Why is International Airlines filing for Chapter 11 bankruptcy in the United States?

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Chapter 11 of the United States Bankruptcy Code, more commonly referred to as Chapter 11, grants a company time to restructure its debts. Finally, the company is offered a fresh start following the presentation of a compromise reorganization plan between the main stakeholders, including the debtor and the creditors.

A saving grace

From General Motors to K-Kmart, some of the biggest names in US business history have filed for Chapter 11 bankruptcy, helping them maintain a strong presence in today’s society. Therefore, it is no surprise that the country‘s airlines have also chosen to follow the same process to help them with their finances following the challenges in the industry.

Chapter 11 does not always end with a new lease of life. A prime example of this is when Pan American filed for Chapter 11 protection in early 1991 before going out of business at the end of the same year.

Yet over the years, the procedure has helped other incumbent carriers such as American Airlines and United Airlines to continue their dominance across the aviation spectrum. In recent years, Chapter 11 has helped people like Ravn Alaska bounce back and maintain essential services in the country.

Global Opportunities

What is more compelling is the fact that many international carriers have gone through Chapter 11 bankruptcy proceedings despite not being based in the United States. Aeromexico, Avianca and LATAM are three names that stand out when it comes to recent international carrier bankruptcy filings. These operators notably do not have their headquarters in the United States, but were eligible and chose to go through Chapter 11 filings.


LATAM Airlines Boeing 787-8 Dreamliner CC-BBF

With several branches, LATAM has managed to show promising signs of recovery following the long-term difficulties in some of its key markets. Photo: Vincenzo Pace | single flight

In total, a foreign operator only needs minimal ties with the United States to benefit from the advantages of the country’s bankruptcy code. In practice, even if an airline group has property in the United States, this may be chosen as the company’s main place of business or where its main assets are based.

With this trio of Latin American carriers operating at airports in the United States while holding cash and property in the country, they are Chapter 11 eligible. Like other international airlines, the three also serve many other countries across continents. Yet they chose the United States to file for restructuring. One of the main reasons is that the US code defines real estate ownership as involving assets wherever located in the world. Thus, the US court has jurisdiction over the airline’s assets worldwide, which simplifies the approach.


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Wider Benefits

This factor has a domino effect on the benefits to be gained from the procedure. With such a global presence, an international carrier can restructure smoothly without having to manage many potentially complex processes in the markets it serves.

A study conducted by the law firm Davis Polk actions:

“Chapter 11 provides international airlines with access to capital markets and restructuring tools not collectively offered in other jurisdictions. A U.S. bankruptcy proceeding offers international airlines the deepest and most sophisticated financing alternatives, an unprecedentedly far-reaching automatic stay, and a statutory framework that uniquely positions airlines to scale their fleets and their contractual obligations.


Daniel-Martinez-Garbuno-Avianca

Avianca emerged from Chapter 11 bankruptcy just before the start of the year. Photo: Daniel Martinez Garbuno | single flight

It’s not just Chapter 11 that has seen international operators make the most of US bankruptcy law. For example, in 2020, Virgin Atlantic filed for Chapter 15 protection as part of its private recapitalization plan.

The aeronautics industry is an extremely sensitive market, subject to many external factors such as the price of oil and aircraft immobilizations. So, following the wave of flight restrictions introduced after the rise of the pandemic, Chapter 11 is a valuable process to offer a robust restructuring solution to airlines.

What do you think of the Chapter 11 process? What do you think of the benefits of the procedure? Let us know what you think in the comments section.


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