Others Failed, but This Bankruptcy Is Given a Chance
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Several airlines have filed for protection under Chapter 11 of the bankruptcy code, never to return. But US Airways, which filed on Sunday, has some factors working in its favor and could benefit from the process, bankruptcy experts said yesterday. The long road to reorganization can offer airlines a useful opportunity to streamline their operations and gain new financing. ”Filing for Chapter 11 is not an admission of failure,” said Stuart C. Gilson, a professor at Harvard Business School. ”For many kinds of companies, it offers benefits that can help the management restructure the underlying business.” Airlines, though, have a bad record of trying to survive bankruptcy filings. Some large carriers, like Eastern and Braniff, which in 1982 was the first to file for protection under Chapter 11, disappeared altogether. Others, like Pan Am, emerged to fly another day but later died. Continental and America West each survived Chapter 11 in the early 1990’s but only after three years in court. Part of the airlines’ difficulties comes from a special provision of the bankruptcy code that protects secured lenders and lessors to airlines, said Lynn M. LoPucki, a law professor at the University of California at Los Angeles. ”Even if you file bankruptcy, you have to keep making your lease payment,” Mr. LoPucki said. ”It makes it a little harder to reorganize an airline than it is to organize other businesses.” Labor unions pose another problem, said Harvey R. Miller, a senior partner at Weil, Gotshal & Manges who has worked on airlines’ reorganizations. An airline can use Chapter 11 to throw out costly labor contracts, as Continental did in 1982. But if its employees strike, it may be unable to continue operating. Mr. Miller said the pilots and flight attendants at US Airways appeared to support the Chapter 11 filing, though. And Mr. Gilson asserted that US Airways had a particularly good chance of emerging as a stronger company because of its size and continuing operations. ”The larger the company is, and the sounder the underlying business, the more likely it’s going to survive,” he said. Chapter 11 of the bankruptcy code allows companies to fend off creditors while trying to transform themselves into more profitable concerns. Upon filing, a company can stop paying interest on its debts. The courts protect the company’s assets from seizure by unpaid creditors. After filing, a company will typically obtain temporary financing to continue its operations or to make new investments deemed appropriate by the lenders. The new lenders typically step to the front of the line in priority for repayment. As a result, some companies may find it easier to obtain financing after filing for bankruptcy protection than before. US Airways already has $500 million worth of this financing from a group led by Credit Suisse First Boston and Bank of America. Next, a company in Chapter 11 must come up with a plan showing how it will pay its new and old creditors and how it will manage its business in the future. A company usually has 120 days to offer a plan, but the period can be extended for complex cases. US Airways may be unable to file a plan until it learns the extent of its federal loan guarantees. It has applied for guarantees on $900 million in loans. |