The Two Faces of Bankruptcy

This is a key takeaway from a good account of the work-to-rule campaign by American Airlines pilots:

This horror story begins with the Chapter 11 bankruptcy filing made by AMR Corp. (the holding company that owns American Airlines) last November. Bankruptcy, conventionally speaking, is about restructuring debts owed to banks and bondholders. But most of American’s debt was backed by hard assets like airplanes. What’s more, AMR actually had some cash on hand at the time of the filing. The debts American really wanted to restructure were the implicit debts to employees. As S&P analyst Philip Baggaley put it at the time, the goal was to “reorganize in Chapter 11 and emerge as a somewhat smaller airline with more competitive labor costs and a lighter debt load.” In other words, American went into bankruptcy primarily so it could pay people less.

The bankruptcy process gave American management leverage with which to extract concessions from its labor unions. American got those concessions, except from the pilots’ union, with which no agreement could be reached. So American decided to call the pilots’ bluff and got a bankruptcy judge to void the pilots’ contract.

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The aviation industry has been consolidating for decades, and last winter it looked like American would likely end up merging with either Delta or US Airways, both of which were interested. A Delta merger would pose serious anti-trust questions, but a US Airways merger would work for federal regulators, and US Airways management smartly sought and obtained a thumbs-up from American’s three major labor unions. But American brushed these overtures off and preferred to continue brinkmanship and independence under the umbrella of bankruptcy.

The reason, as Andrew Ross Sorkin explained in July before the pilots’ situation really blew up, is that CEO Tom Horton and the rest of his executive team can earn a huge payday by keeping the company independent. During bankruptcy, Horton earns a relatively modest $660,000 salary. But “in an odd twist of the bankruptcy process, airline management teams have typically managed to extract 5 percent to 10 percent of the company’s shares for themselves upon exiting Chapter 11,” a stake that could be worth hundreds of millions of dollars. There’s no particular reason to think this outcome would be better for shareholders than seriously pursuing a merger with US Airways, but it’s easy to see why it’s appealing to Horton. And by the same token, it’s easy to see why the pilots’ union is in no mood to make concessions whose objectives are as much about executives’ pocketbooks as they are about the viability of the airline. Until that breach of trust is repaired, don’t count on American getting you where you’re going on time.

Favorable bankruptcy laws, in other words, have allowed American Airlines executives to slash the salaries of the company’s workers while allowing executives to loot money from the shareholders. For ordinary consumers, conversely, bankruptcy law has become much more savage. It says a lot about contemporary American politics that law students can have their lives ruined by undischargeable debt while the executives of a failing company can use bankruptcy laws to line their already bulging pockets.