Let’s say you’re an airline in August 2020. You have very little revenue coming in thanks to COVID, but you have very large bills – debt payments, aircraft loans, employee wages – to pay.
Sure, you could try to find investors to increase your runway. But few investors will take the bait on an airline with a business model that was designed for pre-pandemic travel. And the investors that do come to the table will certainly offer less-than-favorable terms for the airline.
The smart move for an airline in this situation is to declare Chapter 11 (or Chapter 15 for foreign entities) bankruptcy and reorganize. Why? It brings creditors and lessors to the table and presents them with a simple question: Would you rather restructure your leases and/or debt, or be stuck with our assets?
I think this is an easy question for creditors. A lessor doesn’t want to be stuck with a fleet of returned aircraft, and although debt holders could force a company to liquidate its assets, these assets will get a small fraction of their value today. An airline’s creditors have a strong incentive to restructure their terms in the hope that travel will pick back up in the future and the airline returns to solvency.
Bankruptcy also gives an airline the opportunity to renegotiate labor agreements. It’s likely that these agreements were signed when the outlook for travel was rosy and demand for crew was strong. Today, airlines can drive a much harder bargain.
This is why Virgin Atlantic’s Chapter 15 bankruptcy filing makes sense. The airline could have found new investors, but these investors would have asked for terms very unfavorable for the airline. Virgin Atlantic has a much stronger bargaining position with existing stakeholders – lessors, debtors and unions – because these stakeholders will face significant losses if the airline is grounded permanently.