Turbulence: The Saga of Bankruptcy in Aviation
As the ramifications of the COVID-19 pandemic unfold, it appears no other industry has been more adversely affected than aviation. While the numbers themselves are overwhelming, contemplating the impact and scope of the struggling commercial airline sector can produce not only a numbing effect on one’s psyche but also a deep-seated fear of what comes next.
With passenger volume next to zero in the first weeks of the outbreak, and almost 60 percent of aircraft grounded—some forever—what comes next? Well, for more than a few companies, the prospect of a financial restructuring via the bankruptcy process or going into administration and reorganizing may be the only solution for economic survival. So, what does all of this mean to those not well versed in such an ominous and foreboding court-managed process?
The word “bankruptcy“ is derived from Italian “banca rotta,” which is interesting because it sounds like a rotten bank. It translates into “broken bench.” This stems from a widespread custom in Genoa of breaking a money changer’s bench or counter to signify their insolvency.
Of course, in today’s modern world, the word itself generates fear and, indeed, failure, which is somewhat misunderstood. In fact, rather than having such a negative connotation, the process itself is designed to help corporations reorganize in an efficient and productive manner. Sure, it can be very disruptive to all of its constituents, but it can also be invigorating and for those who have a “glass half full” perspective, most fulfilling. Obviously, those involved—airplane manufacturers, leasing companies, lenders, unions, pension funds, a vast array of creditors (most unsecured ) and the traveling public—will see the process through their own prism, first asking what it means for them. Let us take a perhaps unconventional look at how it works.
To draw an analogy, it is a bit like professional sports—say American football. What? Stay with me here. In court, you have referees—the judge and the U.S. trustee. There is the coach—that would be the chief executive. The coach’s role is to marshal all the diverse groups and interested parties to form a team, and hopefully a cohesive one. A key responsibility, perhaps the most critical of all, is choosing the right team members, given the egos, experience levels, hidden agendas and personal chemistry issues that will come along with them.
For starters, who will be the lead attorney? And following our analogy, does this person have the skills, experience, rugged toughness and overwhelming charm to be the quarterback? Will they have the flexibility to balance so many different agendas, take direction from the coach/CEO and be a formidable adversary as needed with the creditor committee chairman as well as their lead counsel? And of course, one must have the trust and respect of the U.S. trustee, who I would liken to the instant replay referee. Their role as an independent third party, and indeed a sometimes counselor, is integral to the entire process. Perhaps most important of all, the lead attorney/quarterback needs to call the plays in concert with the CEO/coach while having the ability to call an audible when necessary.
Then there are other vital participants, such as the lead investment banker, whose charter is to find and negotiate both short- and long-term financing, and the lead labor attorney, whose role in negotiating a final deal is critical. We also have the equivalent of sportswriters, in that the news media are in the courthouse, listening to you describe the precarious financial condition of the company and pushing a camera in your face at the end of each day asking for comments. Remember that what you say will be monitored by all of those diverse constituents, to whom every word can have significance. Also remember that the judge watches television as well. Finally, I would add the groundskeepers, who maintain order in court as well as communicate and coordinate with government officials and politicians.
As to keeping score, there are a few things to watch: the tally from unsecured creditors, what the new balance sheet will look like, how much cash is available going forward and the feel of a new cost structure and ownership. And make no mistake, there are winners and losers. Believe me, for anyone who has managed this process, and I often have, it is truly the Super Bowl of all contests. Hopefully, most employees remain, vendors are reinvigorated, healthy competition flourishes and new investors have a strong, viable company. And when the game clock gets to zero on confirmation day and the judge pounds down his gavel, it is impossible to understand the feeling of relief unless you have been out there on the field.
David Banmiller is the former CEO of Golden Myanmar and Aloha Airlines and the author of Turbulence: Fifty Years on the Leading Edge of the Airline Industry.