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5. Financial buyers (both hedge funds and private equity investors) clearly are motivated by the
potential profit they can make by buying distressed debt. Their actions may have both a positive
and negative impact on parties to the bankruptcy process. Identify how parties to Hostess
bankruptcy may have been helped or hurt by the actions of the hedge funds and private equity
investors.
6. Hostess’s assets were sold in a 363 auction. Such auctions attract both strategic and financial
bidders. Which party tends to have the greater advantage: the strategic or financial bidder? Explain
your answer.
7. Comment on the fairness of the 363 auction process to Hostess shareholders, lenders, employees,
communities, government, etc. Be specific.
American Airlines Emerges from the Protection of Bankruptcy Court
Key Points
• Chapter 11 provides an opportunity for debtor firms to reorganize and for creditors to recover a
portion of what they are owed.
• Firms emerging from Chapter 11 often do so by being acquired or by being an acquirer.
• Gaining consensus among creditors requires aggressive negotiation by the debtor firm.
• By buying the bankrupt firm’s debt, hedge funds provide liquidity for creditors unwilling to wait
for the completion of the Chapter 11 process.
American Airlines emerged from Chapter 11 bankruptcy protection on December 9, 2013, merging with
U.S. Airways as the cornerstone of its reorganization plan approved by the bankruptcy court judge. Chapter
11 of the U.S. Bankruptcy Code gives debtors protection from creditors until the court can decide if the
debtor can be reorganized into a viable business or if it must be liquidated. The judge approved the plan
immediately following American’s resolution of a lawsuit filed by the U.S. Justice Department which
argued the combination would result in higher consumer airline fares.
The strategy of entering Chapter 11 only to exit by merging with another airline has been used several
times before by airlines attempting to escape the debilitating effects of high fuel costs, strained labor
relations, and bone-crushing debt. The tactic generally is used as a means of lightening a firm’s debt load
and to renegotiate better terms with unions, suppliers, and lessors.
While United and Delta went through bankruptcies and mergers in the last decade, American has been
steadily losing ground while racking up losses totaled more than $12 billion since 2001. It was the last
major airline to seek court protection to reorganize its business, filing for bankruptcy in November 2011.
The wave of big mergers in the industry has created healthier and more profitable airlines that are now
better able to invest in new planes and products, including Wi-Fi, individual entertainment screens, and
more comfortable seats for business passengers. American’s board and senior management increasingly
saw it as a way to become competitive.
Tom Horton, CEO of American Airlines parent AMR Corp., had spent months trying to convince the
Justice Department the merger would help customers and boost competition by creating a more effective
competitor to larger United and Delta airlines. While in Chapter 11, American had cut labor costs,
renegotiated aircraft and other leases and earned $220 million in the second quarter of 2013, its first profit
in that quarter in 6 years. It also was proposing to lease hundreds of new planes, when it emerged from
Chapter 11.
U.S. Airways’ CEO Doug Parker expected the deal would get done by the end of 2013, once
American’s creditors agreed to the Chapter 11 bankruptcy reorganization plan. U.S. Airways shareholders
voted overwhelmingly in favor of the merger; European Union regulators had also approved the deal.
However, the Justice Department lawsuit threatened to derail the entire transaction when it was filed just 2
days before a U.S. bankruptcy court was scheduled to review and approve the merger plan.
11. Union leadership lauded Parker as a savior and was publicly cheering for the merger.
By February 2013, the 10-month-long duel between Parker and Horton ended in an agreement to
combine the two airlines. The combined airlines would have total revenues of $39 billion annually and a
market value of $11 billion. Parker was to become the CEO with Horton serving as Chairman for no more
than 12 months.
