Experts See Risks in Eastern Bankruptcy
Eastern Airlines’ expected strategy to file for bankruptcy protection could bring the embattled carrier several key benefits and relief from its hobbling debts. But it also entails high risks that could backfire and push the company into deeper financial and legal woes, analysts and bankruptcy law experts said Tuesday.
Depending on what type of bankruptcy proceeding Eastern chooses, it could win temporary relief from its debts, reemerge as a restructured carrier with lower labor costs, or attempt to profit from selling its aircraft and other assets, experts said.
Many labor leaders and others have suggested that Eastern has intended to seek bankruptcy all along and may attempt to use such proceedings to transfer assets to its sister airline, Continental Airlines.
But the options also could result in current management losing control or Continental being dragged into the process. Also, Eastern may get only a fraction of what it hopes by selling its assets. It also could be embroiled in legal entanglements that could take months or years to settle.
“It’s a messy deal,” said Dan A. Hersh, airline analyst at the Los Angeles securities firm of Bateman Eichler, Hill Richards, and a former employee at Eastern’s parent company, Texas Air Corp.
The likelihood of Eastern’s filing for bankruptcy protection grew Tuesday after a federal court judge in Miami refused to order Eastern’s pilots to return to work. The pilots, who have refused to cross picket lines of striking machinists, have effectively shut the airline down. Unable to operate, Eastern is losing as much as $7 million or $8 million a day, far more than the $1 million a day it was losing before the strike, analysts say.
Eastern has three basic options under the federal bankruptcy code, experts said.
- First, the company could file for a straight liquidation of its assets under Chapter 7.
- Second, under Chapter 11 of the bankruptcy code, Eastern’s management could attempt to remain in business while working out a reorganization plan to repay creditors.
- Third, under Chapter 11, management could attempt to liquidate assets, but with more control over that process than in Chapter 7.
The first option--straight liquidation under Chapter 7--is viewed by experts as least probable. In doing so, management would give up virtually all influence over the breakup of the firm. A government-appointed trustee would oversee the sale of assets, which would be used to pay creditors.
Eastern management, led by controversial Texas Air chief Frank Lorenzo, is unlikely to give up control, said John J. Bavis Jr., a union official representing Eastern pilots.
The second option--operating under Chapter 11--also has some risks.
In this scenario, management would remain in day-to-day control, while a bankruptcy judge must approve unusual moves, such as the sale of Eastern’s fleet. The company would file a plan of reorganization that provides a detailed program for rescheduling debt.
The chief benefit is that Eastern can suspend payments to creditors while the plan is worked out.
But management won’t have full control in this scenario either. Committees representing creditors, shareholders and employees would have a formal role to play in evaluating the plan to repay creditors.
Creditors also could petition to remove management and appoint a trustee to run the company.
Eastern also will find it harder to abrogate labor contracts and restart as a new, low-cost carrier, as Texas Air’s Lorenzo did by putting Continental into Chapter 11 in 1983. Then, it unilaterally slashed wages and resumed operations within days.
New laws now require that management must first prove that wage rates were a major factor contributing to the bankruptcy. That process could take months.
Perhaps the biggest risk to Lorenzo is that Texas Air and Continental could be forced by creditors to be included in the proceedings.
That could seriously reduce Lorenzo’s flexibility and allow Eastern creditors a crack at assets held by Texas Air and Continental. Eastern also has an unfunded pension liability of $750 million, sources say. Texas Air assets could be vulnerable if Eastern declares bankruptcy with insufficient funds to pay out pensions.
More appealing, perhaps, to Eastern might be the third option--liquidation under Chapter 11.
Many, but not all, bankruptcy courts permit this. So-called “controlled liquidations can happen very fast,” said Michael S. McManus, vice chairman of the bankruptcy law committee of the State Bar of California.
Eastern’s primary assets include its approximately 255 planes, which could come on to the market at a time when airlines are waiting years to receive deliveries of new aircraft. Also valuable are Eastern’s airport landing “slots,” or rights, and its routes to Latin America, principally from Miami.
Hersh estimates the total value of those assets--based on current market values--at about $3.1 billion. Subtracting Eastern’s debt of $2.5 billion, that would net the airline about $600 million.
Eastern may seek to shift some of those assets to Continental, but such a tactic may not be easily approved by a bankruptcy judge, Hersh said. Or a judge may rule that if assets are transferred to Continental, it too also should be included in bankruptcy proceedings, Hersh said.
Staff writers Scot J. Paltrow in Miami and Henry Weinstein in Los Angeles contributed to this story.
