Podcast: Why Chapter 11 Ain't So Bad

On the heels of Spirit Airlines entering Chapter 11 bankruptcy protection, editors discuss the pros and cons of the process and how other carriers have fared going through it.

Subscribe Now

Don't miss a single episode. Subscribe to Aviation Week's Window Seat Podcast in Apple Podcasts, Spotify or wherever you get podcasts.

Discover all of our podcasts on our at aviationweek.com/podcasts.

Transcript

Karen Walker:

Hello everyone, and welcome to Window Seat, our Aviation Week Air Transport Podcast. I'm ATW and Aviation Week Network Air Transport editor-in-chief, Karen Walker. I'm delighted to welcome you on board. This week I am very happy to be joined by ATW and Routes senior editor, Aaron Karp; CAPA senior analyst Americas, Lori Ranson; and ATW senior editor, Chris Sloan. And our discussion this week, as we all know, US ultra-low-cost carrier Spirit Airlines filed for Chapter 11 bankruptcy protection last week.

It wasn't an industry surprise, especially after the US Department of Justice successfully sought to block a merger of Spirit and JetBlue. But that's not what we're going to talk about specifically today. No, we're going to have a conversation about that Chapter 11 process. What is it? What is it not? Does it work? And most important, what are our favorite memories of airline Chapter 11 processes of the past?

This team of editors has a couple of things in common. We're all based in America, and we've all been covering the airline industry for a long while. So, we've seen and reported on a lot of Chapter 11s. Just about every big name in US airlines has been through it—sometimes more than once. And we've seen some non-American carriers opt for this US process. American Airlines entered Chapter 11 in 2011, and after restructuring it merged with US Airways to become the world's biggest airline. So Chapter 11 definitely isn't necessarily a disaster story.

US Airways went through it twice, as did TWA. And there are lots of others in the alumni. No airline comes close to being the biggest company to seek Chapter 11. That was US reinvestment bank, Lehman Brothers, which listed $639 billion in assets at its Chapter 11 filing in 2008. Any airline can only dream of such numbers. But Lehman did not come out of Chapter 11, and many airlines have done much, much better. Aaron, I'm going to start with you. Why do airlines seek Chapter 11? And in a nutshell, what is it? What are the key advantages or disadvantages?

Aaron Karp:

Well, Chapter 11 is a pretty unique United States mechanism that is not really seen elsewhere in the world. And it goes back actually to the second half of the 19th century, when the United States was becoming a continental country, very dependent on railroads, and it was understood that if a railroad just collapsed, it would create chaos and disruption. And so railroads were allowed to go, railroad companies were allowed to go through a process where they were kept operating, they could reorganize or perhaps merge in an organized way.

And then the modern Chapter 11 we know came about in the late-1970s simultaneously with airline deregulation. And I think that creates the atmosphere where airlines go through the process. And so essentially what it is, is a company can no longer operate successfully. It is losing money and it is heading towards a probable collapse if it doesn't do anything.

And so Chapter 11 is a chance for a fresh start. And when you go into Chapter 11, basically everything freezes. Everything with your creditors freezes, your contracts freezes, and the airline executives run things on a day-to-day basis. But there is a court, a judge, a bankruptcy court who has to sign off on all the big decisions. And the idea is to maximize creditor return and that the creditors and the contractors with the airline would be better off if the airline can reorganize as a viable company than if it just collapsed. And so that's why the creditors often are willing and eager to go through the process because it's much better off for them.

What airlines do is come up with a comprehensive reorganization plan, which can involve a number of things. They can renegotiate credit, they can renegotiate contracts with the court supervising that ultimately the creditors will then often vote to decide if they want to accept everything. The judge will approve the plan, and then the airline emerges hopefully from its perspective, from Chapter 11 as a reorganized company that can survive, that can potentially thrive eventually.

And it kept the airline running while it was in Chapter 11, so things don't collapse. There are no guarantees. There's some companies that do go into Chapter 11 and they end up being transferred to a Chapter 7 liquidation case, though most of them don't end up that way. And there also, while you said that there's a lot of pre-planning going on, there are instances where other entities, other airlines often, or other businesses will swoop into the process and try and give a higher bid. That happened with Carl Icahn and TWA in 2001 where he tried to outbid American at the last minute.

