Corporations Learn to Tilt Bankruptcy in Their Favor : Business: This time, Continental Airlines goes into Chapter 11 with plenty of cash and captive passengers.

Continental Airlines may not survive its second visit to bankruptcy court, which began this week, but, if it goes under, it won’t be for failing to master the intricacies of bankruptcy law.

The debt-heavy carrier delayed seeking Chapter 11 court protection until it had amassed a $138-million cash hoard and until the Christmas season, when many of its passengers were carrying deep-discount, non-refundable tickets. This guaranteed that ridership would be high for weeks--and that initial news reports on the bankruptcy would carry the reassuring word that travelers were sticking with the airline.

“They handled it just about right,” said Russell Thayer, executive vice president of Airline Economics, an airline consulting firm in Washington.

Continental’s strategy reflects corporate America’s increasing sophistication in tilting the bankruptcy process in its favor. As a growing number of large companies have lurched into such proceedings in the aftermath of the debt binge of the 1980s, they have learned to fortify themselves with strong cash positions and protect their relationships with key suppliers, customers and employees.

Companies have learned that they can return to bankruptcy court--in what lawyers jokingly call “Chapter 22.” Others have found how to shorten their visits with “prepackaged” bankruptcies, which can compress the expensive reorganization process into a few weeks. And companies have become more skillful in handling the public relations aspects of bankruptcy, aided by the fact that bankruptcy no longer carries the public stigma it once did.

Some observers wonder whether corporations are becoming too adept at playing the bankruptcy game, even though two out of three do not emerge from Chapter 11. Although reviving firms is a top priority of U.S. bankruptcy law, some wonder whether it sometimes shields incompetent managers and props up weak companies that should be allowed to expire.

“These are questions that should be asked,” said Walter N. Torous, an assistant finance professor at UCLA.

No one knows what the future holds for Continental, but its skilled handling of the bankruptcy process this time around is in sharp contrast to the way airlines have fumbled through these situations in the past.

Braniff blundered into Chapter 11 in 1982 with no cash, stranding passengers with worthless tickets and leaving employees and travel agents unpaid. It emerged from bankruptcy court in 1983. But, in part because it had so alienated customers and travel agents, it skidded into bankruptcy court for a second and last time last year.

In 1983, Continental, too, had a much harder time with reorganization because it closed down for three days after its bankruptcy filing, then returned with sharply diminished operations.

Now, Continental’s big cash balance will help it weather the slow season that begins after New Year’s, and its firm holiday season bookings will give it needed momentum. The Houston-based carrier was clever, too, in telling passengers and travel agents that it would continue to honor all tickets and operate all flights.

By continuing operations with no interruption, Continental has been able to preserve a very important asset: the reservations that are impossible to fully recapture once they are lost, consultant Thayer said.

For many years, airline executives believed that any bankruptcy filing would be fatal to an airline. They reasoned that customers would avoid a distressed airline, fearing that the company would skimp on maintainance and aircraft might plunge from the skies.

But the airlines discovered during the first Continental bankruptcy, and the bankruptcy of its subsidiary, Eastern Airlines, that many passengers will continue to buy tickets.

Other industries have discovered in recent years that customers are blase about bankruptcy cases. “With so many household names in bankruptcy court . . . and doing nicely, people are behaving much more rationally,” said Wilbur Ross, an investment banker and leading bankruptcy adviser at Rothschild Inc. in New York.

Indeed, the common wisdom was that retailers had the most to risk from frightened customers in a bankruptcy. But, as last year’s Chapter 11 filing by Allied and Federated department store chains has shown, “people don’t care, most don’t even know the reorganization is going on,” said David Rachman, marketing professor at Baruch College in New York.

Customers have been largely unfazed by the bankruptcy reorganizations of Greyhound Lines, the bus company; Southland Corp., the owner of 7-Eleven stores; A. H. Robins, the big drug company, and Allegheny International, the maker of Sunbeam and Oster appliances, Rothschild’s Ross said.

