to employee and terminate its Pension Plans, which passengers in the form of various retirees of U.S. corporations who will play out in the United States surcharges. sponsor such plans. In cases of Bankruptcy Court. Under the In American Airlines’ case, it underfunding, if a Pension Plan is Employee Retirement Income has reported $4 billion of aggregate terminated, the PBGC is obligated Security Act of 1974 (ERISA), an net operating losses in 2008, 2009 to honor most of the obligations employer seeking reorganisation in and 2010 and another $2 billion for owed under the Pension Plan. Chapter 11 bankruptcy may fiscal year 2011. Moreover, citing an Unfortunately, the PBGC currently petition the bankruptcy court for $800 million cost disadvantage to estimates its deficit, prior to termination of a Pension Plan. The other U.S. carriers, American American Airlines, at $23 billion. debtor is required to show that Airlines’ stated goal is to reduce Ultimately, the PBGC is backed by unless the Pension Plan is operating costs by $2 billion per the full faith and credit of the U.S. terminated, it will be unable to pay year. Of that number, American Government. A termination of all its debts pursuant to a Airlines seeks to save $1.25 billion by American Airlines’ Pension Plans reorganisation plan and will be terminating its Pension Plans. It has would increase the PBGC deficit by unable to continue in business30 SPRING 2012
  3. 3. US COLUMN I N S O LV E N C Y “AT SOME POINT, GLOBAL CONSOLIDATION MAY NEED TO PLAY A ROLE IN THE INDUSTRY’S FUTUREoutside the Chapter 11reorganisation process. However, ifthe termination would violate theterms and conditions of an existing American Airlines’ creditors’ committee include the PBGC, American Airlines’ labor unions, the banks representing American bankruptcy protection. In Chapter 11, American Airlines retains the exclusive right to propose a plan of reorganisation and to solicit votes in ” to American Airlines’ existing unsecured creditors on account of their debt claims. American Airlines’ Chapter 11collective bargaining agreement, a Airlines’ bondholders and Boeing. favor of such plan for a period of will be perhaps the most importantdebtor seeking a distress termination Both Delta and US Airways have 120 days for a plan, and another 60 case since the U.S. automay also need to obtain the announced they have engaged days to gain acceptance of its plan. manufacturer cases. The PBGC isbankruptcy court’s approval to financial advisors to explore In a case of the size and complexity positioned to backstop Americanunilaterally reject or modify the acquisitions of or mergers with of American Airlines, it is likely the Airlines as “too big to fail” but thecollective bargaining agreement American Airlines. Many industry Bankruptcy Court will exercise its cost will be enormous … topursuant to section 1113 of the analysts believe a Delta merger is discretion to extend that right to 18 American Airlines, to its creditors, toBankruptcy Code. Section 1113 unlikely given potentially months. Very often in Chapter 11 its employees and retirees, to therequires that the debtor make a insurmountable antitrust hurdles cases, creditors, through the officially airline industry and ultimately to theproposal to the union “which and over-lapping U.S. east coast appointed committee of creditors, American taxpayer. This chapter ofprovides for those necessary routes. Most analysts have not ruled will support extensions of such a American Airline’s history will playmodifications in the employees out a US Airways combination but debtor’s exclusivity provided the out in 2012 and 2013. The future ofbenefits and protections that are do not believe it would be the dream debtor is making progress. In this the global airline industry will unfoldnecessary to permit the alliance such as the United and case, “progress” will be measured by over many years.reorganisation of the debtor and Continental combination created. reductions in operating costs and a In an era of above $100 perassures that all creditors, the debtor However, US Airways has been a satisfactory business strategy to barrel oil prices, exacerbated byand all affected parties are treated champion of industry consolidation successfully emerge from Chapter continued unrest in the Middle-East,fairly and equitably”. If history and has managed to post a $447 11 and deliver value to creditors, lagging economies in the U.S., EUrepeats itself, American Airlines will million profit in 2010. With growing perhaps through an acquisition or and Asia, constricted lendinglikely be able to terminate most or political pressure and creditor merger. We anticipate that the conditions and potentially risingall of its Pension Plans, thus support for a merger, American Bankruptcy Court will extend interest rates in global capitalreducing its financial obligations by Airlines may be forced to American Airlines’ exclusivity until markets, U.S. and global carriers$1.25 billion per year. In fact, consolidate by combining with as late as September, 2013. must find ways to gain operatingAmerican Airlines filed a motion to another airline. Recently, American It is also likely that creditors efficiencies and maximize revenuereject its collective bargaining Airlines’ CEO, Tom Horton, has including the bondholders, the opportunities. Many believe thatagreements on March 27, 2012, but indicated a sale or merger may PBGC and vendors will own a growth in emerging markets will beno hearing on the motion has indeed be a business strategy for significant stake in a reorganized critical to enhancing profitability. Atoccurred at this time. Many view American Airlines’ future. American Airlines, or in the some point, global consolidation,this motion as the “velvet hammer” Whether American Airlines is surviving entity in any American beyond current global “alliances”,to prompt a favorable resolution for able to succeed in staying Airlines merger. This is because may need to play a role in theAmerican Airlines. independent or forced to consolidate under the provisions of the U.S. industry’s future. However, many Assuming American Airlines is will again be played out in Bankruptcy Code, the “absolute carriers are state-owned, and “opensuccessful in its goals, what’s next for Bankruptcy Court and may hinge priority rule” prohibits any junior skies agreements” limit foreignAmerican Airlines? On February 9, on who controls the bankruptcy class of creditors from receiving investment to 25%, both hurdles to2012, Reuters reported that process. A key component will be value on account of its claims or global consolidation. PerhapsAmerican Airlines’ creditors’ determining who may propose and interests unless and until all superior American Airlines’ Chapter 11committee wants a merger explored, file a plan of reorganisation, which classes are satisfied in full. Clearly, proceeding will spur a global debatecontrary to American Airlines’ is the court-approved contract to the current American Airlines equity about the future of the global airlinemanagement’s goal to stay pay creditors that allows a Chapter is “out of the money” and thus the industry.independent. The members of 11 debtor to emerge from new equity will be distributed in part SPRING 2012 31