March 29, 2012 The AA bankruptcy
If you have been living under a rock, AA entered chapter 11 several months ago. Chapter 11 is a section of the U.S. Bankruptcy code that allows companies to continue to operate while staying some financial obligations. In order to use Ch. 11, the companies must obtain debtor-in-possession financing. AA must find someone to continue financing them through the bankruptcy process.
In order to exit Ch. 11 AA must put together a plan that shows it will be able to make a sustained profit. That plan has to be approved by AA’s creditors. Normally this is a pro-forma step. A lot of companies have doing so “prepackaged bankruptcy” where there is a plan ready to go from the moment ch. 11 is declared. But with AA they neither had a plan ready to go and there is another issue.
U.S. Airways is going to make a bid for AA in Bankruptcy. What this means is that US presents its plan to the creditors and tries to get them to approve the plan. Then it goes before the judge who will make the final decision on the case. US tried this before with the DL bankruptcy back in 2006 and it did not work. DL fought off US. The big advantage to picking up AA in bankruptcy is that gets to dictate the terms of the merger, much like the AA/TW merger in 2001.
Will US be able to pick up AA? I don’t know. AA is a much weaker company than DL when it entered bankruptcy, with an inferior cost structure. It all depends on how the creditors see AA and the US bid. What we do know is that US wants to merger badly, and AA wants to fight them off just as badly.