What the APA legal team had to say

AAviator

Veteran
Nov 12, 2002
1,385
633
This came in an e-mail, Long read, but info none the less.



Our firm is based in New York and has approximately 750
attorneys, one of the largest in the U.S. We have been involved
in most major airline bankruptcies in the past 20 years. Last
October the APA Board of Directors requested that our firm
provide general restructuring and bankruptcy advice to the board,
initially with respect to US Airways and the potential bankruptcy
filing of UAL, as well as to be prepared in the event AMR filed
bankruptcy.


APA formed a highly competent and experienced team of financial
advisors, airline analysts, accountants and labor, ERISA and
bankruptcy counsel to begin an in-depth analysis of the company''s
internal financial numbers. Together with a financial review
team of APA representatives, we reviewed boxes of financial and
other information, more information than reported to the
Securities and Exchange Commission, more information than many
employees inside the company would have access to.


After meeting with American regarding its restructuring plan and
reviewing the financial situation of American, it became apparent
that, absent some intervention on the cost reduction, the
company''s cash situation would quickly deteriorate to the point
of forcing a bankruptcy filing. The economic factors, combined
with the uncertain international situation, was causing the
company''s financial condition to decline rather than stabilize or
improve. APA''s outside professionals, as well as the APA
representatives, came to the unanimous conclusion that, in the
absence of any foreseeable revenue improvement or a substantial
level of employee and lessor concessions, a Chapter 11 filing was
highly likely.


Historically, airlines have not fared well in Chapter 11. Even
those that have emerged from bankruptcy have often done so as a
smaller, weaker carrier. There are several factors that
contribute to the unique problems experienced by airlines in
bankruptcy. First, bookings for airlines filing bankruptcy
historically have dropped approximately 10%, with negligible
offsetting cost savings. International carriers are particularly
susceptible because of the misperception of foreign passengers
and travel agents regarding U.S. bankruptcy laws.


Second, as a result of the loss of bookings, airlines are
required to sell discounted tickets in order to generate
sufficient operating cash. Operating in bankruptcy requires
significant cash reserves. Bankruptcy-related costs for large
airlines can easily range into the hundreds of millions of
dollars. Multiple attorneys, accountants, analysts, investment
bankers, etc. will be working full time, around the clock during
the initial weeks. In addition, the company must pay all of the
fees and expenses of professionals and consultants for secured
creditors, DIP financing lenders and the committee of unsecured
creditors. Vendors often put a bankrupt airline on COD terms,
potentially creating additional hundreds of millions of dollars
of cash needs. Because bankruptcy is a public process, if at any
time the company''s liquidity appears in jeopardy, passenger
confidence wanes, creating a cycle of reduced bookings, more
discounted tickets and lower cash generating ability.


Third, bankruptcy is primarily designed to reduce a company''s
debt. Although a large debt payment may trigger an airline
filing bankruptcy, it is often not the main underlying concern.
Small variations in passenger revenue and costs (such as fuel)
can have enormous impacts when multiplied into an airline''s high
volume financial structure. If an airline is losing money on an
operating basis, even before debt payments, this problem must be
addressed first. However, bankruptcy will tend to increase
operating losses, requiring deeper and deeper cost cutting
measures.


Fourth, in the current environment with US Airways and UAL filing
bankruptcy within the last year, the necessary loan financing for
bankruptcy (referred to as debtor in possession or DIP financing)
is becoming more expensive and more difficult to obtain.


Bankruptcy is also not an environment conducive to negotiating
labor contracts. The bankruptcy trustee appoints an unsecured
creditors'' committee. This committee, and many other individual
creditors, are involved in virtually all negotiations during the
bankruptcy. Because these creditors will likely be the ultimate
owners of the company following bankruptcy, they have an
incentive to drive labor costs as low as possible. What was a
two-party negotiation prebankruptcy, becomes a three or more
party negotiation, each with their own agenda and leverage.


In addition, bankruptcy is time intensive and draws the company
operational and financial management teams away from labor
negotiation where they are needed. Frequently good managers
leave and less capable managers take over critical aspects of the
company''s business. The company begins managing toward the
short-term goals of cost reduction, cash generation and a plan of
reorganization acceptable to creditors, rather than focusing on
the long-term relationship with employees and customers.