Parker often is described as flamboyant, charismatic, and the consummate dealmaker. At age 39, he
headed America West and later bought U.S. Airways out of bankruptcy in 2005. In 2006, Parker tried to
merge with Delta while it was in bankruptcy protection. Delta rallied workers and creditors against the
hostile bid. Creditors rejected his bid in early 2007. A year later, Delta bought Northwest. In 2007, he failed
to acquire Delta while it was in Chapter 11 when the unions opposed the deal and Delta chose Northwest
instead.
Parker engineered an audacious merger of America West and the larger U.S. Airways in 2005 and then
spent the next 7 years looking for another target. First, Delta rebuffed him and later United twice rejected
his overtures. He then went after American, the only remaining big airline. Parker had clearly learned that
to win American he would have to get labor’s backing. He approached American differently by initially
lining up early support from American’s labor unions, and he courted creditors from the outset.
In contrast, Horton is often described as unflappable and a believer in detailed planning. Horton saw
bankruptcy as American’s salvation. By 2011, the firm had fallen behind United and Delta. In November
2011, the board agreed to put the firm into Chapter 11 and named Horton the CEO, moving aside the then
CEO Gerard Arpey, who resisted efforts to enter bankruptcy as too disruptive to the firm.
Horton knew that since the firm’s creditors effectively owned American he had to get their support. Two
creditor groups were crucial: the court-appointed Unsecured Creditors Committee (UCR), a combination of
representatives from American’s unions, trade creditors, and trustees, and a second group made up chiefly
of hedge funds (dubbed the “ad hocs”) that had acquired American’s unsecured bonds for pennies on the
dollar around the time of bankruptcy. Nothing could pass the UCC without two-thirds approval of the
bondholders.
Horton also pressured the unions to accept concessions and threatened that American would leave
Chapter 11 without labor contracts leaving the destiny of labor unclear. The unions eventually agreed, but
only with the caveat that the new firm would have a new board and management, a direct slap at Horton. A
month later, U.S. Airways increased its initial offer from owning 50.1% of the firm to one in which
American’s shareholders would own 70% of the new firm. Both creditors’ groups backed the deal. Horton
continued to negotiate aggressively eventually improving American’s ownership stake in the new firm to
72%.
The $16 billion all-stock deal gives creditors of AMR control of the combined firm due to an agreement
to exchange creditors’ debt for equity in the new firm. U.S. Airways stockholders received one share of
common stock in the combined airline for each U.S. Airways share they owned, giving them a 28% share
of the equity of the new firm. The remaining 72% of the shares were issued to American shareholders,
creditors, labor unions, and employees.
Blockbuster Acquired by Dish Network in a Section 363 Sale
______________________________________________________________________________________
Key Points
Section 363 auctions are an increasingly common means of preserving asset value when failing firms are
hemorrhaging cash flow.
Such sales allow buyers to purchase assets at potentially bargain prices.
While not without risk, 363 sales are often viewed as a more efficient way to exit bankruptcy than via a
more conventional reorganization plan.
______________________________________________________________________________
Despite facing challenges reminiscent of a Hollywood movie thriller, Blockbuster, the movie rental giant,
went from a mundane prepackaged bankruptcy agreement to acknowledging its own insolvency to facing
the real possibility of liquidation in the span of six months. What follows is a discussion of the sometimes-
unpredictable twists and turns of a highly contentious Section 363 bankruptcy filing.
Blockbuster had been in a downward spiral years before approaching its creditors for a negotiated
reduction in its debt burden in mid-2010. The ability to download movies via the Internet had come to
dominate the video rental business, thanks largely to DVD rental provider Netflix Inc. and video-on-
demand services from cable providers. Blockbuster was forced to file for bankruptcy for its North
American operations on September 23, 2010, with 5,600 stores, including 3,300 in the United States. The
fate of 29,000 employees and hundreds of creditors hung in the balance.
Prior to the firm’s petition for protection under Chapter 11 of the U.S. Bankruptcy Code, Blockbuster
had reached an agreement with its major creditors on a so-called prepackaged reorganization plan that
would have left the firm with $400 million in new senior debt as it emerged from bankruptcy as an ongoing
business. This amounted to about 27% of its outstanding prepetition debt of $1.46 billion.
