The Bankruptcy Side of the Equation

Implications: Increased pressure to improve Delta's stand-alone plan.

Creditors likely to weigh how much better they will be treated under the US Airways bid.

Fireworks before 2/15/07 deadline.

Analysis: US Airways' bid for Delta certainly has an obstacle course full of hurdles. Hurdles include a lack of support from Delta's existing management, a lack of support from Delta's workers worried about being laid off by a merged airline, and antitrust concerns. However, in the first instance, the US Airways bid will be evaluated by Delta's various creditor groups which will want to compare how they would be treated under a still as yet to be filed Delta stand-alone plan of reorganization versus a plan of reorganization that might be built around the US Airways bid. The sheer numbers, $8 Billion, suggests that creditor groups likely to do better with the US Airways bid.  Since creditors vote on a plan of reorganization by class and many classes are not likely controlled by employees or vendors continuing to do business with Delta, the highest and quickest return is likely to be the most significant metric that will guide creditor voting.  The US Airways $8 Million bid will likely increase the pressure on Delta to enhance the recoveries it had been planning to offer its creditor constituencies in its stand-alone plan and will also make it more likely that the Bankruptcy Court will not grant Delta a further extension of the exclusive period to propose its plan that currently expires on 2/15/07.

Bankruptcy is an attractive forum in which to play this game out since the tools available to a bankruptcy airline include the ability to reject executory contracts and to restructure certain financial obligations. Instead of shedding contracts after a merger in the dollar for dollar world in which most companies fly, the US Airways merger would allow the combined firm to first shed those of Delta's contracts not necessary for the combined operation with the claims of the other party to that contract able to file a claim in the bankruptcy case on which it receives whatever creditors are to be paid under the plan of reorganization. Furthermore, certain leases and employment agreements, if rejected, may have their claims capped by the Bankruptcy Code. And assets of Delta that would be duplicative and therefore unnecessary in a merged entity could be sold off in the 363 process available in bankruptcy.

It's hard to say whether the US Airways bid indicates that similar situations will emerge for other bankrupt airlines.  However, should US Airways succeed you can expect that others will look at the way that it was accomplished and try to emulate. You can also expect creditor groups in those other airline cases to seek out merger partners in response to management's stand-alone plan proposals.