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Puckinflight

An all things aviation blog

Tag Archives: bankruptcy

Bahrain low cost carrier Bahrain Air shut down operations this morning with plans to liquidate assets. The privately owned airline operated a fleet of 4 A320 aircraft with service to a dozen destinations. Operating since 2008 the carrier has been competing with state owned Gulf Air. Bahrain Air’s CEO cited government favoritism of Gulf Air as one of the root causes of Gulf’s liquidation.

In the era of more competition Bahrain’s liquidation, is just another question mark about the role of airline state ownership. Other states in the Middle East, Saudi Arabia and Kuwait have both looked into privatizing their state run carriers. Certainly state run carriers have less of a profit motivation than pure private companies such as Bahrain Air, but they come with their own problems. Air India a part state owned carrier has suffered from years of government miss-management and is currently barely clinging to life.

Certainly governments getting out of the airline business is a good thing, but it doesn’t fair well for the carriers who too often are ill-equipped to deal with the free market world of air transport.

http://www.bahrainair.net/

http://gulfbusiness.com/2013/02/bahrain-air-shuts-down-blaming-political-unrest/#.URurV3WdN5C

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So yesterday one news agency reported that AA and US were getting close to inking their merger deal. Then every aviation blogger and news agency that cared repeated the same information. For the most part they got it all wrong. Now Doug Parker and his merry gang of US executives have been searching for a merger partner for years. They tried to buy Delta in bankruptcy, United started talks with them when Continental balked at merging (The CO board overrode then CEO Larry Kellner’s refusal to merge, ousted him, installed the current CEO Jeff Smisek and inked the merger deal with United), and now they are working on American.

Right now we know that American and US Airways are doing the due diligence, and these talks have been going since 2010. While the preliminaries of a deal are in place, both board of directors have to approve the deal. Also in the case of American Airlines the creditors committee has to approve the deal. Neither board is scheduled to meet soon as far everyone knows and getting a deal through the creditors committee is no sure thing. AA has made repeated statements on how it wants to remain a stand alone airline.

 

It’s easy to see why AA wants to remain independent. Doug Parker is a controversial figure in American aviation. Doug Parker has to be one of the most capable airline CEO’s in the business, coming in second to Gordon Bethune. However, the decisions he has made have been universally unpopular with both staff and customers. But they are popular with the shareholders. By virtue of that fact, it is clear that if the companies merge Doug with take over as CEO of the combined airline. That is not something AA executives and staff want as cuts will be coming.

So here are the courses of action possible.

If the AA board rejects the merger, then US airways can pitch the merger to the creditors committee themselves. US bought a nominal amount of AA debt to gain access to the committee, though they do not have enough debt for a seat at the table, they do have access. If the committee green lights the US buy out plan for AA then AA board gets de facto fired by the bankruptcy judge and AA ceases to exist.

If the AA executive suite rejects the merger and the board green lights it, expect to see what happened in the CO/UA merger. The CEO will get fired followed by a joint merger announcement. Then as long as it passes the creditor committee then it goes through.

With either option the creditor committee will have the final say. But until news happens, everyone calm down ok?

 

Happy travels

Colpuck.

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Last week AA’s petition to the bankruptcy judge to throw out their contract with the pilots was rejected. This is a situation that is pretty much unprecedented in bankruptcy court. Traditionally, firms in bankruptcy are given wide latitude to restructure their obligations. Bankruptcy courts have recently seen an influx of “prepackaged” bankruptcies. These are not true bankruptcies, but the firm has decided that their current cost structure is not to their favor. The firms have decided that bankruptcy court is the best way to renegotiate their contracts. Bankruptcy court is supposed to give firms a second chance, not provide a negotiate edge to the firm.

It was bound to happen that bankruptcies court would start pushing back. Bankruptcy courts are becoming less of a rubber stamp for the firm and the creditors committee. This is a good thing; the DOT does not really appear to understand the airline industry they are tasked with regulating in regards to economic concepts. The only government influence  over airlines has been though the bankruptcy courts. Now it appears the courts seem at least willing to hear out other groups, pilots, traveling public, ect. For AA this is not a good thing, though it should be good for everyone else. As stated previously, US Airways is positioning itself as a merger partner to take over AA. The court at least appears to be willing to listen to US and others. Overall this does not bode well for AA’s plan to continue to as a standalone airlines.

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Meet the nine votes that will determine the fate of AA:

Boeing

Three AA Unions (APA, APFA, TWU)

HP Enterprise Services

Wilmington Trust Bank

Bank of New York

PBGC

Manufacturers and Traders Trust Co

Remember what I said earlier about the Ch. 11 process. AA has to present a plan to these 9 that shows it can operate profitably. Other entities can present a take over plan to the committee that if approved will end AA’s existence. The Bankruptcy judge has final approval, but they generally follow what the committee approves.

The three banks: Manufacturers and Traders Trust Co; Wilmington Trust Bank; and Bank of New York will do whatever is in the interest of their bottom line. They are going to side with the people that promise to pay them more. Representing the bondholders, their votes are a toss up.

The three unions are another issue. I wondered why US was inking deals with AA’s unions, now it makes sense. These deals will give US three yes votes.

The Pension Benefit Guarantee Corporation is a lot like the FDIC for pension programs. When AA kills their pension program, the PBGC takes over the obligation. They are no fan of AA but I can’t image they are a fan of US. They are going to put the employee’s interest first. This vote is up in the air. With AA wanting to kill the pension program, I can imagine this vote leaning US

HP is an interesting creditor. There were rumors of AA developing a new passenger service system to be called “jetstream” developed by HP. Apparently AA owns HP such a substantial amount of money they got a seat. HP owns SHARES the current PSS for UA and US. If US kills Jetstream then HP may want to vote for AA. HP want’s to get paid, I think they lean to AA

Boeing is the last creditor. AA inked a huge deal with Boeing to lease over a 100 new aircraft in the coming years. US has promised to honor these leases. I am not buying it. US hasn’t ordered any new Boeing aircraft in a long time and is looking to retire the aircraft they do have. Airbus continues to cut US sweetheart deals on planes just to increase US market share. I think Boeing has to vote for AA. AA’s got rid of the A300’s and is looking to accelerate the retirement of the MD-83s in favor of 737-800’s.

Totals:

Banks, ? ? ?

Unions, US, US, US

PBGC, ?

HP, AA

Boeing, AA

If I was AA, I would forget the PBGC vote and focus solely on inking deals with the bondholders. If I was US, I would assume the AA pensions and pay off one bank or pay off two banks whichever is cheaper. Either way the banks are going to be the swing votes here.

Ch. 11. is a blessing and a curse. Right now AA’s future is in the hands of three banks. On the other side of the table you have one the most capable CEO’s of all time in Doug Parker.

People always discount Doug Parker because of how poor U.S. Airways is. This underestimation has hidden the facts, that will three second tier hubs, a marginal route network, a mutinous workforce, and a southwest airlines incursion at two hubs, US is making money. Something neither pre-merger United nor American could apparently pull off.

BTW Southwest is starting to pull back out of PHL.

Doug Parker ranks as either the number one or number two Airline CEO’s of all time. Gordon Bethune may beat him out for the number one spot for saving Continental Airlines, but it is close.

Will AA survive, maybe, but it is going to be very very close.

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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.

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