The circumstances changed unexpectedly when famed billionaire investor Charles Icahn bought 31% of
the firm’s existing senior notes in late September, making him a major creditor and a key participant on the
creditor committee in the subsequent negotiations. Icahn and Blockbuster had had a tumultuous history
together. He had purchased shares in Blockbuster in 2004. The next year, following a bitter proxy battle, he
won three seats on the firm’s board of directors. Eventually, Icahn was able to oust then–board Chairman
John Antioco. In 2010, due to increasing demands on his time, Icahn stepped down from the board and sold
his shares in Blockbuster.
By buying such a large percentage of the outstanding debt, Icahn, as a major creditor, was able to submit
his own plan for revamping Blockbuster. His proposal was to eliminate Blockbuster’s debt when it
emerged from bankruptcy, and it represented a radically different approach from the prepackaged plan that
Blockbuster had negotiated with other creditors. His proposal involved swapping senior secured notes for
equity in a recapitalized company, with the senior subordinated note holders, preferred, and common
shareholders completely wiped out. Unsecured shareholders were to receive warrants to buy up to 3% of
the new firm’s equity. Financing to meet the firm’s immediate cash flow needs would come from a $375
million debtor-in-possession (DIP) loan from a group of the senior note holders. Such lenders’ credit claims
are given a much higher payment priority than those of other creditors in the event of the firm’s liquidation
and, as such, are often viewed as relatively low risk.
Having missed several performance milestones in the prepackaged (but never filed) reorganization plan,
Blockbuster was in default on its DIP loan, even though it had never utilized any of the funds. By
defaulting, the firm violated a covenant that allowed senior note holders to include $125 million of their
securities as part of the DIP loan. This action gave them the same high-priority position as that afforded a
DIP lender.
Blockbuster feared that it would be liquidated if it were acquired by Icahn, and it accelerated efforts to
conduct a 363(k) auction for selling the firm’s assets in the hope it could emerge from bankruptcy as a
going concern. On February 21, 2011, Blockbuster filed a motion with the U.S. Bankruptcy Court seeking
authorization to conduct an auction for selling the company’s assets, which would be conducted under the
Court’s supervision and in accordance with Section 363 of the U.S. Bankruptcy Code. Following approval
by the Court, Blockbuster initiated the bidding process. The auction allowed for a 30-day period during
which potential bidders could perform due diligence. At the end of this period, interested parties would
have one week to submit bids, with the winning bid to be announced shortly following the close of the
auction.
On April 5, five different bidding groups submitted bids. The financial buyers included the consortium
led by Icahn (which included liquidator Great American Group); a group led by Monarch Investors; and a
group consisting of liquidators Gordon Brothers and Hilco Merchant Resources. Hedge funds and investor
groups specializing in restructuring and liquidation often buy distressed debt at a deep discount, acquire the
failing firm’s assets through a credit bid (i.e., exchanging what they are owed for the firm’s assets), and
liquidate the assets at a price in excess of what they paid for the debt. The other bidders included South
Korea’s SK Telecom Co. and satellite television provider Dish Network. Both were interested in
Blockbuster because of potential synergy with their current operations.
Icahn’s, Monarch’s, and the Gordon Brothers’ strategies appeared to be similar: Close the Blockbuster
stores, liquidate the inventories, and sell the digital download business. In contrast, SK Telecom and Dish
offered the prospect of Blockbuster’s emerging from bankruptcy as a reorganized but going concern. Dish
believed the chain’s brand could be valuable for its video-on-demand services. Dish also saw an
opportunity to sell subscriptions through Blockbuster’s stores and believed the Blockbuster buyout could
give it some leverage in negotiating future business with movie studios.
