Protection Afforded to a U.S.

¶ … protection afforded to a U.S. carrier operating in Chapter 11 bankruptcy have a negative impact on the overall air transport industry?

Chapter 11-bankruptcy protection has been seen as a lifeline for companies on the verge of total financial collapse. The protection given by U.S. constitution allows companies another chance to reorganize while being protected from meeting normal financial and operating obligations. Those with financial interests -- secured and unsecured creditors, debt holders, stockholders, employees, and retirees have to be prepared to make sacrifices to keep the company afloat. Chapter-11 protection has enabled the sinking companies to impose new wage and benefit plans for its employees, redesign the pension and health plan and in brief gives them protection from their contracts and obligations.

In the aftermath of 911, the airline industry in the U.S.A. underwent a major financial crisis; new security related costs and decline in number of passengers due to security concerns hit the industry hard. The post Iraq war oil price increases has proved to be the last straw for several airlines. United Airlines and U.S. Air had to file for Chapter 11 protection. Continental Air and several other airlines were able to reorganize themselves under Chapter11 protection to streamline their business and compete again. Chapter 11 protections have been a blessing for the ailing airlines.

However, there is another side to the 'benefits' of Chapter 11 insolvency protection. Critiques of Chpater11 protection point out that by supporting the lame ducks, the regulations are discriminating against the more efficient airline operators. Chapter 11 is being misused to obtain unfair advantage over the financially viable competitors. Airlines operating under Chapter11 protection are protected from meeting their financial obligations, while the efficient and viable airlines have to meet all their financial obligations, pay for their rivals pension plan in increased contribution to Pension Benefit Guaranty Corporation and finally compete again with an airline that used Chapter 11 protection to reduce its cost.

This case study looks at the impact of Chapter 11 protections on the airlines requesting the protection and also at the financial impact on the overall airline industry.