Term Paper on "Protection Afforded to a U.S. Carrier Operating"

Term Paper 17 pages (4974 words) Sources: 1+

[EXCERPT] . . . .

protection afforded to a U.S. carrier operating in Chapter 11 bankruptcy have a negative impact on the overall air transport industry?

Chapter 11-bankruptcy protection has been seen as a lifeline for companies on the verge of total financial collapse. The protection given by U.S. constitution allows companies another chance to reorganize while being protected from meeting normal financial and operating obligations. Those with financial interests -- secured and unsecured creditors, debt holders, stockholders, employees, and retirees have to be prepared to make sacrifices to keep the company afloat. Chapter-11 protection has enabled the sinking companies to impose new wage and benefit plans for its employees, redesign the pension and health plan and in brief gives them protection from their contracts and obligations.

In the aftermath of 911, the airline industry in the U.S.A. underwent a major financial crisis; new security related costs and decline in number of passengers due to security concerns hit the industry hard. The post Iraq war oil price increases has proved to be the last straw for several airlines. United Airlines and U.S. Air had to file for Chapter 11 protection. Continental Air and several other airlines were able to reorganize themselves under Chapter11 protection to streamline their business and compete again. Chapter 11 protections have been a blessing for the ailing airlines.

However, there is another side to the 'benefits' of Chapter 11 insolvency protection. Critiques of Chpater11 protection point out that by supporting the lame ducks, the regulations are discriminating against the more efficient airline operators. Chapter 11 is being misused to obtain unfair advantage over the financially viable competitors. Airlines operating under Chapter11 protection are protected from meeting their financial obligations, while the efficient and viable airlines have to meet all their financial obligations, pay for their rivals pension plan in increased contribution to Pension Benefit Guaranty Corporation and finally compete again with an airline that used Chapter 11 protection to reduce its cost.

This case study looks at the impact of Chapter 11 protections on the airlines requesting the protection and also at the financial impact on the overall airline industry.

It has been found that the government needs to tighten the regulations to prevent misuse of Chapter 11 protections. The Chapter 11 has played a positive role in streamlining the industry and has not had a detrimental effect on the overall industry. Allowing the airlines to go under will be more costly, undermine the purpose of deregulation and leave the passengers at the mercy of the few survivors who can stay in the field while others go bankrupt without the protection offered by Chapter11.

OUTLINE

Statement of Problem: Issues to be studied

Background

Bankruptcy

Types of Bankruptcy

Chapter 7 Bankruptcy

Chapter 11 Bankruptcy

Other Types of Bankruptcy

Pre-Deregulation Days Practices

Deregulation of Airline Industry in USA

Impact of Deregulation

Analysis

Post 911 Crises and their Impact on Air Travel Industry

Chapter 11 Protection Role in Supporting Sick Airlines

Assessment of Chapter 11 Protection on Airlines Industry

Related Issues

Discussions & Conclusions

Bibliography

ISSUE IDENTIFICATION

Since mid-1970 more than 100 airlines have filed for bankruptcy protection in United States. Delta Airlines, Northwestern Airlines, United Airlines and U.S. Airways, Aloha and ATA are under bankruptcy protections at present.

The 1978 United States Airline Deregulation Act [U.S. Airline Deregulation Act, 1978] brought severe difficulties for the pre-deregulation period airlines viz. United, Northwest, Delta, Continental, American, and U.S. Airways These airlines carried the legacy of the past uncompetitive times, union agreements, highly paid old and experienced workforce, antiquated operating practices meant that these airlines could not compete in the deregulated market. Continental Airlines declared bankruptcy in 1983 and in 1990, while TWA had to close after three attempts to reorganize.

Chapter 11, the chapter in the Bankruptcy Code that contains the provisions for court-supervised reorganization of debtor companies has widely been used to assist in restructuring of U.S. airlines. Chapter 11 permits the airline to reorganize its finances and operations subject to the supervision of a bankruptcy court. It provides airlines with protection from its creditors, permits them to redesign or abandon their pension and health plan and renegotiate or abandon union agreements and impose wage and benefit packages.