Dish submitted the winning bid of $320 million. Of that figure, $125 million was to repay the senior
notes that had been “rolled up” into the DIP loan, with 75% of the rest of the proceeds paid to note holders
and 25% to the holders of administrative claims. Senior note holders were expected to receive about 26%
of their claims and unsecured lenders about 19% of their claims, with preferred and common shareholders
receiving nothing. Dish assumed $11.5 million in debt to the movie studios. The bankruptcy judge
overruled 111 objections from landlords, business partners, and other creditors about the amounts
Blockbuster proposed to pay them under contracts on which it had defaulted.
Discussion Questions
1. What are the primary objectives of the bankruptcy process?
2. What types of businesses are most appropriate for Chapter 11 reorganization, Chapter 7 liquidation, or
a Section 363 sale?
3. The Blockbuster case study illustrates the options available to the creditors and owners of a failing
firm. How do you believe creditors and owners might choose among the range of available options?
Explain your answer.
4. Financial buyers such as hedge funds clearly are motivated by the potential profit they can make by
buying distressed debt. Their actions may have both a positive and a negative impact on parties to the
bankruptcy process. Identify how parties to a bankruptcy may be helped or hurt by the actions of the
hedge funds.
5. Do you believe that a strategic bidder like Dish Network has an inherent advantage over a financial
bidder in a 363 auction? Explain your answer.
6. Speculate as to why Blockbuster filed a motion with the Court to initiate a Section 363 auction rather
than to continue to negotiate a reorganization plan with its creditors to exit Chapter 11.
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The Deal from Hell: The Tribune Company Emerges from Chapter 11
___________________________________________________________
Key Points
Tribune Company’s LBO failed because it was structured without any margin for error.
Large secured creditors failing to recover what they are owed often exchange their debt for equity in the
restructured company.
The extreme length of time in Chapter 11 reflected the absence of prenegotiation with creditors due to the
firm’s rapid entry into bankruptcy, the deal structure’s complexity, and fraud allegations.
______________________________________________________________________________________
Four years after its ill-fated leveraged buyout left the media firm with an unsustainably large debt load,
Tribune Company (Tribune) emerged from Chapter 11 bankruptcy on December 31, 2012. Founded in
1847, Tribune publishes some of the best-known newspapers in the United States, such as the Los Angeles
Times, the Baltimore Sun, and the Chicago Tribune. The firm also owns WGN in Chicago and 22 other
television stations as well as the WGN radio station. Over the years the firm has spent hundreds of millions
of dollars in an attempt to become a diversified media company.
The bankruptcy court judge approved a reorganization plan that left the firm in the hands of a new
ownership group consisting largely of former creditors and hedge funds that had acquired some of the
firm’s outstanding debt. The largest owners included Oaktree Capital Management, JPMorgan Chase, and
Angelo, Gordon & Co., a firm that specializes in investing in distressed companies. Senior lenders now
own 91% of the firm’s shares in exchange for forgiving their credit claims. This group held most of
Tribune’s senior debt and worked with the company and the committee representing unsecured creditors to
create a reorganization plan acceptable to the bankruptcy court judge. Court documents indicated that the
restructured firm was valued at about 40% of its $8.2 billion valuation when it was taken private in 2007.
The firm’s broadcast business had an estimated value of $2.85 billion, and its publishing businesses were
valued at $623 million, bringing the firm’s total value to $3.47 billion.
To understand these allegations it is necessary to recognize the extent of the financial engineering
underlying this transaction. The deal was predicated on achieving the highest leverage possible and quickly
paying down the debt through asset sales and expected tax savings. However, the timing of the transaction
could not have been worse, closing at a time when newspapers nationwide were beset by declines in their
subscriber base and advertising revenue.
Despite these considerations, Tribune seemed ripe for a takeover, with its share price having lagged well
behind that of other media companies. This also was one of the most active periods in decades for LBO
transactions. With interest rates at near-record lows, prices paid for LBO targets soared. While the firm’s
cash flows from newspapers were declining, operating cash flow from its other media operations had been
relatively stable in recent years. With profit margins on loans squeezed, lenders were trying to offset
declining interest earnings by generating additional fee income that would result from originating loans and
later selling them to other investors.