But anyway, that's essentially the process. It's basically a court administered process where an airline or another company can just say, "We haven't collapsed yet, but we're on the road to it, so let's freeze everything, go into a process, renegotiate all our contracts, offload some debt, reorganize the debt, and then have a chance to survive."

Karen Walker:

So that's the what it is. I think we can immediately see some of the appeal here. As you say, if an airline thinks, "Well, we're heading into crisis anyway," and this gives them breathing space and protection, etc. Chris, can I bring you into this? Because I would like ... Aaron, I'm going to come back to you. You mentioned TWA, and I think you've got a nice story about that, and I want to get to some of those stories in a minute. But Chris, give us an example if you can—again, you've seen many of these things±—give us an example of a successful Chapter 11 story and one that didn't work.

Chris Sloan:

Well, thank you. I mean, we're going to have to climb in the way, way back machine and go back 40 years to Continental Airlines. And if you recall, about a year after Frank Lorenzo and Texas Air Corp., and Texas International took over Continental American Institute, the whole AB scales, and that became very difficult for Continental to compete with. And so there became a lot of very contentious labor negotiations as Continental sought to have pay decreases and such.

And finally it broke the back. And so Continental shut down in a prepackaged bankruptcy and they shut down their entire domestic network for three days. And at that point you had only the international services flying. And so at this point, the credit card companies weren't even cooperating at this point. So when the company restarted all flights were, I believe at like $49 each way domestically, and it exploded.

It started working, but it only had to be paid in cash. And eventually you had a lot of pilots cross the picket lines and Continental for quite a while had non-unionized pilots, which was a complete break-the-union type strategy that would have—and we'll talk about that briefly in a moment later—but as far as it being successful from a company that only served 25 cities, it dropped more than 75% of its network within a year. It was actually larger and more successful than it had been prior to its bankruptcy.

Then, as we all know, in the late 80s ended up purchasing people in the big bang, famous big bang, and then you had New York Air. And Continental created the Newark hub and it was truly successful. And it was only until the early 90s then when Lorenzo again was forced out and they went into bankruptcy again. But the one that didn't work was they tried to pull the same thing essentially with Eastern as they tried to extract some pretty significant labor concessions. And Eastern in '89, this is when Texas Air Corp had rolled up Eastern, a significant stake—the machinists and then ultimately the pilots and flight attendants went on strike in '89 and virtually shut the airline down. It went into bankruptcy Chapter 11 and actually at this point sold off the Eastern Shuttle. I believe that actually went to US Airways and Trump eventually became the US Airways and Trump Shuttle, if I'm not mistaken. And then they sold off Latin America, which they'd acquired from Braniff, and it completely did not work. And ultimately Lorenzo regretted it, backed out of the situation, lost a tremendous amount of money. And Eastern with the Gulf War and the recession never emerged and completely liquidated in 2000 ... I mean, sorry, in 1999, [rather] 1991, and I was here in Miami and in that same year we lost both of our major carriers, Pan Am and Eastern. It was the largest private employer in the county. And so the same playbook essentially failed.

Karen Walker:

You mentioned a whole list of sort of legacy, historic names, big brands, most of which are not around. I always think of TWA as “try walking across” because I was living in the UK at the time. And as you rattle off these, I shouldn't really say it, but I can't help thinking, we didn't lose anything. Well, we lost those names. They weren't actually from a passenger perspective, great airlines. But again, today, Chapter 11 seems much more of a just a holding pattern, and the airlines do come back. But talking about those legendary names, Aaron, can I just go back to you because you, I believe, you were in the court covering the TWA Chapter 11 process, is that right?

Aaron Karp:

Yes. I was in Wilmington, Delaware, in the courtroom for the third and final TWA bankruptcy in 2001, in which there was a pre-plan that American would buy the assets and take on leases and just TWA would be incorporated into American. And American was the total package, just $500 million. And what I really remember is all of a sudden Carl Icahn who had been the TWA chairman and had left in 1993 swooped in and tried to buy the assets for $1 billion dollars. And Icahn when he left TWA had negotiated this very unusual arrangement where he was able to buy TWA tickets at 55% of the cost. And in the early days of the web had a website called Lowest Fair where he then sold those tickets for regular cost.

