Flight delays: How the law kept the airline industry afloat during the pandemic
When the pandemic hit last year, it wasn’t just lawyers who stopped flying in friendly skies. As global travel came to a halt, the airline industry faced an existential threat like never before.
With airports abandoned by all but a few travelers, airlines around the world have turned to their lawyers to help them navigate safely. And by orchestrating a series of restructurings and debt financing and guaranteeing loans from a federal bailout, their lawyers have kept their promises.
“The airline industry as a whole was in extreme distress, with almost all of its cash flow lost at that time,” said Lisa Schweitzer, who guided LATAM Airlines, the largest Latin American airline, through voluntary restructuring and reorganization last spring, with compatriot Cleary Gottlieb Steen & Hamilton, Rich Cooper, partner.
After considering the possibility of an out-of-court restructuring, Schweitzer and Cooper determined the best way forward for an airline with routes around the world and a diverse set of debt and contractual obligations would be a deposit at the Chapter 11 in the United States. The lawyers were challenged to make the filing quickly, before the airline’s cash and liquidity situation deteriorated further, as well as to have the debtor-in-operator financing announced at the same time. to make sure the process would be seen by customers. , suppliers and other stakeholders as preserving the value of LATAM.
Choosing Chapter 11 allowed the company to continue operating and take advantage of automatic suspension to renegotiate contracts, restructure its fleet and secure more than $ 2 billion in DIP funding. Cooper says that subsequent Chapter 11 filings by Aeromexico and Avianca both borrowed heavily from the structure the Cleary team created for LATAM. He notes that the donor community reacted differently than it would have done if just one airline was in trouble last year.
And LATAM was far from alone. In July, Kirkland & Ellis partners Sophia Hudson and Michelle Kilkenney advised United Airlines on $ 6.8 billion in financing that included $ 3.8 billion in bonds and $ 3 billion in term loans guaranteed by the airline’s MileagePlus loyalty program as part of a unique structure that has allowed it to retain full ownership. and operational control of the program.
A few months later, Ben Barkley of Kilpatrick Townsend & Stockton orchestrated a $ 9 billion debt financing for Delta Air Lines that was, at the time, the largest ever for an airline. (In March, American Airlines overtook it with a $ 10 billion fundraiser.) Like the deal with United, Delta’s funding was secured through its own SkyMiles loyalty program.
Recognizing the desperate position the airlines found themselves in, Congress set aside $ 25 billion for a secured loan program for airlines as part of the coronavirus relief bill last March. Hughes Hubbard & Reed partners Mark Denham and Emilio Saiz have helped United get nearly $ 7.5 billion in loans from that pool.
These are just a few of the many lawyers who have struck deals to help preserve the airline industry over the past year. As Schweitzer notes, “there will be winners and losers in the airline industry, as in any struggling industry,” but those who have taken proactive steps to weather the downturn, like LATAM, can expect to come out strong from each other. side.
Cooper points out that the job is not done, and for many airlines, debt funded in response to the pandemic could weigh heavily if demand takes a long time to return to 2019 levels.
“What you are going to see is for those who have not submitted a file [for bankruptcy]- and most of them didn’t – they got a lot of support from governments, which is obviously very helpful, but they also took on a lot of debt, ”Cooper said. “The good news for most airlines is that this is pretty cheap debt.”