On April 2, 2007, Tribune announced that the firm’s publicly traded shares would be acquired in a
transaction valued at $8.2 billion. The deal was implemented in a two-stage transaction in which Sam Zell
acquired a controlling 51% interest in the first stage, followed by a backend merger in the second stage in
which the remaining outstanding Tribune shares were acquired. In the first stage, Tribune initiated a cash
tender offer for 51% of total shares for $34 per share, totaling $4.2 billion. The tender was financed using
$250 million of the $315 million provided by Sam Zell in the form of subordinated debt plus additional
borrowing to cover the balance. Stage 2 was triggered when the deal received regulatory approval. During
this stage, an employee stock ownership plan (ESOP) bought the rest of the shares at $34 a share (totaling
about $4 billion), with Zell providing the remaining $65 million of his pledge. Over time, the ESOP would
hold all of the remaining stock. Furthermore, Tribune was converted from a C corporation to a subchapter S
corporation, allowing the firm to avoid corporate income taxes, except on gains resulting from the sale of
assets held less than 10 years after the conversion from a C to an S corporation.
At the closing in late December 2007, Sam Zell described the takeover of the Tribune Company as “the
transaction from hell.” His comments were prescient, in that what had appeared to be a cleverly crafted deal
from a tax standpoint was unable to withstand the credit malaise of 2008. The end came swiftly when the
161-year-old Tribune filed for bankruptcy on December 8, 2008, to conserve its rapidly dwindling cash
flow.
Those benefiting from the deal included the Tribune’s public shareholders, such as the Chandler family,
which owed 12% of the Tribune as a result of its prior sale of the Times Mirror to Tribune, and Dennis
Fitzsimons, the firm’s former CEO, who received $17.7 million in severance and $23.8 million for his
holdings of Tribune shares. Citigroup and Merrill Lynch received $35.8 million and $37 million,
respectively, in advisory fees. Morgan Stanley received $7.5 million for writing a fairness opinion letter.
Finally, Valuation Research Corporation received $1 million for an opinion indicating that Tribune could
satisfy its loan covenants.
What appeared to be one of the most complex deals of 2007, designed to reap huge tax advantages and
to use as much debt as possible, soon became a victim of the downward-spiraling economy, the credit
crunch, and its own leverage. Ironically, those who constructed what appeared on paper to be a very shrewd
deal had failed to include in their planning the potential for a slowing economy, let alone one of the worst
recessions in U.S. history. For this highly leveraged deal to have worked, everything would have had to go
according to plan, a plan that did not seem to include any contingencies.
Discussion Questions
1. What are the primary objectives of the bankruptcy process?
2. What types of businesses are most appropriate for Chapter 11 reorganization, Chapter 7
liquidation, or a Section 363 sale?
3. The Blockbuster case study illustrates options available to the creditors and owners of a failing
firm. How do you believe creditors and owners might choose from among the range of available
options?
4. Financial buyers clearly are motivated by the potential profit they can make by buying distressed
debt. Their actions may have both a positive and negative impact on parties to the bankruptcy
process. Identify how parties to a bankruptcy may be helped or hurt by the actions of the hedge
funds.
5. Do you believe that a strategic bidder has an inherent advantage over a financial bidder in a 363
auction? Explain your answer.
6. Speculate as to why Blockbuster filed a motion with the Court to initiate a Section 363 auction
rather than to continue to negotiate a reorganization plan with its creditors to exit Chapter 11.
Photography Icon Kodak Declares Bankruptcy, A Victim of Creative Destruction
Key Points
Having invented the digital camera, Kodak knew that the longevity of its traditional film business was
problematic.
Concerned about protecting its core film business, Kodak was unable to reposition itself fast enough to
stave off failure.
