Would It Be Better to Let Airlines File for Chapter 11 Bankruptcy?

It could be the fairest way to decide how losses are distributed.

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Last week, Congress passed a $2 trillion economic relief package, the CARES Act, which included up to $50 billion in aid for passenger airlines. An airline may request a direct payroll grant for “the equivalent of their payroll between April 1 and Sept. 30 of last year” and five-year government loans that “would carry tougher terms than grants or loans from private banks.”

But this wasn’t the only option on the table. Richard Squire, a bankruptcy law professor at Fordham University, published an intriguing op-ed in the Washington Post that advocated for letting airline companies file for Chapter 11 bankruptcy in lieu of a taxpayer-funded bailout. 

With 230 million Americans living under “stay-at-home” orders that have required non-essential businesses to shutter (though the definition of “essential” varies by jurisdiction), airlines won’t be the only businesses facing an existential threat before April 30. 

We reached out to Squire to discuss why he favors bankruptcy over federal grants and loans (broadly referred to as “bailouts”) and what options Congress has available moving forward.

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  1. Avatar photo
    Visibly

    It is a dream, and not at all possible to carry out. But would it not be fantastic if we for the next 3-6 months of this pandemic, put all money transactions on hold? From everything like rent, buying food, paying your mortgages, salaries etc. Like just stop, so that the world, can return back, and in a better shape some few months from now. A fantasy, I know, but...

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    Steve Gordon

    I hate when the government starts picking winners and losers. Now, that's said so often it's trite of course. But with an economy as large and complex as ours is, there is no way to get it right, even with the best of intentions. Throw in some self-serving political motives on behalf of key constituencies and any lifeline starts to resemble the Bride of Frankenstein pretty quickly.

    Besides the airlines, how about fuel vendors, uniform vendors, caterers, cleaning services, airport car services, airline manufacturers, parts manufacturers, transportation providers for those manufacturers and service providers, etc. etc. etc. Maybe it's just better to get some relief out there, but it's hard thing to explain to those going out of business who got overlooked somehow.

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  3. Mike Monroe

    I just read an email alert from a law firm stating that the CARES Act specifically allocates $25 billion for the passenger airline industry. I take it as well that these firms qualify for other, generally available forms of relief mentioned in the write-up.

    Question for the attorneys: If an airline were to seek Chapter 11 protection, wouldn't its creditors be well within their rights to demand that the Court require the trustee to tap CARES-type relief to whatever extent possible and that makes sense in crafting a settlement? Now that it's law, does CARES kind of make the Chapter 11 decision more of a both/and question rather than either/or?

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    Some Viking

    Thanks for the insights. Sounds like corporate socialism. How about we forgive student debt? You can’t even renegotiate that in anything similar to Chapter 7 or 11. Those aren’t developed thoughts at all but seriously?

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    C C Writer

    Here's something that's semi-off-topic because it concerns small businesses rather than big businesses. But it's an interesting case of crossing political boundaries in response to a crisis.

    Here in Chicago, there is an organization called Block Club that has reporters on the local news beat, down to the neighborhood level. I subscribe to it because I think the paid news model is best. From time to time the millennial journalists show their progressive outlook, but I tend to cut them some slack because I think they'll learn from their own investigative reporting; also I endorse the idea, which has been talked up a lot on Dispatch and Remnant, that the local level is where people find that being civil and tolerant and focusing on reality and real people more than the "party line" helps solve actual problems.

    Anyway, a story up today is about a project to help entrepreneurs in Chicago, especially those owned by minorities. This project is operated by the Institute for Justice out of the University of Chicago. This seems to be a case where the free-market right and leftish neighborhood activists find themselves in some agreement: encouraging small businesses will help close the racial wealth gap.

    https://blockclubchicago.org/2020/03/30/want-to-help-local-businesses-affected-by-coronavirus-from-home-shop-in-place-on-new-site/

    https://ij.org/press-release/shopinplacechi-com-helps-chicagoans-track-local-small-businesses-offering-essential-products/

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  6. Avatar photo
    Pat Riot

    For the moment, the priority should be to give almost all working Americans a 10 week paid vacation, with the understanding that their job will be there when they get back.

    In other words, the best thing the Federal government could be doing right now is to let Americans know that this is just a blip on the radar, we're going to take a big charge on the chin, and then resume business when it's over.

    Anything else will cause damage that will take *a decade* to heal, lower our GDP for that time, and thus end up costing us *more* money in the long run and suffering in the short run.

    How we engineer all of that is tricky, but that's what we need to accomplish.

    In that context, not propping up the airlines in the short run means layoffs, and layoffs means lots of people stop spending, default on their loans, etc. All of that means uncertainty, the expectation of a shrinking economy, and then a spiral downwards.

    So prop them up for now. It's not fair. It's not capitalism. Some of them should probably die in the long run. But for now the priority should be to maintain the pre-crisis status best we can.

