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August 15, 2005
St. Paul, Minn. — A few weeks ago, Northwest's CEO Doug Steenland told reporters and analysts on a conference call that the airline might consider filing for Chapter 11 bankruptcy before October 17. That's when big changes to the bankruptcy code take hold. But experts disagree on whether this sense of urgency to file is really warranted.
"The argument for filing before the law goes into effect for large corporations has basically been overstated," according to Douglas Baird at the University of Chicago Law School.
"If they're going to file anyway, I think the tendency is to file before the law goes into effect, rather than after," says Jim Rubenstein, a lawyer with the local law firm Moss & Barnett.
"It also could work in the other direction. Carriers might want to postpone looking at bankruptcy," says Michael Miller of Velocity Group, an aviation consultancy firm. He adds that some companies might want to wait to file so they can take more time to see how exactly the new rules play out.
Despite their disagreements, Miller, Rubenstein, and Baird agree that three particular revisions to the new bankruptcy code are causing the consternation about when to file.
One new provision shortens the amount of time a bankrupt company has to decide whether to ditch certain leases. Another hits management in the wallet. It restricts the bonuses a bankrupt company can grant to high-level employees to keep them from quitting. And a third provision gives management a much shorter time frame to file a reorganization plan to pull itself out of bankruptcy. That time frame is called the exclusivity period. And to a lot of analysts, it's the most serious change in the new code.
Under the old law, the bankruptcy judge has a lot of discretion in deciding how long a company has to write a new business plan. When that time runs out, other parties, namely creditors, can step in with their own wish list.
Jim Rubenstein, of Moss & Barnett, says the new law goes overboard in restricting the exclusivity period by limiting it to 18 months.
"Now that may seem like a long time," he says. "But United has been in bankruptcy for two and a half years. Other companies, not just airlines, have been in bankruptcy for that long or longer."
But to Michael Miller of Velocity Group, United Airlines is an example of why a big company should not be granted an indefinite amount of time to work out its reorganization, while creditors wait.
"United is the poster child for why these bankruptcy rules are changing in October. They will continue to be in bankruptcy at the three year period, and they still haven't filed a reorganization plan," he notes.
Douglas Baird of the University of Chicago Law School agrees, pointing out that it's perfectly reasonable to impose limits on how long a company can take to file a new plan.
"A lot of these cases, the amount of time negotiations take is the amount of time deadlines give you," Baird argues. "If I bring you into a room and say you've got 90 minutes to make a deal, the chances you'll make a deal in less than 90 minutes is pretty high."
So in the end, Baird doesn't think it will be a great onus for companies to file a reorganization plan under a tighter deadline.
And, Baird says, if Northwest files soon in order to enjoy a longer exclusivity period, it could sacrifice an important negotiating tool: the mere threat of bankruptcy.
Northwest's mechanics union may strike late in the evening August 19 over the airline's demand for $176 million in job and pay cuts. Baird says other airlines, such as American, have used the threat of bankruptcy strategically under similar circumstances.
"They did toy with the idea of filing for bankruptcy and when it became quite public and serious about it, they were able to get labor concessions," Baird says.
Jim Rubenstein of Moss and Barnett agrees, offering an analogy.
"It's kind of like pointing a gun at yourself and saying, 'if I don't get certain concessions I'm trying to reach, I'm gonna have to file chapter 11,'" he explains. "No one really knows at that stage if they're going to go through with it, and if they do, what the consequences would be. Then of course once you pull the trigger, you find out if there's a bullet in the gun and how much damage it's done, but a lot of people don't want to have the trigger pulled."
According to Northwest's filings with the Securities and Exchange Commission, the airline currently has $2.1 billion in cash. That might seem like a lot of money for a corporation floating the possibility of bankruptcy. But aviation analyst Michael Miller says it's imperative for a company on the verge of filing for Chapter 11 to have funds set aside so it can continue operating, or else it will have to shut down altogether.
Miller says that issue -- not the new bankruptcy law's implementation in October -- should be driving Northwest's decision about when to file.
"Northwest has money for the near term but not for the long term, mainly because of the cost of oil right and the fact that they have the oldest fleet in the world. That alone is burning a lot of cash because their fleet burns more jet fuel. They will have to file in the next sixty days or so," he says.
If Northwest files for bankruptcy, it certainly won't be alone. Lynn M. Lopucki is a law professor at the University of California, Los Angeles law school and runs a database on bankrupt companies. He counts at least 10 airline bankruptcies, including cargo carriers, just since the year 2000. Those include Fine Air Services, Kitty Hawk, Tower Air, Midway Airlines, Transworld Airlines, United, US Air, Hawaiian, and ATA Holdings.
According to Lopucki, the airline industry is fairly prone to bankruptcy, second only to the telecom industry in the frequency of filings.
And that makes aviation analyst Michael Miller rather blasé about the whole question of whether airlines like Northwest should file for bankruptcy before the new laws take effect in October.
"Airlines going into bankruptcy are as common as local groceries shutting down, changing name and moving," he argues. "There really is no immediate effect on most travelers. Frequent flyer miles are fine. Prices could go down."
Miller adds that the pressing question is not so much whether an airline should file for bankruptcy or when, but how long it will then take to emerge from it.