Summary
- Chapter 11 bankruptcy proceedings allow airlines to restructure their debt while continuing to operate, supported by DIP financing.
- The automatic suspension clause protects airlines from debt collection measures and lawsuits and accelerates restructuring.
- Chapter 11’s international recognition, contractual flexibility and strict voting requirements make it a good choice for airlines.
Airlines are among the most volatile companies in the global economy. They often face significant financial challenges due to fluctuating fuel costs, labor disputes, and economic downturns, such as those seen recently with the COVID-19 pandemic. When these challenges become too great, many airlines resort to Chapter 11 bankruptcy as a strategic tool to restructure their operations.
Chapter 11 of the U.S. Bankruptcy Code is designed to allow companies to restructure their debts while continuing operations. Unlike Chapter 7 liquidation, Chapter 11 focuses on reorganizing the company’s obligations and operations to restore profitability. Given the industry’s high fixed costs and complex operating structures, the ability to continue operations during the restructuring process is critical for airlines.
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The appeal of Chapter 11 for airlines
Several factors make Chapter 11 particularly attractive for airlines compared to other restructuring options, such as the UK Scheme of Arrangement or other domestic procedures. These factors include:
- Debtor-in-Possession (DIP) financing: One of the biggest benefits of Chapter 11 is the availability of DIP financing. This type of financing is critical for distressed companies because it provides immediate liquidity to continue operations during restructuring. In Chapter 11, DIP lenders receive senior claims, often including liens on unencumbered assets, making such financing more accessible and attractive to lenders. This mechanism has been critical for airlines such as Avianca and Aeromexico because it has allowed them to maintain operations during their restructuring processes.
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- Automatic stay provision: Automatic stay is another powerful tool of Chapter 11. It immediately stops all collections, lawsuits and other actions against the company once it files for bankruptcy. This provision allows the airline to develop a reorganization plan without immediately facing asset seizures or court judgments. The scope and duration of the automatic stay under Chapter 11 is more comprehensive than the UK Scheme of Arrangement, which lacks a similar automatic stay mechanism.
Photo: Angelemiratos | Shutterstock
- International recognition and precedents: Chapter 11 is widely recognized and has extensive case law, particularly in the airline sector. This familiarity among creditors and stakeholders can facilitate smoother negotiations and a more predictable restructuring process. The historical precedent of successful Chapter 11 airline restructurings, including high-profile cases such as American Airlines, provides a guide to reassure the airline and its creditors.
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Why non-US airlines are filing for Chapter 11 bankruptcy
Chapter 11 allows airlines to continue operating while restructuring their debt.
- Flexibility for contracts that have not yet been fulfilled: Chapter 11 allows airlines to reject or renegotiate pending contracts. These are contracts where both parties still have ongoing obligations. For airlines, these are often leases for aircraft, airport gates and other critical infrastructure. Renegotiating or terminating these contracts without immediate penalties is a significant benefit that allows airlines to reduce costs and adapt their operations to the new financial realities.
- Voting and cram-down provisions: The voting structure in Chapter 11 is designed to balance the interests of various stakeholders. Under the Pillsbury Act, a plan of reorganization must be approved by at least two-thirds of the dollar amount and by more than half of the voting creditors of each impaired class. In addition, Chapter 11 allows for a “cram-down,” in which a plan can be confirmed even if not all classes of creditors agree, provided certain conditions are met. This flexibility can be critical to pushing through a restructuring plan that may face opposition from a minority of creditors.
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Which airlines have recently gone through Chapter 11 bankruptcy proceedings?
|
Name of airline |
Date of Chapter 11 Filing |
Result |
|---|---|---|
|
LATAM Airlines |
26 May 2020 |
On November 3, 2022, the Chapter 11 proceedings were terminated, the restructuring was carried out and operations continued. |
|
Avianca |
10 May 2020 |
On December 1, 2021, the Chapter 11 proceedings were terminated, the restructuring was carried out and operations continued. |
|
Aeromexico |
30 June 2020 |
On March 17, 2022, the Chapter 11 proceedings were terminated, the restructuring was carried out and operations continued. |
|
Virgin Atlantic |
4 August 2020 |
On September 3, 2021, the Chapter 11 proceedings were terminated, the restructuring was carried out and operations continued. |
|
Philippine Airlines |
3 September 2021 |
On December 31, 2021, the Chapter 11 proceedings were terminated, the restructuring was carried out and operations continued. |
|
Norwegian Air Shuttle |
December 8, 2020 |
On May 26, 2021, the Chapter 11 proceedings were terminated, the restructuring was carried out and operations continued. |
|
Thai Airways |
27 May 2020 |
On March 5, 2021, the Chapter 11 proceedings were terminated, the restructuring was carried out and operations continued. |
Country comparison: Chapter 11 in the US and UK systems
Although Chapter 11 is well known, some airlines, particularly those based outside the U.S., may consider alternatives such as the U.K. Scheme of Arrangement. According to Watson Farley & Williams, the U.K. Scheme is often faster and less expensive, typically completing within three months, compared to the 18–24 months typical for Chapter 11. In addition, the U.K. Scheme allows for a more targeted restructuring because it can be selectively applied to certain creditors.
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However, the scope of the Chapter 11 process, with its proven DIP financing mechanisms, comprehensive automatic stay and international recognition, often outweighs the benefits of the UK process, particularly for global airlines with complex international operations.
Chapter 11 remains the primary restructuring tool for airlines in severe financial difficulties. Because it provides immediate liquidity through DIP financing, protects the company from creditors through an automatic payment stay, and provides a flexible and internationally recognized framework for restructuring, it is particularly well suited to the unique challenges of the airline industry.
While other restructuring mechanisms, such as the UK Scheme of Arrangement, offer benefits, Chapter 11’s comprehensive nature and proven track record in the aviation sector mean that it is often the preferred choice for airlines looking to navigate turbulent times in the Financial Times.
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LATAM expects to emerge from Chapter 11 bankruptcy in the second half of this year.
For airlines, the decision to file for Chapter 11 bankruptcy is not an easy one. However, if the goal is to emerge as a leaner, more competitive company with long-term viability, Chapter 11 is often the best option.
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