What is the downside to BK?

[JayhawkDude]

Okay, for those of us who weren't economics majors or insurance salesmen, what are the negatives to declaring bankruptcy for an airline. I'm not talking about the employees, shareholders, the government, etc. I'm talking about the company- the decision makers- the board or the CEO or whoever the guy is who says, "Yep, let's file the papers."

From an uneducated point of view, there doesn't seem to be much of a cost. The company can eliminate pensions, reduce payrolls, reduce debt to suppliers and lessors while assets like aircraft are protected by judges. I know a small segment of the travelling public may avoid an airline if it thinks operations will be disrupted, but it seems they rarely are. Frequent flier programs are often protected and I can find few other downsides.

Further, once a company declares BK, what is the motivation to come out? For example, United has been in BK for many months now and I can't see (as an outsider or member of the traveling public) how it affects their day-to day operations. Why hurry to leave bankruptcy? If you're the CEO and you're collecting your paycheck, what's in it for you?

This is an honest question. I'm not trying to sound holier than thou. I just don't understand the process. I'd appreciate it if anyone could enlighten me (without people slamming each others' airline.)

Thanks.

JD

 

[lowecur]

From an insurance salesman pt of view

Bankruptcy can be very expensive, that's why you hear Continental talking about liquidity. When all your assets are mortgaged you must set a cash threshold where you have to file bankruptcy in order to survive through bankruptcy. Most airlines cannot get DIP(debtor in possession) loans to survive through bankruptcy because they have very few assets that are not mortgaged, so they must have enough liquidity to survive the process. Once you have gone through the process of reducing debt and restructuring payroll, you then have to find exit financing.

This is why Gerard Arpey and Gerald Grinstein are trying to address the financial issues they have without going through the process. That said, they too have bought a limited amount of time where unless the company makes money they too will have to file.

The CEO and directors have a fiduciary responsibility to the employees/shareholders to make the proper decision. It is not based on what is good for each of the people in charge. Bankruptcy decisions carry alot of exposure for the CEO and directors. Each could be sued for looking out for their own interests ahead of the employees/shareholders if they neglect to file and the company has to liquidate.

Your question about when to come out is determined by the bankruptcy judge. He has alot of latitude, but eventually he must draw the line and set timetables that the airline must adhere to. When you're UAL, and you have so many employees welfare at stake, the judge will do backflips to help them.

 

[Air Biscuit]

Continental is talking about liquidity? That's one I haven't heard.

 

[Guitar Guy]

Small correction for lowecur

This is why Gerald Arpey and Gerald Grinstein are trying to address the financial issues they have without going through the process.

Just a small correction: American Airlines' CEO is "Gerard" Arpey, not "Gerald". Here's a link: http://www.aa.com/content/amrcorp/corporateInformation/bios/arpey.jhtml

I thought you might like to know that for future reference.

 

[lowecur]

Continental is talking about liquidity? That's one I haven't heard.

Yup, this is from the recent quarterly press conference.

"The cuts will save the carrier part of the $500 million annually that it wants from employee groups by Feb. 28 to fend off a potential liquidity crisis, layoffs and deeper payroll cuts in light of soaring jet fuel costs."

 

[lowecur]

Just a small correction: American Airlines' CEO is "Gerard" Arpey, not "Gerald". Here's a link: http://www.aa.com/content/amrcorp/corporateInformation/bios/arpey.jhtml

I thought you might like to know that for future reference.

Thanks, I always thought it was Gerald.

 

[bafanguy]

...what are the negatives to declaring bankruptcy for an airline... the decision makers- the board or the CEO or whoever the guy is who says, "Yep, let's file the papers."

JD

Well, it would seem to me that one would need to define terms. A "negative" for you, the employee or stockholder, isn't quite in the same category of a "negative" for GG and his Band of Merry Men.

A "negative" means you...individually, directly, painfully, and in life-altering ways, have your world rocked to its foundations. It hurts...you know you've messed up because nothing is the same for you because of what YOU did.

A negative for you means you aren't flying anymore but are working at Home Depot. A negative for GG means he'll have to spend all that time with his accountants and lawyers figuring out how to handle all the $$$ from his golden parachute...not how to apply online to Home Depot.

Don't you wish you had a job where NOTHING you did had any real-life consequences ? Sued by the stockholders for breach of fiduciary responsibility ??? Give me a break !!

Are Ron Allen and Leo Millions experiencing any "negatives" from their failure to be successful at what they were paid to do ? You tell me...

If they lived up to their end of the deal, I'd say give 'em a boatload of $$$. Unfortunately, they will experience no meaningful repercussions from their failure to succeed. How about you ?

 

[B6Busdriver]

I don't like their fries. I think McDonalds are much better.

 

[AA717driver]

Corporate bankruptcies have a similar effect on credit as do personal bankruptcies.

Once out of Ch.11 a company has to re-establish its good credit. That is difficult to do. There is no fuel hedging and you get no discounts from the suppliers. If (when) a company has to borrow money it is lent at the highest interest rates out there. And that is if they can even borrow--all assets are usually encumbered by secured creditors who have already taken a bath on payments they should have received.

The credit card companies continue to hold payments until the flight is completed. That is a serious blow to cashflow (hence the 'firesale' fare sales). If you are able to secure new airplanes, their lease rates are off the top of the charts. Suppliers of everything from parts to paper cups want cash on the barrell head--no credit.

This is why I rage on some of the "kiddies" on A.net. They expect their favorite airline in Ch.11 (whoever their parents fly on the most ) to come out of bankruptcy with guns blazing. It's more like surviving the accident but being in the ICU for a few months.

You have to be REALLY lucky to survive Ch. 11 and even luckier to prosper afterwards.TC

 

[Devil Dawg]

Continental did it. But now they seem to be in trouble as the rest of this industry.