Chapter 11 protections have permitted the ailing airlines to restructure their business and become competitive with the airlines which started after deregulation and do not have to carry the burden of the legacy of pre-deregulation past. These new airlines are lean, have low operating costs and can compete with the major airlines due to these advantages.

Chapter 11 protections for sick airlines however, can create certain disadvantages for the other profitable airlines. It is claimed that the protections loads the dice in favor of the uncompetitive airlines. The successful and viable airlines have to pay their bills and meet their obligations while the sick airlines abandon their responsibilities, cut their losses and come back to compete with airlines which have met all their obligations. This case study attempts to investigate if the Chapter 11 protection is harming the airline industry. The thesis is:

Does the protection afforded to a U.S. carrier operating in Chapter 11 bankruptcy have a negative impact on the overall air transport industry?

BACKGROUND

In order to understand the reason behind the debate we need to find out what bankruptcy is, what are various types of bankruptcies and why the government laws have been designed to prop ailing industries to give them a chance to recover from dire financial circumstances.

The word bankruptcy comes from Latin 'bancus ruptus' which means broken bench. The roman custom allowed the creditors to smash the trading counter of the debtors to vent their anger. In 17th century England the debt defaulters were treated as criminals and thrown in the dungeons or given a death sentence. The punishment under the modern laws is not so hard and both debtors and creditors have rights under the bankruptcy proceedings.

In United States bankruptcy is a federal subject. States are not allowed to regulate the bankruptcy although they can make rules for debtor-creditor relationship. Bankruptcy law is contained in 'Title 11 of the United States Code'. It allows a debtor in financial problems to equitably divide his assets among the creditors. The 'straight bankruptcies' or liquidations distribute available assets among the creditors and release the debtors of any further obligations, even if the debts are not paid in full.

The Bankruptcy Courts, which are a part of the District Courts of the United States, handle litigation and proceedings related to 'Title 11 of the United States Code'. The chapters applicable to different types of bankruptcies include:

Chapter 7: Liquidation

Chapter 9: Adjustment of the Debts of Municipality

Chapter 11: Reorganization

Chapter 12: Adjustment of the Debts of a Family Farmer with Regular Annual

Income

Chapter 13: Adjustment of the Debts of An Individual with Regular Income

The above classification can really be divided into proceedings of two basic types; 'Liquidation' under Chapter 7 and 'Rehabilitation' under the other appropriate categories. Chapter 7 and 11 are of interest to the study and will be discussed in more detail.

LIQUIDATION (CHAPTER 7 BANKRUPTCY)

Some companies are so heavily in debt that cannot continue in business. The liquidation option is for companies or individuals in this position. In such cases the company / individual or his creditors approach the court and initiate liquidation proceedings. The bankruptcy court appoints a trustee. The trustee sells all permissible assets. The court fees and administrative expenses of Chapter 7 are met first.

Under Chapter 7, the company stops all operations and goes completely out of business. A trustee is appointed to "liquidate" (sell) the company's assets and the money is used to pay off the debt, which may include debts to creditors and investors. The creditors are paid following a certain priority list. The remaining unpaid debts are discharged. Certain debts, including taxes or fines owed to any government unit, cannot be discharged.

The secured creditors have the first option and their collateral is returned to them. If the income from sale of debtor's asset is insufficient to repay the secured creditors in full, they are grouped together with the unsecured creditors for the remainder of their claim. Bondholders and unsecured debtors are informed of the Chapter 7 proceeding to allow them to file their claims. The stockholder can only be paid if all creditors are paid in full, the stockholders will then be asked to file their claims [What is Chapter 7 Bankruptcy, 2005]. Almost 90% of all business bankruptcies are of Chapter 7 liquidation. The unsecured creditors are the worst sufferers in liquidation cases. On average they get back only 6% of their credit. The unsecured creditors have the most interest in letting the company reorganize rather than fall under Chapter 7 liquidation.

For an individual declaring Chapter 7 bankruptcy means poor credit rating for 10 years making it difficult to get any kind of loans. Chapter 7 bankruptcy does not exempt an individual from paying student loans, child support, alimony and taxes [http://www.bankruptcyesquire.com/featured-articles.htm].… READ MORE

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