AMR/American Airlines

american-airlineThe Challenge
Four pension plans covered over 100,000 participants with an estimated funding deficiency of over $10 billion.  If those plans were to terminate, the insurance program would be faced with a huge administrative challenge and a severe blow to its balance sheet.  AMR’s lead bankruptcy counsel publicly announced that they intended to terminate the pensions immediately, putting PBGC on the alert.  Each labor group was in contentious contract negotiations with the plan sponsor, further complicating the situation. There was also an opportunity for the plan sponsor to incentivize the unions to agree to plan termination in order to reduce the unavoidable cuts to compensation and jobs facing these groups.  Sophisticated bond holders also understood that, while terminating the plans would increase the claim pool, the resulting business would no longer have those liabilities on the balance sheet. 

The Strategy
Kelly led PBGC’s assembled team, which included outside counsel, investment bankers, and Mo Garfinkle as the industry expert.  A strategy was quickly developed to address all of the competing concerns.  Kelly and the team delivered a consistent message to all stakeholders and professionals that the PBGC would fight any attempt to terminate the pension plans, regardless of what the unions might do in contract negotiations.  Creditors were quickly educated about the size of the potential claims by PBGC and how these claims would affect control of the situation.  They were also warned that these claims would have a dilutive effect on the recovery rate.  The team worked closely with the pilots union to identify a resolution to a unique issue related to lump sum payments.  It also worked closely with the Treasury Department to develop a resolution to resolve the problem so that the pilot plan did not have to terminate and to ensure that similarly situated plans in the future had a path to resolve their issues.

Kelly and Garfinkle led an intensive effort to build alliances with and between a variety of creditors and other stakeholders and supported the unions in their negotiations and litigation efforts to preserve the pension plans in the contracts. They educated all constituents on the current state of the airline industry and the company’s relative place in the industry and the advantages and disadvantages of a merger with another airline, either while AMR was in bankruptcy or post-emergence.

The Advocacy
Aside from sharing his in-depth knowledge of the state of the airline industry, Garfinkle brought the perspective of someone who had worked on all of the airline mergers in the U.S. in the last decade.  Kelly and Garfinkle led scores of meetings with advisers, committees, unions, indenture trustees, and individual creditors explaining why the plan sponsor did not meet the standard to terminate the pension plans and the company’s standing in the industry – both the advantages and disadvantages it faced.

Kelly and Garfinkle also leveraged the unique resource PBGC had with its industry expert to explain to all parties the impact on American Airlines and the industry of the proposed merger with another airline. 

The Results
AMR/American Airlines is poised to emerge from bankruptcy with all four of its pension plans still maintained by the company and the three union plans still required to be maintained as part of the union contracts.  The company is on track to merge and form the largest airline in the world.  It is positioned to be competitive with the largest U.S. and global airlines, all the while providing creditors potentially 100 cents on the dollar and AMR shareholders guaranteed value for their equity. By any standard, this is an extraordinary outcome in bankruptcy.

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