Confronted with a situation “more dire than 9/11,” the nation’s airlines industry is facing conditions that even bankruptcy may not be able to fix, according to former airlines executive Gary Kennedy.
Although the industry received $25 billion in pandemic relief earlier this year in the form of loans and grants from the federal government, Kennedy said that capital will soon be exhausted, likely forcing them to seek the protection of the courts.
“Airlines will have no option really other than to file” Kennedy said. “The difficulty, however, is this: That typically you look for ‘What is that reorganization plan?’ Unless those customers return, that plan is really questionable. How do you reorganize if you don’t have the business?”
As the former general counsel of American Airlines, Kennedy witnessed first-hand the industry response to the World Trade Center terrorist attacks and his company’s subsequent, successful bankruptcy.
“But I think it looks much more dire than after 9/11,” Kennedy said.
Kennedy’s stark assessment came in remarks he made Thursday as part of a panel on bankruptcy hosted by The Texas Lawbook and the DFW Chapter of the Association of Corporate Counsel and sponsored by Weil, Gotshal & Manges. Along with Kennedy were Talen Energy GC Andy Wright, Victoria Lazar, former GC at Bristow Group, and Weil bankruptcy partner Alfredo Perez.
“I know that, for example, the current estimate is that 90% of business travel has not returned,” Kennedy said. “And you cannot run the kind of business at least that American runs — or United or Delta — without business travel. So perhaps if we get the vaccine or perhaps if people say, ‘I really want that one-to-one contact in person’ rather in a Zoom call, then we’ll recover.”
Perez worked on the American Airlines bankruptcy at Weil. He said other industries are facing similar changes in their foundational businesses.
“It’s really hard not to say that about some of the areas affected by the pandemic — the real estate, the retail,” Perez said. “There’s going to be a shift of paradigms in terms of business plans and all those areas are going to be affected.”
“It’s as if innovation sped up because innovation was taking place sideways.”
Last week’s panel was against a backdrop that includes a tripling of bankruptcies in Texas during the first six months of 2020 year-over-year.
For more than a decade, some of Texas largest companies’ took refuge in bankruptcy courts out-of-state for a variety of reasons, Perez said. First, the bankruptcy courts in Texas were unpredictable. In Delaware, for instance, a single judge presided over bankruptcies. In Houston, multiple judges heard bankruptcy cases. Moreover, Texas venues were perceived as inhospitable to certain types of businesses, like retail.
But as bankruptcies become more complicated and values more volatile there are several considerations in choosing a bankruptcy venue, Perez said, and not all of them involve the bankruptcy court itself.
“I think, in my mind, there are a couple of reasons that venues become popular. One is the predictability of what is going to happen; and two is the law and the circuit,” Perez said.
“For instance, there is a much greater chance of being able to enforce intellectual property contracts in the Fifth Circuit than there is in the Third Circuit (where Delaware sits),” Perez said. “As a result if you have a lot of intellectual property that is of value to you when you file bankruptcy, and you want to ensure that you can retain those assets, the Fifth Circuit is a much better venue for you than is Delaware.”
By July 2019, when Victoria Lazar took the job as general counsel of the Bristow Group, the aviation company had already entered bankruptcy. Her job, as she described it, was to maintain its bankruptcy a restructuring opportunity and to keep it from being “sold for parts.”
She did. The company emerged from Chapter 11 in late October 2019 and was merged earlier this year with Era Group.
“No one ever considers themselves lucky to in Chapter 11,” Lazar said. “But I think the timing couldn’t have been better to take a company through bankruptcy last year as opposed to this year.”
Lazar, a former executive counsel at General Electric who formed her previous experience with bankruptcy as a preeminent attorney for mergers and acquisitions, the process was eye-opening.
“I think for anyone that is expecting an orderly process, I think you need to look elsewhere,” she said. The primary difference, she said, is in the scale of disappointment that lies behind the process.
“It’s not fun, really, for anyone in the sense that there are a lot of stakeholders who are disappointed. You have to face a lot of disappointed people. You have to face a lot of disappointed investors, a lot of disappointed creditors. There are a lot of people who perceive this as a failure: a lot of negative karma going on. You have to deal with that.”
There is also a process of education, particularly among employees. Bristow had a large number of employees outside the United States who were unfamiliar with restructuring, believing it to involve liquidation only. Employees were urged to direct questions to company headquarters and continue business as usual, sequestering them from any sense of trouble. With each milestone met, company employees gradually perceived it as a “smooth, non-chaotic process.”
“But anyone who’s been through it knows that’s a joke,” Lazar remarked.
That kind of communication is a large part of the task,” Lazar said.
“Your job as a general counsel is to make sure that you have defended the needs of all the stakeholders well enough so that everybody will confirm the plan. But you also have to keep the plan on track, so that no one gets a little bit too greedy, and nobody gets out of line and that is challenging when you have two lenders or three lenders. It’s a lot more challenging when you have multiple stakeholders: from employees to equity holders to creditors.”
And then there’s the cost. Lazar said the company spent about $100 million on the bankruptcy, including about $5 million for a contested hearing forced by smaller equity holders who were not going to have a recovery.
“It’s full-rate, top-rack retail prices,” Lazar said. “There’s a lot of money going out the door and it’s all cash.”
Still, the company emerged with a fairly favorable credit profile and Lazar said she is thankful for that. She said she came to understand bankruptcy in terms of rebirth and reinvention.
“You’ve been given a gift, so pay it forward. The American legal system has given you a second chance, so don’t waste it,” Lazar said.
Andy Wright’s bankruptcy experience at Energy Future Holdings was anything but quick. Built on a $45 billion private equity transaction in 2007 as a gamble on the continuation of high natural gas prices, the company quickly knew there was trouble ahead. The emergence of fracking opened up supplies of natural gas, and the Great Recession of 2008 drove down energy demand.
“It didn’t take an economics genius to see that rise in supply and a drop in demand would be a problem,” Wright said.
Wright said the company could see “the writing on the wall” and hired Kirkland & Ellis as bankruptcy advisors a full two years before filing in 2014.
“We essentially wanted to get prepped,” Wright said. “We were joined at the hip with bankruptcy counsel for the next five and a half years.”
“We were able to restructure a lot of our debt,” Wright said, “but we received a ‘going concern’ opinion from our accountant and that finally tipped the scales.”
By then the company had already embarked on an extensive liability management effort, restructuring its massive debt. But with what were essentially two energy businesses — one regulated and one unregulated — the process was full of fast-moving pressures and slow-moving approvals.
“There was a lot of legal wrangling,” said Wright. ONCOR, the regulated part of the business was sold four times before a sale received final approval.
Much like Lazar, Wright said he had emerged from the process with the perception that the greatest need for general counsel was to operate as an “honest broker.”
“You’ve got to cross the ‘t’s’ and dot the ‘i’s’ because you’re going to get challenged on it,” Wright said. “But just play it down the middle of the fairway.”
Perez, one of the most active lawyers in Texas these days, doesn’t expect his work to throttle down anytime soon. More bankruptcies, he said, are just on the horizon. Energy service companies are beginning to tumble and more companies that are ancillary to the energy space are likely to fail.
But the problem goes beyond that, Perez said.
“I still think there are over-leveraged companies and business plans that no longer work,” Perez said. “And to the extent the government stops feeding the economy, that’s always going to have an effect. I don’t think we’ve seen the high-water mark yet.”
For a recording of this 75-minute program, please contact the publisher.