So he wanted to buy TWA and transform it into an airline that would be called Lowest Fair Airline. And my enduring memory of that is being outside the courthouse and Carl Icahn talking to a gaggle of reporters with his attorney and talking about how he was ... They had to approve his plan. The judge actually said to him, "This is almost a joke, because this is all organized and you're coming in, and this isn't ..." Even though he was offering more money, the court thought it was a much less viable plan.

But that shows that airlines can have a process that they're planning to go through. American went bankrupt and filed Chapter 11 in 2011, actually didn't think it was going to merge with US Airways at the beginning, and eventually two years later, that's how the bankruptcy emergence occurred. So they can be somewhat unpredictable processes, but the idea is to make them so that they're not wildly unpredictable. So in that case, Carl Icahn had to go to the court. He had to present his offer to the judge, and the judge was able to say, "Superficially, this looks like a more high money offer," but really this scheme to do this Lowest Fare Airline and keep TWA going in this way was not the best option. And so TWA, the Chapter 11 emergence was actually their assets being bought by American and TWA after a very storied history then disappeared.

Karen Walker:

You raised an interesting point there, I think Aaron, is that what Chapter 11 does do it brings—which some sees a disadvantage—but it brings in other eyes and other sorts of people who can, as you say, there has to be a plan and that has to be signed off and then they have to keep to it or else they can't come out of Chapter 11. But it brings other people in. And I'm going to say maybe controversially, but I'm going to say that in those days, the sorts of people who were running airlines were often nowhere near as financially smart.

They tended to be a little bit showy. Icahn certainly was that category. But they weren't actually as good at running a company, let alone an airline as they thought they were. And these days we don't see many Chapter 11s. There was a whole spate of them for a while, but we don't see that. Now, part of that could be consolidation, of course, in the US, but I think part of it is that by and large, there are smarter people running some of these airlines. Lori, thoughts on that? You've been around here for a long while and also seen a lot of these. What do you think?

Lori Ranson:

Yeah. I would actually agree with that point. And at one point in time, I think all the US majors or most of the US majors were run by former CFOs. So they were able to have some discipline, I think, and that was sort of the age of capacity, discipline, let's get our business in order. So I think any Chapter 11 that you see in the US or otherwise now is basically, it's occurred because of market conditions, black swan events, those types of things. It's not ineptitude from management.

Karen Walker:

Much more diplomatic to put than I said it, Lori. Well done. Chris, do you have thoughts on that?

Chris Sloan:

Yes. No, I mean I absolutely completely agree. I mean, I might take a few quibbles because I do think there was a lot of bravado and there was a lot of more "animal spirits" back in those days. I mean you would say Crandall and even Lorenzo for all of his ills, I mean there were very, very smart people. But I think it's an accurate assessment that there's "many more adults in the room." And a corollary to what Aaron was talking about, I remembered the American bankruptcy, and remember that was in 2011 and American was famously one of the very, very last. They were years behind everybody else.

United was in bankruptcy for close to four years, and everybody else was in the early 2000s. American waited until around Thanksgiving of 2011. But when you think about that notion of prepackaged, they made the famous 460 aircraft narrowbody order, which I think was the largest aircraft order of its time. They knew essentially that they were girding themselves for bankruptcy. They made that massive order that launched the [Boeing] Max and the [Airbus] Neo right before about five months before knowing what they were about to go into. So I think that's again, plays to this idea of a much more strategic as opposed to a knee-jerk reaction in the past.

Karen Walker:

Good points. Now, there's one name that is very notable, big name in this among US carriers that is not on this list, and I think we all know who we're talking about. Southwest Airlines is just about the only big US airline name that has not gone through Chapter 11. Who'd like to chime in on why they've not done that? Aaron, I'm going to turn to you.

