Judge Sean Lane approved a series of typical first-day motions from American Airlines at a bankruptcy court hearing in Manhattan on Tuesday afternoon, the same day the company filed for Chapter 11 protection. The airline is said to have been working with its legal team since at least September and its motions to keep paying critical vendors, insurance programs and the like went largely without objection. But what made yesterday's relatively uncontentious hearing unusual was the lack of motions regarding funding the company through the Chapter 11 process.
American Airlines came to court with $4.1 billion in cash on hand, enough that it does not need debtor-in-possession financing or the use of cash collateral. “Their cash flow is unencumbered, which is fairly remarkable and unusual,” said one lawyer not currently involved in the case.
Still, several lawyers watching the case said in interviews that they worked to organize DIP financing for American Airlines – nearly 10 years ago.
American Airlines is the latest in a long series of airline bankruptcies, including virtually all of the company’s competitors. The Associated Press reported this week that 189 airlines have filed for bankruptcy since 1990. The company was on the verge of filing in 2003 – when lawyers were working to organize a DIP – but was able to renegotiate certain labor contracts and avoid Chapter 11.
“For the past 20 years, American has fought ferociously to avoid this day,” said Harvey Miller, the Weil Gotshal & Manges partner heading American's legal team. But rather than wait too long, Miller said, the company chose to file for Chapter 11 at a time when it still “has the tools to effectuate its reorganization.”
“What I find fascinating about this is they filed and have not submitted a motion for post-petition financing, which makes clear that they realize that a filing was certainly more likely than not, and they made the pragmatic decision to do so now at a point when the company has maximum leverage,” said one lawyer who worked on the original DIP in 2003. By filing now, with $4.1 billion in cash on hand, American Airlines can operate in Chapter 11 without the constraints of a DIP facility, the lawyer said. “Since I have absolutely no doubt there are a number of vulture funds involved in the American case, they haven’t been able to assert themselves yet because there's no funding,” he said.
American’s goal in bankruptcy is to build a global, successful airline, Miller told Judge Lane. To that end, the company will seek to remove the “competitive disadvantages that precipitated this filing,” by adjusting labor costs and making changes to account for unpredictable fuel costs, he said.
In response to the filing, Pension Benefit Guaranty Corporation Director Josh Gotbaum issued a statement Tuesday warning that American Airlines employees could lose a billion dollars in pension benefits if American terminates its four plans, covering almost 130,000 participants. “As of [Nov. 29], the plans collectively had about $8.3 billion in assets to cover about $18.5 billion in benefits,” Gotbaum wrote. “If American Airlines were to end their plans, the agency would be responsible for paying about $17 billion in benefits; about $1 billion in benefits would be lost.” If American does terminate any of its plans, it can expect a major battle with the PBGC, lawyers say.
Judge Lane approved a number of routine first-day motions at Tuesday’s hearing, allowing for the continued payment of critical vendors, and the retention of customer-incentive plans, including frequent-flier-miles programs.
The U.S. Trustee will hold a creditors’ meeting on Dec. 5, at 10:00 a.m. EST in the Sheraton New York Hotel & Towers. Judge Lane also scheduled further hearings for Dec. 13 and Dec. 22. – John Bringardner
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