Why are non-US airlines using Chapter 11?

The famous Chapter 11 allows, in the United States, businesses in difficulty to restructure by sheltering themselves from their creditors. Thus, it was widely used by US airlines in difficulty to regain their health when they were on the verge of collapse.

More surprisingly it was also often used by non-US airlines. Many of you have asked the question following our article on the SAS bankruptcy: why did a Swedish-Danish airline resort to the American law to save itself?

This raises two questions: why Chapter 11 and how come a non-US airline can use it?

As noted above, Chapter 11 allows a business, under conditions set by a court, to continue to operate while protecting itself from its creditors to carry out its restructuring in a more serene climate and sheltered from its past financial commitments: in fact, the only engagements to which it will be bound are, to put it simply, the debts contracted after the entry into Chapter 11, taxes and salaries.

Lawyers will forgive this simplifying definition but it is more than enough for a neophyte.

However, similar provisions exist in all national legislation, so what makes Chapter 11 so special?

Here we leave the floor to the lawyers:

Chapter 11 can provide international airlines with access to capital markets and restructuring tools that are not offered collectively in other jurisdictions. […] a US bankruptcy proceeding provides international airlines with the most sophisticated and deepest financing alternatives, an automatic stay[des engagements] that is unparalleled in its reach, and a statutory framework
that uniquely positions airlines to right-size their fleets and contractual obligations.

Basically, there is the same elsewhere but it is much less powerful and efficient.

We have seen it in the past, it has been a rare efficiency: most of the American airlines were entitled to it when they were in bad shape and with an outdated product, make a total reset, invest massively and leave as good as new with a modern fleet and product, all while thumbing their noses at their creditors. We admire the bad faith with which they criticize the so-called illegal subsidies received by the Gulf airlines when, on their side, they use Chapter 11 as a wild card at the first opportunity.

Not surprisingly, many airlines would like to take advantage of the Chapter 11 provisions, which are more advantageous than their national legislation.

Well, they can!

How a non-US airline can use Chapter 11

In recent times we have seen many foreign airlines resort to Chapter 11. Of course SAS is the latest, but before it, Aeromexico, LATAM, Avianca, Philippine Airlines or Virgin Atlantic.

However, they are not businesses under American law and they are not headquartered in the United States.

In fact, U.S. law is very expansive in its assessment of the applicability of Chapter 11. A business can file for bankruptcy under the U.S. Bankruptcy Code as long as it has a property in the country or is doing business there. This includes, technically speaking, all airlines that operate flights to the US.

This explains everything.

Bottom line

The U.S. Chapter 11 is one of the most favorable mechanisms for an airline in difficulty wishing to restructure, and it is not limited to American companies: a foreign airline can use it as long as it has an activity or an address in the United States.

Photo : Chapter 11 de Vitalii Vodolazskyi via Shutterstock.

Bertrand Duperrin
Bertrand Duperrinhttp://www.duperrin.com
Compulsive traveler, present in the French #avgeek community since the late 2000s and passionate about (long) travel since his youth, Bertrand Duperrin co-founded Travel Guys with Olivier Delestre in March 2015.

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