Sometimes, the attendant publicity can even bring in customers. When Donald Trump’s Taj Mahal casino was briefly in bankruptcy court last month, “it seemed like people who just happened to be somewhere near Atlantic City began to drop in,” Ross said.

Companies are also increasingly turning to the prepackaged bankruptcies.

In these prearranged reorganizations, companies negotiate new repayment deals to win support from specified majorities of the holders of each class of the company’s stocks and bonds. With such backing in hand, the company can seek bankruptcy court protection and ask for immediate approval of a reorganization plan, to end-run the minority objections that often make bankruptcy a long, expensive and bitter process.

Major company reorganizations often take two to three years, noted Mark Roe, a bankruptcy-law specialist at Columbia University Law School. With prepackaged plans, some have taken less than two months.

Avoiding the expenses of bankruptcy court is a major advantage of these arrangements. Drexel Burnham Lambert, the one-time junk-bond powerhouse that failed last February, is expected to pay $75 million in fees for lawyers, bankers and accountants in its first year of reorganization, noted Barry J. Dichter, bankruptcy lawyer at Cadwalader, Wickersham & Taft in New York.

Companies have also discovered that they can smooth their path through bankruptcy by seeking court orders at the outset that will enable them to pay employees, continue benefit plans and pay debts owed to suppliers up until the moment of the filing, Dichter said.

Such moves enable them to preserve important relationships, while restricting the focus of the bankruptcy proceeding to the company’s central financial problem, which so often today is junk-bond debt rather than any operational weakness, Dichter said.

Distressed companies have found new access to financing while in bankruptcy. Several banks, such as Wells Fargo and Chemical Bank, have been attracted by the profitable return on such lending and the high-priority claim they have on corporate assets, said David Minnick, a bankruptcy specialist at Lillick & McHose in Los Angeles.

Ames Department Stores, for example, recently began its way through a reorganization by establishing a $250-million credit line from Chemical Bank.

A second trip through bankruptcy court also is an option for companies. But it is used rarely and only in the direst circumstances.

Some observers contend that executives’ new awareness of how to navigate the bankruptcy maze has led some to consider Chapter 11 as a choice even before their financial distress begins.

“Anybody who plays the high leverage game has got to start thinking about it from the beginning--when the junk financing or leveraged buyout takes place,” said Richard A. D’Aveni, professor of corporate strategy at Dartmouth University.

So is bankruptcy court too easy an alternative?

For the most part, the debt holders aren’t complaining about the system; they have usually done better in smoothly run reorganization proceedings in which the company is able to get back on its feet and pay its bills.

In most of the major cases, the suffering debt holders aren’t widows and orphans “but sophisticated institutional investors who bought junk bonds and enjoyed those big 16% coupons,” attorney Minnick said. “They went in with their eyes open.”

Even if bankruptcy reorganization is easier than it was, corporate executives can’t be enthusiastic about it because, often, they lose their jobs, Columbia’s Roe said.

They can be fired, like the management of Manville Corp., which sought Chapter 11 to deal with asbestos-related lawsuits; or they can have the company sold out from under them, as happened to the family that owned Robins.

But that doesn’t mean many top executives don’t survive the process. The management teams at Texaco and LTV Corp. remain at the helms of their reorganizations, and James M. Zimmerman, president and chief operating officer of Allied Stores, remains in his post, Joseph Kelly, a New York bankruptcy lawyer, noted.

“It’s not uncommon to have the same people in there, unless the creditors think they’re real scoundrels,” Kelly said.

Even though most companies don’t survive Chapter 11, big companies with a lot of momentum--and particularly those that suffer from too much debt but not operating problems--frequently endure and thrive.

Among the recent celebrated cases, Texaco, Resorts International, A. H. Robins, Allegheny International, Public Service of New Hampshire, Wheeling-Pittsburgh Steel and Storage Technology are healthy or appear to be recovering.

“The vast majority of problems arise from bad management,” said Minnick, a lawyer who represents creditors.