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Puckinflight

An all things aviation blog

Tag Archives: CH 11

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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Pinnacle Airlines today filled for bankruptcy protection and reorganization under Ch. 11. See their press release here.

This bankruptcy is different from most other airline bankruptcies because of the way Pinnacle operates. Pinnacle is a regional operator, in short they operate regional service for other carriers. Pinnacle operates flights for US, DL, and UA.

These flights operate under a “capacity purchase” agreement. Delta pays Pinnacle X number of dollars to fly route aaa-bbb on XYZ plane type, once a day. This is good for Delta as they know how much the flight is going to cost them months in advance. It’s good for Pinnacle, because they know how much revenue is generated so they build a cost structure to meet it. In the event Delta doesn’t sell any tickets Pinnacle still gets paid. In the event of a huge fuel spike, Delta’s costs are the same.

Pinnacle has stated they intend to repudiate some of these capacity purchase agreements. This is interesting. First, I am not a bankruptcy nor contracts expert. Second, I do not have access to said capacity purchase agreements. In fact Pinnacle has petitioned the court to file those agreements under seal, so we the public can not view them. But to get back to the original point. Most Airline bankruptcy’s involve labor agreements and aircraft leases. A capacity purchase agreement is neither, it is a straight up sales contract. Court’s don’t like companies breaching those contracts. I am not sure how the court here will handle them.

Let’s say the contracts are invalidated.Delta would have two options find a new supplier, operate service themselves, or broker a new deal. I am going to go with option c here, broker a new deal. Delta (or UA or US) doesn’t want to operate the service themselves and it is doubtful that there are other carriers out there with excess capacity to move into the market. UA is getting express jet to pull ERJ-135s out of the desert as a stop gap measure, but there are only so many spare planes around.

Some have postulated that another carrier could take over capacity and the route. My question is why? Delta would still have to broker a new deal with the carrier. The new carrier would need more pilots and possibly a new set of regs, simulators, and other materials if it is new type for the carrier. It would be more expensive I think to do that then issue a new contract with Pinnacle. However, this has its own problems.

When did the US bankruptcy system become a way to change basic contracts. At what does the law say no, one can not use bankruptcy to avoid contractual obligations. I think the debtor should be required to make some showing that they are not abusing the system.

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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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