Bankruptcy Law Legal Update March 2012 American Airlines
- 1. Bankruptcy Law 速 A legal update from Shumaker, Loop & Kendrick, LLP March 2012 American Airlines: Whos Flying the Plane? A American Airlines pension bust would be the merican Airlines Chapter 11 filing on largest in U.S. History. November 29, 2011 may signal the reality that a formal insolvency proceeding is part of the airline industry business cycle. The U.S. airline industry has experienced substantial consolidation and many carriers have reorganized in Chapter 11. The U.S.s largest carriers, United/Continental, Delta/Northwest, and American Airlines, each filed for Chapter 11 at least once. Southwest Airlines is the only major U.S. carrier that has not filed for Chapter 11 protection. Typically a primary motivator for an airline bankruptcy is to cut defined benefit pension plans (Pension Plans) for employees and/or to reject or modify collective bargaining agreements. Although jet fuel spot prices have risen 110% from January 2001 to December 2006, and 133% from January 2007 to July 2008, there is little airlines can do to reduce cost of this essential commodity, other than pass along those price increases to the passengers in the form of various surcharges. In American Airlines case, it has reported $4 billion of net operating losses in 2009 and 2010 (2011 numbers are not yet released). Moreover, citing an $800 million cost disadvantage to other U.S. carriers, American Airlines stated goal is to reduce operating costs by $2 billion per year. Of that number, American Airlines seeks to save $1.25 billion by terminating its Pension Plans. It has four Pension Plans, one for pilots, flight attendants, agents, and ground crew, covering almost 130,000 employees and retirees. The Pension Benefit Guaranty Corporation (PBGC) estimated that the combined assets in the Pension Plans are $8.3 billion as of American Airlines filing date and the combined liabilities are $18.5 billion, leaving the Pension Plans underfunded by approximately $10.2 billion. By comparison the Chapter 11 underfunding for the Pension Plans of other major airlines was as follows: United Airlines - $7.4 billion - 2005 U.S. Airways - $2.7 billion - 2003/05 Delta Airlines - $1.6 billion - 2006
- 2. The PBGC has publicly opposed American Airlines proposed termination of its Pension Plans. The PBGC is a quasi-governmental U.S. agency (analogous to the FDIC) created to guaranty the benefits granted in Pension Plans to employee and retirees of U.S. corporations who sponsor such plans. In cases of underfunding, if a Pension Plan is terminated, the PBGC is obligated to honor most of the obligations owed under the Pension Plan. Unfortunately, David H. Conaway the PBGC currently estimates its deficit, prior to American Airlines, at $23 billion. Ultimately, the PBGC is backed by the full faith and credit of the U.S. Government. A termination of American Airlines Pension Plans would increase the PBGC deficit by 50%, a burden which may be eased 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 to oppose terminations of the American Airlines Pension Plans. Specifically, George Miller, a Democratic member of the U.S. House of Representatives from California, and ranking member of the House Committee on Education and the Workforce issued a public letter to Joshua Gotbaum, Chairman of the PBGC, to do everything in its power to avoid the pension plan termination by American Airlines. There has been historical perception that the PBGC has generally rolled over and accepted corporate Pension Plan terminations. Clearly the stakes are high for American Airlines, the airline industry in general, and the U.S. government and the American taxpayer. This presages a legal battle over American Airlines ability to terminate its Pension Plans, which will play out in the United States Bankruptcy Court. Under the Employee Retirement Income Security Act of 1974 (ERISA), an employer seeking reorganization in Chapter 11 bankruptcy may petition the bankruptcy court for termination of a Pension Plan. The debtor is required to show that unless the Pension Plan is terminated, it will be unable to pay all its debts pursuant to a reorganization plan and will be unable to continue in
- 3. business outside the Chapter 11 reorganization Court will exercise its discretion to extend that process. However, if the termination would right to 18 months. Very often in Chapter 11 violate the terms and conditions of an existing cases, creditors, through the officially appointed collective bargaining agreement, a debtor seeking committee of creditors, will support extensions of a distress termination may also need to obtain the such debtors exclusivity provided the debtor is bankruptcy courts approval to unilaterally making progress. In this case, progress will be reject or modify the collective bargaining measured by reductions in operating costs and a agreement pursuant to section 1113 of the satisfactory business strategy to successfully Bankruptcy