BA unhappy about Open Skies/Ch 11 not a subsidy
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BA unhappy about Open Skies/Ch 11 not a subsidy
From:
http://enplaned.********.com/2005/11...t-subsidy.html
Chapter 11 is Not a Government Subsidy
British Airways (BA) has finally come out swinging against the tentative US-European Union open skies agreement. That's not much of surprise since there's little for BA to like about it (see prior post for why).
But here's the annoying last line of the Dow Jones version of the story:
BA long has been critical of the U.S. government's policy of letting carriers in financial difficulty file for 'protective bankruptcy' under federal law, which they claim is an unfair subsidy that is undermining the 'real' aviation market.
Chapter 11 ("protective bankruptcy") is not a government subsidy. That's easy to see, because there's no government money involved. Look all you want, you won't find government money pumped into companies in Chapter 11. There's also no differential treatment of creditors according to nationality. Lenders who happen to be US are treated the same as lenders who happen to be non-US.
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http://enplaned.********.com/2005/11...t-subsidy.html
Chapter 11 is Not a Government Subsidy
British Airways (BA) has finally come out swinging against the tentative US-European Union open skies agreement. That's not much of surprise since there's little for BA to like about it (see prior post for why).
But here's the annoying last line of the Dow Jones version of the story:
BA long has been critical of the U.S. government's policy of letting carriers in financial difficulty file for 'protective bankruptcy' under federal law, which they claim is an unfair subsidy that is undermining the 'real' aviation market.
Chapter 11 ("protective bankruptcy") is not a government subsidy. That's easy to see, because there's no government money involved. Look all you want, you won't find government money pumped into companies in Chapter 11. There's also no differential treatment of creditors according to nationality. Lenders who happen to be US are treated the same as lenders who happen to be non-US.
...
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hmm I think there is no appropriate word to use for a protective regime that is only avaliable to US based airlines. Thus the word "subsidy" while not strictly correct is the most understood alternative.
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During the period leading up to the privatisation of BA in the mid-80s, BA got bucketloads of government money to aid in the restructuring. Even now Alitalia needs government loans. If BA did go through a serious crisis now, would it raise restructuring money privately? Would UK Government guarantee loans raised privately?
No, chapter 11 "bankrupty protection" could not technically be considered a "subsidy" like gauranteed low interest loans or disbursement of government funds. It is no big shock that certain parties might broaden the definition of the word a bit if it tends to support their argument. Perhaps it would be more accurate to say that chapter 11 staus may provide certain competitive advantages to participants by helping them lower their cost structure. This may be done by re-structuring their debt in a way that is advantagious to the company.
Trouble is, the creditors and employees may be forced by court decree to accept less than contracted for or wait longer to be paid what was agreed to. Tremendous leverage for the company because of the bargaining position it puts them in. Just as an example, the United bankruptcy court ruling that allowed them to dump their pension fund obligations means that other companies who choose to meet their obligations may be at a competitive disadvantage because of higher costs. So the court has by their action endorsed an ethical standard for business practices that
cannot escape the notice of that company's competitors. How must they react to a playing field that is no longer level? If BA must compete against companies who enjoy this kind of "help", What will they have to do to lower their costs and remain competitive?
So while Ch 11 is not a subsidy per se, it has a similar effect upon the competitive environment in that some players are given an advantage by the government while others (the ones who pay their bills) are not. On the other hand, protectionism takes many forms. It might be argued that BA enjoy the benefit of that now and hope that a little rhetoric might help maintain status quo a while longer. I do not have enough information yet to say with any certainty which forms of protection are more destructive. As ever, I suppose that one's opinion will be based upon how it affects oneself. I, for one, am sorry to see the goal of airline industry reduced to the lowest (cost) common denominator. But the people have spoken and I hope they appreciate the results.
Best regards,
Westhawk
Trouble is, the creditors and employees may be forced by court decree to accept less than contracted for or wait longer to be paid what was agreed to. Tremendous leverage for the company because of the bargaining position it puts them in. Just as an example, the United bankruptcy court ruling that allowed them to dump their pension fund obligations means that other companies who choose to meet their obligations may be at a competitive disadvantage because of higher costs. So the court has by their action endorsed an ethical standard for business practices that
cannot escape the notice of that company's competitors. How must they react to a playing field that is no longer level? If BA must compete against companies who enjoy this kind of "help", What will they have to do to lower their costs and remain competitive?
So while Ch 11 is not a subsidy per se, it has a similar effect upon the competitive environment in that some players are given an advantage by the government while others (the ones who pay their bills) are not. On the other hand, protectionism takes many forms. It might be argued that BA enjoy the benefit of that now and hope that a little rhetoric might help maintain status quo a while longer. I do not have enough information yet to say with any certainty which forms of protection are more destructive. As ever, I suppose that one's opinion will be based upon how it affects oneself. I, for one, am sorry to see the goal of airline industry reduced to the lowest (cost) common denominator. But the people have spoken and I hope they appreciate the results.
Best regards,
Westhawk
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Thanks to Westhawk for his lucid explanation of Chapter 11 of the bankrupty code and its effects on the competitive environment.
It's tempting for some to believe that Chapter 11 is some piece of American trickery invented to protect their national carriers.
I think it's important to point out that Chapter 11 is used by many kinds of companies to prevent a needless winding-up of a business that, given time, could be recovered.
