American Airlines Must Find Own Chapter 11 Path
The lawyer who piloted United Airlines through the largest Chapter 11 bankruptcy case in the industry's history cautioned that American Airlines cannot just rely on the restructuring path cut by competitors.
"Every case is different, and they should beware of assuming that past cases are a road map. They should be aware of their own set of facts," said James Sprayregen, a partner with Kirkland & Ellis.
Sprayregen cemented his reputation as a leading bankruptcy attorney in 2006 by bringing UAL, the parent of United Airlines, out of its Chapter 11 reorganisation with strong creditor support.
United Airlines collapsed into court protection in the wake of the September 11, 2001 attacks, and used bankruptcy to shed pension obligations, cut billions in debt and knock 20 percent from what was then the industry's highest cost structure.
American faces a similar list of problems. The attorney leading its restructuring, Harvey Miller of Weil, Gotshal & Manges, has said he hopes to have the company out in 18 months -- about half the three years it took United, which was slightly larger by the size of assets involved.
"It's quite possible to get this done in that type of time frame," said Sprayregen. "The risks are they are not able to reach a consensual agreement with various stakeholders and it devolves into time-consuming litigation. Hopefully that won't happen, but it's a risk."
American and its parent AMR filed for bankruptcy protection last week after failing to reach a cost-cutting deal with its pilots' union. While the filing was not a surprise, its timing was, coming sooner than many analysts expected.
"I think they are correct to take this on before there are liquidity issues," said Sprayregen, noting that American has a USD$4 billion stockpile of cash.
Until it filed last week, American was the only major US airline to have avoided bankruptcy and it had the industry's highest labour costs.
Many analysts said the company was likely to reject its pension plans, which cover 130,000 employees and retirees, and are underfunded by more than USD$10 billion, according to the Pension Benefit Guaranty Corporation. United rejected pension plans that faced a similar funding gap.
"I think there are going to be a lot of people paying attention to this, including people in Washington," said Sprayregen.
He declined to comment whether he thought unions might be emboldened by the General Motors bankruptcy experience and try to draw in policymakers. The government took a leading role in the automaker's restructuring and union pensions were preserved.
"It's best if the airline and stakeholders negotiate among themselves and get deals done," he said.
Sprayregen said a big focus of the early months of American's bankruptcy would be leases on aircraft.
American's fleet has 614 aircraft, with another 245 at American Eagle, according to Ascend Worldwide, a consultancy. Of that total, Ascend says 176 at American are leased.
The bankruptcy code essentially gives American 60 days to reach preliminary deals with leasing companies.
Those negotiations will also be impacted by the market for used aircraft, although who that gives leverage to remains to be seen, said Sprayregen.
Half of American's leased aircraft are older MD-80 planes, according to data from Ascend, and American's attorney, Miller, said those planes are sure to be shed by American and returned to lessors.
Sprayregen said American will focus on making the time in court as useful as possible, examining everything the company has done as well as things it has never tried.
"You want bankruptcy to be a once-in-lifetime experience," he said.