Recently, Scandinavian Airlines System (SAS) became the latest airline to file for Chapter
11 bankruptcy protection in the United States. Over the last two years, several
airlines have begun Chapter 11 proceedings, including the likes of Avianca, LATAM,
Aeromexico, Ravn Alaska, and Philippine Airlines, due to the impact of the COVID-19 crisis.
But why do non-US airlines file for this US-based protection?
A Chapter 11 bankruptcy is known as a reorganization bankruptcy
because the company is allowed to continue operating while restructuring its debts
over a period of time. This is different from Chapter 7
bankruptcy proceedings- when a business has to close and file a liquidation of assets.
In the context of the COVID-19 pandemic, filing for Chapter 11 provides airlines
“a clear and guided opportunity” to work with their creditors and other
stakeholders to reduce their debts and address commercial challenges.
However, SAS’ Chapter 11 is not directly related to the COVID-19 pandemic. Instead, the airline has
cited material concerns regarding the impacts of its pilots' recently-announced strike,
which it says has a quote “negative impact on the liquidity and financial position of the Company."
An entity, even if it is not based in the US or organized under US law, is eligible
to file for relief under the bankruptcy code as long as it has a place of business or property
in the United States. All the Chapter 11 airlines (from Avianca to Philippine Airlines and SAS)
have operations and property in the US, and were therefore eligible for this protection.
Overall, Chapter 11 provides international airlines with access to capital markets and
restructuring tools that are not offered collectively in other jurisdictions.
Additionally, a US bankruptcy proceeding provides international airlines with the
quote “most sophisticated and deepest financing alternatives,
an automatic stay that is unparalleled in its reach, and a statutory framework that
uniquely positions airlines to right-size their fleets and contractual obligations.”
For SAS, it expects to complete its court-supervised process in
the United States in nine to 12 months.
It’s worth noting, however, that it usually takes longer for an airline to emerge from Chapter 11.
Avianca filed for bankruptcy proceedings in May 2020 and exited in December 2021;
Aeromexico filed in June 2020 and emerged in March 2022; LATAM
filed in May 2020 and could formally emerge in the second half of 2022.
Not all airlines are able to emerge from Chapter 11, though. For instance, Pan American sought
Chapter 11 protection in early 1991 before ceasing operations at the end of the same year.
Between 1978 and 2019, there were over 100 airline bankruptcy filings in the United States.
While there is no official record of how many Chapter 11s ended in liquidation,
many airlines are no longer flying.
Recession, fierce competition, rising costs, the Gulf War, the September 2001, tragedy,
and COVID-19 have prompted bankruptcy filings amongst several carriers,
including the likes of American Airlines, Frontier Airlines, Avianca, United, Allegiant, and more.
Before watching this video, did you know the difference between the different types
of bankruptcy proceedings? Let us know by leaving a comment.