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    1. Avatar photocircle-angle-nib
      Sarah Isgur vertical-nib Author

      But this issue is why the airlines? Why not all the other businesses? That’s what I find interesting about his argument re bankruptcy being more equitable.

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        Torsius

        There is an argument to be made that airlines are an essential part of interstate commerce in a way that movie theater chains, for example, are not. While I would not like to nationalize the airline industry, if there was some exogenous event that crippled every trucking company equally, I believe some government assistance would be appropriate for the public good. Our airlines provide a good deal of freight shipment in their cargo holds, and the runways of major passenger terminals also service UPS/FedEx planes.

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        1. Avatar photocircle-angle-nib
          Sarah Isgur vertical-nib Author

          I largely agree with this point. Its different than "too big too fail" but its in some ways the same concept.

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            Torsius

            I would distinguish this from the financial crisis. This is essentially an uninsurable natural disaster in which we must preserve the essential industries for our recovery. The financial bailouts still seem like naked rent-seeking by people who should have been reaping what they sowed.

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        Pat Riot

        They are surely getting hit harder than all of the other industries generally, but I agree that we should be propping *everybody* up, not just them.

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    Jason

    Let them sink or swim. The economic damage, and the associated real world suffering are real, and yet they are worth enduring versus the social cost of socializing the losses.

    Americans will be impacted too, imagine on Thanksgiving higher flight prices, fewer choices, and cities hit by the loss of a hub (I know that story well, being from Pgh), but again let's all experience and work through the consequences of it happening versus propping them up and letting the populist resentment surge unabated.

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    Earl King

    Despite Yamiche Alcindor ignorant question...It still remains "is the cure worse than the virus". We are staring an economic Depression...Certainly for some industries. Tens of thousands of restaurants will never reopen Many of the unemployed will run up their credit cards to the max, home owners will tap out their HELOC's...millions will have high debt after this even if they go back to jobs. What will they be spending their money on? That means a severely depressed GDP.
    Will people buy a new car? Only if they feel financially secure. When will that be? Arguably this could take ten years..Corporate Bankruptcy has the veneer that Corporations are not people. But they are. They have good salaries and good benefits. Sloughing off the firing of hundreds of thousands of employees has major consequences for the local businesses they support. Those businesses fail. Imagine Boeing failing. Seattle would get pneumonia. Getting back to Yamiche....the NIH has studied Poverty, it concludes that Poverty contributes to the national death toll. Imagine what a Cabrini Green in Chicago looks like on steroids.
    NYC will be a very different city. Just think about all those foreigners who drove up the cost of apartments. Who is going to buy them now. All those builders, trades people and businesses that support them? They are all going to fail. Economic insecurity...its a real thing. Bankruptcy? Doesn't do a thing for that.

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    Steve Eggleston

    "There is an option between federal bailouts and the normal bankruptcy process, as Squire described. After the 2008 financial crash, General Motors and Chrysler filed for Chapter 11 bankruptcy, but rather than appeal to banks for further loans, it was the federal government that provided the lion's share of the new credit. This both ensured the two automakers’ future viability and allowed the federal government some say in how much creditors got paid."

    "(S)ome say in how much creditors got paid" is one way to put it. "(U)pended bankruptcy laws and precedent to allow the UAW to profit rather handsomely for driving GM and Chrysler to the brink at the expense of the non-union creditors" is a more accurate way to put it. On some $20 billion in money owed to its retiree health trust fund (VEBA), which was unsecured obligations before GM and Chrysler entered bankruptcy, the UAW netted somewhere north of $35 billion between direct payments (which was reclassified as senior secured obligations) and sales of stock it was awarded through the "bankruptcy" process...several years earlier than it would have received that $20 billion in normal repayments. Meanwhile, the other non-secured creditors of GM got a rather large haircut on what they were owed, the other non-secured creditors of Chrysler got nothing, and the secured creditors of Chrysler got a large haircut on what they were owed.

    Given the prohibition of involuntary furloughs in the CARES Act, I would expect the same basic dynamic to play out if the federal government became the financier of any airline bankruptcy.

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    1. Avatar photocircle-angle-nib
      Sarah Isgur vertical-nib Author

      I struggled over how much of the GM/Chrysler history to include bc youre exactly right that it’s fascinating and got very political in the end!

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    Logical

    Yes. And treat'em like utilities going forward. Remember Warren Buffet: "if you want to make a small fortune in airlines, start with a large fortune."

    Profits in airline business is an illusion. Cumulative profits since the Write Bros. are negative. Recent "so called" profits owing to mergers was short lived.

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      Chris Craft

      I worked for 15 years for one of the most profitable companies in the U.S. It went close to 30 years without posting a quarterly loss, and that was a result of 9/11. It also happened to be a major airline.

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      Pastorfbt

      Well Buffet did buy Netjets, so there's that

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        Logical

        True. But Netjets is not exactly an airline. It's like a caviar only restaurant, suitable for only the top .1% who never go broke.

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          Pastorfbt

          Pretty sure WB was underwater on that investment for a while at first

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