Chapter 11 reorganization offers an opportunity to emerge as a viable business, save jobs, minimize
creditor losses, and limit the impact on communities.
_____________________________________________________________________________
Economic historian Joseph Schumpeter described the free market process by which new technologies and
deregulation create new industries, often at the expense of existing ones, as “creative destruction.” In the
short run, this process can have a highly disruptive impact on current employees whose skills are made
obsolete, investors and business owners whose businesses are no longer competitive, and communities that
are ravaged by increasing unemployment and diminished tax revenues. However, in the long run, the
process tends to raise living standards by boosting worker productivity and increasing real income and
leisure time, stimulating innovation, expanding the range of products and services offered, often at a lower
price, to consumers, and to increase tax revenues. Kodak is a recent illustration of this process.
Founded in 1880 by George Eastman, Kodak became the latest giant to fall in the face of advancing
technology, announcing that it had filed for the protection of the bankruptcy court early in 2012. Kodak had
established the market for camera film and then dominated the marketplace before suffering a series of
setbacks over the last 40 years. First foreign competitors, most notably Fujifilm of Japan, undercut Kodak’s
film prices. Then the increased popularity of digital photography eroded demand for traditional film,
eventually causing the firm to cease investment in its traditional film product in 2003. Although it had
invented the digital camera, Kodak had failed to develop it further, announcing on February 12, 2012, that
it would discontinue its production of such cameras. Kodak’s failure to move aggressively into the digital
world may have reflected its concern about cannibalizing its core film business. This concern may have
ultimately destined the firm for failure.
Kodak closed 13 manufacturing plants and 130 processing labs and had reduced its workforce to 17,000
in 2011 from 63,000 in 2003. In recent years, the firm has undertaken a two-pronged strategy: expanding
into the inkjet printer market and initiating patent lawsuits to generate royalty payments from firms
allegedly violating Kodak digital patents. Kodak technologies are found in virtually all modern digital
cameras, smartphones, and tablet computers. Kodak had raised $3 billion between 2003 and 2010 by
reaching settlements with alleged patent infringement companies. But the revenue from litigation dried up
in 2011.
Kodak also announced that it had obtained a $950 million loan from Citibank to keep operating during
the bankruptcy process. Moreover, the firm filed new patent infringement suits in March 2012 against a
number of competitors, including Fujifilm, Research in Motion (RIM), and Apple, in order to increase the
value of its patent portfolios. However, a court ruled in mid-2012 that neither Apple nor RIM had infringed
on Kodak patents. In early 2013, Kodak announced that it would put additional assets up for sale (including
its camera film business and heavy-duty commercial scanners and software businesses) since the sale of its
remaining digital imaging patents raised only $525 million, much less than the nearly $2 billion the firm
had expected. The sale of these businesses would cement Kodak’s departure from its roots. In late
September 2012, Kodak announced that it would suspend the production and sale of consumer inkjet
printers. Kodak also received permission from the bankruptcy court judge to terminate the payment of
retiree medical, dental, and life insurance benefits for 56,000 retirees at the end of 2012.
Kodak has to demonstrate viability to emerge from Chapter 11 as a reorganized firm or be acquired by
another firm. The firm has pinned its remaining hopes for survival on selling commercial printing
equipment and services, a business that generated about $2 billion in revenue in 2012 but that may lack the
scale to sustain profitability. If it cannot demonstrate viability, Kodak will face liquidation. In either case,
the outcome is a sad ending to a photography icon.
Discussion Questions
1. To what extent do you believe the factors contributing to Tribune’s bankruptcy were beyond the
control of management? To what extent do you believe past mismanagement may have
contributed to the bankruptcy?
2. Comment on the fairness of the bankruptcy process to shareholders, lenders, employees,
communities, government, etc. Be specific.