Aaron Karp:

Well, they made money for 47 years in a row. And so if you're making money, there's no need to go into Chapter 11. And they managed their costs very well. And they had a model that was pretty disciplined and wasn't unwieldy in terms of aircraft type, in terms of operating only domestically and point-to-point. And now we see them having some trouble. I think they're far away from Chapter 11, but they were just successful. And if you're successful and you're managing your cost and your revenues outpacing your cost, then there's no need to go to Chapter 11.

One thing you mentioned about how airlines use it strategically, that's a complaint you'll hear around the world is that an airline will actually say, "Well, it's a better course for us to go to Chapter 11 rather than to try and eke out survival and do what we can,” that the airlines are not necessarily in a desperate situation. But they get to a situation where they say, "Well, this works for us and its strategic."

And in other parts of the world, companies, airlines will say, "Well, you're strategically using a process that in a sense is a backdoor government bailout because you're having a government entity, which is a court organize a way for you to offload your debt." And so I think the strategic part is interesting because that's something that is unique to the US where you can choose even if you're not imminently about to collapse, to go through the process.

Karen Walker:

Good point. Because what you do hear is complaints from non-US airlines, particularly when a US airline that is in the international market has got all those protections and advantages of Chapter 11, and yet they're still in the same competitive field with non-US carriers. And my argument there, my reply there would be, look at all those government-owned or airlines around the world that have big government stakes and say, and that's effectively their version of Chapter 11.

Lori, let me turn to you because what I think has been interesting, and we'll come back to this again in a second, is that we all thought there would be quite a lot of Chapter 11s and actual outright bankruptcies through the pandemic years, especially 2020-21. Really didn't happen, and we can talk about that in a minute, but there were some Latin American carriers, big names again, who sought Chapter 11 in the US courts. LATAM of course in Chile ,and I've just forgotten who the other one was, avianca.

Lori Ranson:

And Aeromexico.

Karen Walker:

And Aeromexico. That's right. Absolutely. So avianca for Colombia and Aeromexico. Why was that? Lori, why did they do that?

Lori Ranson:

So the interesting thing about those airlines is they weren't in bad shape before filing for Chapter 11. Avianca had done—just recently had completed a balance sheet restructuring. So what happened to them with the pandemic, they had the rug pulled up from under them pretty much overnight. And you could argue that Chapter 11 actually helped them because they had the flexibility to rework their business, to right-size their operations to get their cost in line. And you come out the other side, LATAM this year is going to have an EBITDA of $3 billion, which is 40% higher than pre-pandemic.

And they actually had no choice because, as we all know, Latin American governments very supportive of carriers during the pandemic. So they basically were forced to do this in order to maintain their businesses. I mean, can you imagine if three of the largest airlines in Latin America went out of business? I mean, that would not be good for the marketplace.

Karen Walker:

It'd been disastrous for people in those very big countries who really don't have the alternative transports. There isn't the infrastructure in general. So air transport is critical. So yeah, those were success stories for those airlines. It worked and they clearly could see how they could use Chapter 11 and what the end point was. I mentioned about the CARES Act and here in the US, which I think tha t... I mean there was a lot of money. It was something like $63 billion came in at a time when all of the US airlines were in the same situation, couldn't really operate. Chris, do you think that is why we didn't see as many bankruptcies or Chapter 11 filings?

Chris Sloan:

Yeah. I absolutely feel that way because if you look at what happened then versus 9/11 which was another black swan event, and you look at the amount of federal aid then it was extremely limited. There were loans. There were some grants, but I mean it paled in comparison. You see a very similar situation at the end of the 90s and early 2000s. You had insane massive labor agreements that were increasing. But you did not have the benefit of the CARES Act. You did not have the benefit of the astute management that you brought up.

As astute management, you did not have the benefit of the consolidation. And so I think had those things not occurred, it would've been a remarkably different story. However, I will say that the next time this happens, and it seems like there's some deja vu moments, you wonder what the political appetite and the appetite will be because there has been a lot of backlash. If there has to be something like such a CARES Act bailout again, I mean it's ... history does tend to repeat itself. So I do hit that with a kind of cautionary note.

