Did you take a flight on United Airlines between December 2002 and February 2006? How about on Delta between September 2005 and April 2007? Or on American Airlines between November 2011 and December 2013?
If so, you traveled on a bankrupt airline. These firms had all invoked Chapter 11 of the U.S. bankruptcy code and were in the process of restructuring their finances in court. Yet they continued to operate and still exist today.
However, Washington seems to believe that airlines need to be saved from this process. The Senate coronavirus emergency aid bill, headed to the House for consideration on Friday, contains up to $25 billion in loans and loan guarantees to the airline business, plus $25 billion in direct funding for airline employee salaries and benefits, plus $3 billion to keep paying the contract workers who provide airline catering and services at the airport. That's a lot of taxpayer money.
There is no reason that the federal government should spend upward of $50 billion to bail out airlines when these companies continue to have access to the same financial restructuring procedures that they have used time and time again.
When there is fundamental ongoing demand for the service or product a company provides, and there is a sustainable business model that underlies it, Chapter 11 bankruptcy allows the company to restructure its debts. Shareholders are wiped out and creditors such as banks and bondholders take losses as well. But these investors should take losses in such a scenario. After all, they took the risk of investing in the hopes of earning a higher return. There was no guarantee that such investments would perform well.
On the other hand, when a company's business is simply no longer viable, it will likely end up being dismantled and liquidated. In a liquidation, the assets are sold off and the proceeds are used to pay off some of the company's debts. For example, Toys "R" Us began with a Chapter 11 filing in 2017 but ultimately ended up being liquidated the following year. The store chain's troubles weren't just a one-time shock. Its business model was simply no longer sustainable in the world of Walmart and Amazon.
There is only one real risk of sending airlines and other affected businesses into Chapter 11 bankruptcy, and that is the risk that a business with value as a going concern might end up being liquidated anyway. For a firm to pursue Chapter 11, its creditors must get enough additional loans to be able to continue to operate the firm during the bankruptcy. This new credit is called debtor-in-possession, or DIP, financing.
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If capital markets are severely disrupted, such financing might not be available, or might be available only on prohibitive terms. That might tilt the process toward inefficient liquidations. If such capital market disruption is a major concern, the government could support this market for bankruptcy finance by offering some short-term DIP financing, in conjunction with private creditors who would add discipline to the deal.
Airline executives are well aware that they run business with large fixed costs on very thin margins. Since creditors are confident in their ability to recover substantial portions of their debt investments, particularly those secured on aircraft and other tangible assets, they are willing to provide airlines with a very large amount of credit.
When Congress speaks of helping airlines, it is really talking about helping investors in these airlines: creditors and shareholders. Perhaps also frequent flyers who might see the value of their air miles diluted, but that is certainly a cost society can bear.
So while there may be some reasons for limited federal support to ensure efficient bankruptcy outcomes, there is every reason to believe capital markets and courts would work again, as they have in the past. Nobody really thinks that without government assistance the entire business of offering flights to individual travelers is going to collapse, forcing consumers to drive or ride Amtrak. And if Congress truly wants to help workers, why are lawmakers selecting airline workers in particular? Most of the millions of workers now claiming unemployment insurance are not in the airline industry.
This general line of reasoning applies not only to airlines but to all other industries dominated by large corporations. Investors should bear the losses they signed up to take when they invested. Taxpayers should be protected from restoring those losses under the false pretense of saving the business. And to the extent there is any government involvement in large corporations that are highly indebted by their own choice, it should focus on ensuring that the Chapter 11 restructuring process has the financing it needs to proceed without ending in unnecessary liquidation.
ABOUT THE WRITER
Joshua D. Rauh is a senior fellow at the Hoover Institution and Ormond Family Professor of Finance at the Stanford Graduate School of Business.
Visit the Chicago Tribune at www.chicagotribune.com
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