3. Describe the firm’s strategy to finance the transaction?
4. Comment on the fairness of this transaction to the various stakeholders involved. How
would you apportion the responsibility for the eventual bankruptcy of Tribune among
Sam Zell and his advisors, the Tribune board, and the largely unforeseen collapse of the
credit markets in late 2008? Be specific.
5. Why do the bankruptcy courts allow investors such as hedge funds to buy deeply discounted debt
from creditors and later exchange such debt at face value for equity in the newly restructured firm?
Delta Airlines Rises from the Ashes
Key Points:
• Once in Chapter 11, a firm may be able to negotiate significant contract concessions with unions
as well as its creditors.
• A restructured firm emerging from Chapter 11 often is a much smaller but more efficient
operation than prior to its entry into bankruptcy.
______________________________________________________________________________________
On April 30, 2007, Delta Airlines emerged from bankruptcy leaner but still an independent carrier after a
19-month reorganization during which it successfully fought off a $10 billion hostile takeover attempt by
US Airways. The challenge facing Delta's management was to convince creditors that it would become
more valuable as an independent carrier than it would be as part of US Airways.
Ravaged by escalating jet fuel prices and intensified competition from low-fare, low-cost carriers, Delta
had lost $6.1 billion since the September 11, 2001, terrorist attack on the World Trade Center. The final
crisis occurred in early August 2005 when the bank that was processing the airline's Visa and MasterCard
ticket purchases started holding back money until passengers had completed their trips as protection in case
of a bankruptcy filing. The bank was concerned that it would have to refund the passengers' ticket prices if
the airline curtailed flights and the bank had to be reimbursed by the airline. This move by the bank cost the
airline $650 million, further straining the carrier's already limited cash reserves. Delta's creditors were
becoming increasingly concerned about the airline's ability to meet its financial obligations. Running out of
cash and unable to borrow to satisfy current working capital requirements, the airline felt compelled to seek
the protection of the bankruptcy court in late August 2005.
Delta's decision to declare bankruptcy occurred about the same time as a similar decision by Northwest
Airlines. United Airlines and US Airways were already in bankruptcy. United had been in bankruptcy
almost three years at the time Delta entered Chapter 11, and US Airways had been in bankruptcy court
twice since the 9/11 terrorist attacks shook the airline industry. At the time Delta declared bankruptcy,
about one-half of the domestic carrier capacity was operating under bankruptcy court oversight.
The overhaul of Delta, the nation's third largest airline, left it a much smaller carrier than the one that
sought protection of the bankruptcy court. Delta shed about one jet in six used by its mainline operations at
the time of the bankruptcy filing, and it cut more than 20 percent of the 60,000 employees it had just prior
to entering Chapter 11. Delta's domestic carrying capacity fell by about 10 percent since it petitioned for
Chapter 11 reorganization, allowing it to fill about 84 percent of its seats on U.S. routes. This compared to
only 72 percent when it filed for bankruptcy. The much higher utilization of its planes boosted revenue per
mile flown by 15 percent since it entered bankruptcy, enabling the airline to better cover its fixed expenses.
Delta also sold one of its "feeder" airlines, Atlantic Southeast Airlines, for $425 million.
Delta would have $2.5 billion in exit financing to fund operations and a cost structure of about $3 billion
a year less than when it went into bankruptcy. The purpose of the exit financing facility is to repay the
company's $2.1 billion debtor-in-possession credit facilities provided by GE Capital and American Express,
make other payments required on exiting bankruptcy, and increase its liquidity position. With ten financial
institutions providing the loans, the exit facility consisted of a $1.6 billion first-lien revolving credit line,
secured by virtually all of the airline's unencumbered assets, and a $900 million second-lien term loan.
Discussion Questions:
1. To what extent do you believe the factors contributing to the airline’s bankruptcy were beyond the
control of management? To what extent do you believe past airline mismanagement may have
contributed to the bankruptcy?
2. Comment on the fairness of the bankruptcy process to shareholders, lenders, employees,
communities, government, etc. Be specific.