Karen Walker:

That's a very good point and I don't think it would be possible again to get that much money. I think Lori made the point of those three very important carriers in the Latin American market. That really was critical that they could continue. But was it really essential that all the US airlines needed to survive the pandemic? I mean, could that have been an opportunity to lose a few or was the outcome the right one? Anybody going to chime in with that one? Aaron, I'm going to put you on the spot.

Aaron Karp:

What's really interesting about that is just prior to the pandemic, there was talk among the US airlines. And I remember [former American CEO] Doug Parker talked about this just before that they had finally solved the case and that they knew how to make money now, knew how to discipline costs. And then all of a sudden this huge unexpected thing happened and the whole industry basically shut down and there was no way for airlines to make money.

And so I think there was a feeling that if you had ... There was a fear of multiple airline collapses that you might have two of the majors go under. And so I think that drove bailing the airlines out rather than a situation where you might have three or four airlines going through bankruptcy, especially during a very disruptive time and especially when you did need those airlines for cargo deliveries and medical supply deliveries and that sort of thing.

But I do think that that enabled carriers to avoid Chapter 11. I don't know what would happen next time because the pandemic was such a unique event that hopefully we won't experience something like that again. But with the airlines, there are always unexpected outside events that hurt the industry. And I think we would all agree that the airlines are being managed better today than they were in the past, than they were, say, 30 years ago. But even that better management didn't protect them from the bailouts. And the other thing I would mention in terms of getting bailouts again in another circumstance is that what ended up happening was there are a lot of people took voluntary retirement and a lot of people left and they came out of the pandemic having to rehire people and struggling to get going again.

A lot of members of Congress said the whole point of the bailouts was so you didn't have to do that. And so I think there was a belief that the airlines took the bailouts and then also did some internal restructuring and lost employees. So I think that's my thoughts on that.

Lori Ranson:

Yeah, I have one quick thought on that. I think most airlines are definitely trying to manage their debt in a different way, their cash and their debt in a different way after the pandemic. And that's not total protection from collapse if something like that happens again. But I do think there's a different logic that they apply to their leverage and their cash flows and cash on hand. So again, not protection, but I do get the sense that we need to think about this differently.

Chris Sloan:

Well, and I totally agree, but I'd also add to that history does tend to repeat itself. And some of the same themes we're hearing now, we've heard then. We hear things like JetBlue, "We're going back to our roots as a leisure carrier.” Spirit—I'm not exactly sure what roots they're going back to, but there's a lot of selling, burning the furniture. And this question is, "Can you shrink to survive?" And if you look back in history, whether it's United beginning to selling off ... or Pan Am selling off the Asia routes, then Heathrow, then essentially almost the entire European system to Delta, then Delta kind of propping them up for about a month.

Braniff sells off Latin America, then Eastern sells off, America sells off the shuttle, and everybody starts kind of burning the furniture to kind of shrink back to their core. And there has not ... Even Eastern said at the very end, we're going to become bascically the same thing that JetBlue said, we're going to become a North-South leisure-based New York to Florida airline and play to our original core markets. And we see a lot of these themes repeating themselves, and you wonder if shrinking to survive what cases in the long term that's actually worked and if that will work again. So yes, it's a very different structure, but you do hear a lot … Yogi Berra has said deja vu all over again.

Karen Walker:

I love that, yes, very much. And at the end of the day, we got through the pandemic, and we still got ... Essentially, we've still got Alitalia going. I know it's called something different, but it's still Alitalia, let's be honest. We've still got SAA, South African Airlines going. We've still got SAS going. So we've seen this over and over and over again. Certain carriers just keep on going. And for all the predictions, something happens that then changes the game again. So Aaron, Chris, Lori, thank you so much for your time today. I've really enjoyed this conversation. What I just said to our listeners is, if your favorite airline enters Chapter 11, don't worry. They'll likely keep operating and come out of the process stronger financially. So keep flying is the best message I can offer.

Thank you also to our producers, Cory Hitt and Guy Ferneyhough, and of course, a huge thank you to our listeners for following Window Seat. Make sure you don't miss us each week by subscribing to the Window Seat Podcast on Apple Podcasts or wherever you prefer to listen. This is Karen Walker signing off from Window Seat.