Code. Section 1113 requires that the emerge from Chapter 11 and deliver value to debtor make a proposal to the union which creditors, perhaps through an acquisition or provides for those necessary modifications in the merger. We anticipate that the Bankruptcy Court employees benefits and protections that are will extend American Airlines exclusivity until as necessary to permit the reorganization of the late as September, 2013. debtor and assures that all creditors, the debtor and all affected parties are treated fairly and It is also likely that creditors including the equitably. If history repeats itself, American bondholders, the PBGC, and vendors will own a Airlines will likely be able to terminate most or all significant stake in a reorganized American of its Pension Plans, thus reducing its financial Airlines, or in the surviving entity in any obligations by $1.25 billion per year. American Airlines merger. This is because under the provisions of the U.S. Bankruptcy Code, the Assuming American Airlines is successful in its absolute priority rule prohibits any junior class goals, whats next for American Airlines? On of creditors from receiving value on account of its February 9, 2012, Reuters reported that American claims or interests unless and until all superior Airlines creditors committee wants a merger classes are satisfied in full. Clearly, the current explored, contrary to American Airlines American Airlines equity is out of the money managements goal to stay independent. The and thus the new equity will be distributed in part members of American Airlines creditors to American Airlines existing unsecured creditors committee include the PBGC, American Airlines on account of their debt claims. labor unions, the banks representing American Airlines bondholders and Boeing. Both Delta American Airlines Chapter 11 will be perhaps the and US Airways have announced they have most important case since the U.S. auto engaged financial advisors to explore acquisitions manufacturer cases. The PBGC is positioned to of or mergers with American Airlines. Many backstop American Airlines as too big to fail industry analysts believe a Delta merger is but the cost will be enormous to American unlikely given potentially insurmountable antitrust Airlines, to its creditors, to its employees and hurdles and over-lapping U.S. east coast routes. retirees, to the airline industry and ultimately to Most analysts have not ruled out a US Airways the American taxpayer. This chapter of American combination but do not believe it would be the Airlines history will play out in 2012 and 2013. dream alliance such as the United and Continental The future of the global airline industry will combination created. However, US Airways has unfold over many years. been a champion of industry consolidation and has managed to post a $447 million profit in 2010. In an era of above $100 per barrel oil prices, With growing political pressure and creditor exacerbated by continued unrest in the Middle- support for a merger, American Airlines may be East, lagging economies in the U.S., EU and Asia, forced to consolidate by combining with another constricted lending conditions and potentially airline. rising interest rates in global capital markets, U.S. and global carriers must find ways to gain Whether American Airlines is able to succeed in operating efficiencies and maximize revenue staying independent or forced to consolidate will opportunities. Many believe that growth in again be played out in Bankruptcy Court and may emerging markets will be critical to enhancing hinge on who controls the bankruptcy process. A profitability. At some point, global consolidation, key component will be determining who may beyond current global alliances, may need to propose and file a plan of reorganization, which is play a role in the industrys future. However, the court-approved contract to pay creditors that many carriers are state-owned, and open skies allows a Chapter 11 debtor to emerge from agreements limit foreign investment to 25%, both bankruptcy protection. In Chapter 11, American hurdles to global consolidation. Perhaps Airlines retains the exclusive right to propose a American Airlines Chapter 11 proceeding will plan of reorganization and to solicit votes in favor spur a global debate about the future of the global of such plan for a period of 120 days after filing to airline industry. file a plan, and another 60 days to gain acceptance of its plan. In a case of the size and complexity of We hope that you have found this information American Airlines, it is likely the Bankruptcy helpful. If you have any questions regarding the
- 4. foregoing, or any other matter, please feel free to contact us. 息David H. Conaway Shumaker, Loop & Kendrick, LLP 704.375.0057 dconaway@slk-law.com The contents of this Update are offered as general information only and are not intended for use as legal advice on specific matters. CHARLOTTE | COLUMBUS | SARASOTA | TAMPA | TOLEDO slk-law.com