Who's Flying the Plane

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 amendments
ISSUE 47 €30
ISSN 1752-5187
47
9 771752 518006

2. I N S O LV E N C Y US COLUMN
American Airlines:
Who’s flying the plane?
American Airlines’ Chapter 11 filing on 29 November 2011 may signal the reality that
a 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 business
30 SPRING 2012

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 FUTURE
outside the Chapter 11
reorganisation process. However, if
the termination would violate the
terms 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 11
collective bargaining agreement, a Airlines’ bondholders and Boeing. favor of such plan for a period of will be perhaps the most important
debtor seeking a distress termination Both Delta and US Airways have 120 days for a plan, and another 60 case since the U.S. auto
may also need to obtain the announced they have engaged days to gain acceptance of its plan. manufacturer cases. The PBGC is
bankruptcy court’s approval to financial advisors to explore In a case of the size and complexity positioned to backstop American
unilaterally reject or modify the acquisitions of or mergers with of American Airlines, it is likely the Airlines as “too big to fail” but the
collective bargaining agreement American Airlines. Many industry Bankruptcy Court will exercise its cost will be enormous … to
pursuant to section 1113 of the analysts believe a Delta merger is discretion to extend that right to 18 American Airlines, to its creditors, to
Bankruptcy Code. Section 1113 unlikely given potentially months. Very often in Chapter 11 its employees and retirees, to the
requires that the debtor make a insurmountable antitrust hurdles cases, creditors, through the officially airline industry and ultimately to the
proposal to the union “which and over-lapping U.S. east coast appointed committee of creditors, American taxpayer. This chapter of
provides for those necessary routes. Most analysts have not ruled will support extensions of such a American Airline’s history will play
modifications in the employees out a US Airways combination but debtor’s exclusivity provided the out in 2012 and 2013. The future of
benefits and protections that are do not believe it would be the dream debtor is making progress. In this the global airline industry will unfold
necessary 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 per
assures that all creditors, the debtor However, US Airways has been a satisfactory business strategy to barrel oil prices, exacerbated by
and 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., EU
repeats itself, American Airlines will million profit in 2010. With growing perhaps through an acquisition or and Asia, constricted lending
likely be able to terminate most or political pressure and creditor merger. We anticipate that the conditions and potentially rising
all of its Pension Plans, thus support for a merger, American Bankruptcy Court will extend interest rates in global capital
reducing 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 operating
American Airlines filed a motion to another airline. Recently, American It is also likely that creditors efficiencies and maximize revenue
reject its collective bargaining Airlines’ CEO, Tom Horton, has including the bondholders, the opportunities. Many believe that
agreements on March 27, 2012, but indicated a sale or merger may PBGC and vendors will own a growth in emerging markets will be
no hearing on the motion has indeed be a business strategy for significant stake in a reorganized critical to enhancing profitability. At
occurred 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 the
American 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 “open
successful in its goals, what’s next for Bankruptcy Court and may hinge priority rule” prohibits any junior skies agreements” limit foreign
American Airlines? On February 9, on who controls the bankruptcy class of creditors from receiving investment to 25%, both hurdles to
2012, Reuters reported that process. A key component will be value on account of its claims or global consolidation. Perhaps
American Airlines’ creditors’ determining who may propose and interests unless and until all superior American Airlines’ Chapter 11
committee wants a merger explored, file a plan of reorganisation, which classes are satisfied in full. Clearly, proceeding will spur a global debate
contrary to American Airlines’ is the court-approved contract to the current American Airlines equity about the future of the global airline
management’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