One part of bankruptcy law that does work well for airlines is
contract rejection. In Chapter 11, an airline can reject any of
its contracts and leases. The other party to the contract only
receives a claim for damages, which is thrown into the pot with
all of the other prebankrutpcy claims. While section 1113 of the
Bankruptcy Code delays to some extent a company''s ability to
reject collective bargaining agreements, the bankruptcy court
will readily abrogate a collective bargaining agreement that is
inconsistent with the company''s reorganization needs. The court
does not pick and choose which parts of the agreement will be
rejected; it is all rejected.


If American were to file Chapter 11, and inherit all of the
negative implications of bankruptcy, it would certainly avail
itself of the contract rejection laws to the maximum extent,
either to reject a contract or leverage negotiations for a more
favorable contract. Such negotiations would be with a smaller,
weaker airline that would have to cut deeper and quicker than
outside Chapter 11.


As APA''s outside advisors counseled with the APA Board of
Directors and National Officers, several concerns were raised
repeatedly.


1. Double Dip. It is possible that American may in the future be
required to file bankruptcy in spite of the employees''
substantial concessions. In this case, the employees may be
required to give additional concessions. But it is the unanimous
view of APA''s outside advisors that these cuts, in total, would
not be more than would be required in bankruptcy anyway and may
actually be less. Nevertheless, there are risks. The pension
plans are at particular risk. Outside events could also create
the need for additional concessions. DIP lenders and creditors
could require deeper cost cutting. But without prefiling labor
concessions, these risks would become a certainty instead of just
a risk.

2. Bankruptcy Inevitability. It is our view that management is
attempting every maneuver possible to avoid bankruptcy. However,
even if the company were forced into bankruptcy, due to economic
conditions or the failure of one labor group to ratify, we
believe it is better for APA to have some prebankruptcy agreement.

First, we do not believe that another union would receive a
better deal by holding out. On the contrary, the bankruptcy
judge and the creditors will have little sympathy for an employee
group that triggers a Chapter 11 filing. Second, in Chapter 11,
our fate is tied to the health of the airline and the sooner the
airline exits bankruptcy, the better for all concerned.
Companies that have prenegotiated contracts with employees and
major creditors have a higher chance of a prompt reorganization
and better public perception. Third, labor negotiations in
bankruptcy are destabilizing and 1113 is particularly so. If the
company views the savings from the additional concessions
proposed under 1113 to be outweighed by the cost of labor unrest,
the employee group may potentially avoid the 1113 action which
would have been inevitable without the prebankruptcy agreement.
Further, the company will agree prebankruptcy not to file an 1113
motion unless required to do so by a material adverse change in
its financial situation. This is not an absolute protection
against 1113, but it is better than no protection.

3. Better in Bankruptcy. For all of the reasons above, we do not
believe that a better deal would be available in bankruptcy, all
things being equal.

4. Change in Management. Large companies filing bankruptcy often
undergo a change in management before the reorganization is
complete. However, this has seldom resulted in better employee
relations because creditors want a hard-line, cost-cutting
manager. Frequently, new management''s first request is for
additional labor concessions. A labor management battle or a
change in top management during Chapter 11 usually raises
considerable uncertainty in the minds of the investor community
and the traveling public.

5. Pension. The pension has been preserved in its current form,
although the wage cuts will impact pilots accruals. While the
pension is still vulnerable in a Chapter 11 scenario, the pay
cuts, when combined with the projected furloughs, significantly
reduces the A Plan''s underfunding, making this issue somewhat
easier for the company to accept.

6. Duration. The interaction of the Railway Labor Act and
collective bargaining agreement rejection under 1113 in
bankruptcy is a gray area of bankruptcy law where there is no
statutory guidance and relatively little precedent. It is not at
all clear that allowing an airline to reject a contract would
result in a shorter duration than a negotiated contract.

7. Equity. Stock or options received prior to bankruptcy will
likely be worthless in the event of bankruptcy. There is no
assurance that employees would receive any additional equity in
bankruptcy. This is one of the risks of a prebankruptcy
agreement that is difficult to work around. Pilots should not
base their decision solely on the potential value of the options.
 

L1011Ret

Veteran
Oct 31, 2002
1,326
0
That is a very informative summary. I hope some read it before they make their decisions.