The equivalent in the UK is Administration. An important difference is that Chapter 11 leaves the management in place whereas an Adminstrator may know little or nothing about the business he has to run. The result is that a company that is put into Administration seldom survives the experience, usually having its assets sold quickly to get what can be got for the creditors and, er, to pay the Administration costs.
Regards to all
DerekL
It's tempting for some to believe that Chapter 11 is some piece of American trickery invented to protect their national carriers.
I think it's important to point out that Chapter 11 is used by many kinds of companies to prevent a needless winding-up of a business that, given time, could be recovered.
The equivalent in the UK is Administration. An important difference is that Chapter 11 leaves the management in place whereas an Adminstrator may know little or nothing about the business he has to run. The result is that a company that is put into Administration seldom survives the experience, usually having its assets sold quickly to get what can be got for the creditors and, er, to pay the Administration costs.
Regards to all
DerekL
Controversial, moi?
Prior to privatisation BA was owned by the government so obviously it had cash injections to help sort itself out for privatisation before it could be sold off.
Would it get government help now? Can you imagine the fuss if it even contemplated trying? It would not happen whether asked for or not.
Whichever way it is looked at Chapter 11 is a way of allowing a company to continue trading artificially. Remind me how long United has been in Chapter 11 and how many of the US airlines are operating under its protection?
Not to mention the government money injected since 11/9.
I wouldn't mind quite so much if BA, Virgin and numerous other airlines weren't having to compete in the same market, i.e. trans-atlantic routes, against such blatantly unfair, subsidised competition.
I have no desire to wish the demise of any company on its employees with all the angst and distress that goes with it but market forces can only be bucked for so long and the demise of a large US carrier is as eventually as inevitable as it is overdue.
Is that the same management that created the mess in the first place?
Would it get government help now? Can you imagine the fuss if it even contemplated trying? It would not happen whether asked for or not.
Whichever way it is looked at Chapter 11 is a way of allowing a company to continue trading artificially. Remind me how long United has been in Chapter 11 and how many of the US airlines are operating under its protection?
Not to mention the government money injected since 11/9.
I wouldn't mind quite so much if BA, Virgin and numerous other airlines weren't having to compete in the same market, i.e. trans-atlantic routes, against such blatantly unfair, subsidised competition.
I have no desire to wish the demise of any company on its employees with all the angst and distress that goes with it but market forces can only be bucked for so long and the demise of a large US carrier is as eventually as inevitable as it is overdue.
An important difference is that Chapter 11 leaves the management in place
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Whilst I tend to agree with the BA point of view - I do not agree with the situation wrt to Chapter 11 and the US seemingly wanting Open Skies on their terms.
Yes. BA had subsidies in the early 80s but the playing field has changed somewhat.
We (the UK) seem to abide by the EU rules on subsidies, wheras some of the European carriers clearly do not - Alitalia being a prime example, Air France is highly suspect too.
I don't really see how we can criticise the US in this so called 'one Europe' when we as Europe do not have our own house in order.
The US have always been outstanding in protecting their own markets be it by having different mobile 'phone frequency ranges, to Chapter 11 rules.
If we specifically talk about BA then there is the whole issue of access to LHR and Grandfather rights - now how fair is that ?
Yes. BA had subsidies in the early 80s but the playing field has changed somewhat.
We (the UK) seem to abide by the EU rules on subsidies, wheras some of the European carriers clearly do not - Alitalia being a prime example, Air France is highly suspect too.
I don't really see how we can criticise the US in this so called 'one Europe' when we as Europe do not have our own house in order.
The US have always been outstanding in protecting their own markets be it by having different mobile 'phone frequency ranges, to Chapter 11 rules.
If we specifically talk about BA then there is the whole issue of access to LHR and Grandfather rights - now how fair is that ?
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Hey, some balanced views for a change! I was afraid this was going to degenerate into another bash the USA thread.
Ch 11 laws have been amended after October of this year to prevent the type of Neverending Bankruptcy that we have seen with United. You will not see this drag out again.
Remember that any company that is not a viable concern will be liquidated by the creditors - Chapter 7. Ch 11 is only used if you can convince the creditors (and the judge) that you have a viable business plan somewhere in there. When you look at the losses incurred by United you also have to look at the costs of the bankruptcy itself - lawyers fees alone are over hundreds of millions of dollars. If GECAS (and the other lessors) wanted United (or US Air) gone then they would have forced a CH 7 liquidation. The lessors are forced to take back some aircraft but at least in the case of Us Air, those jets were redeployed to other carriers most likely at a higher lease rate.
As for BA's whining about unfair cost advantages tell me which airline is the first to dump transatlantic fares each fall? Not an American carrier - they need the international yields to come up, not go down. BA are just posturing just as Branson is with his call for cabotage in the USA. Opening our markets to European airlines would be stupid. We would never gain the benefits of doing so back. Just what we need here in America, more 3rd world workers taking jobs away. Its bad enough that my computer tech support is in India, I don't want my job outsourced overseas as well.
Ch 11 laws have been amended after October of this year to prevent the type of Neverending Bankruptcy that we have seen with United. You will not see this drag out again.
Remember that any company that is not a viable concern will be liquidated by the creditors - Chapter 7. Ch 11 is only used if you can convince the creditors (and the judge) that you have a viable business plan somewhere in there. When you look at the losses incurred by United you also have to look at the costs of the bankruptcy itself - lawyers fees alone are over hundreds of millions of dollars. If GECAS (and the other lessors) wanted United (or US Air) gone then they would have forced a CH 7 liquidation. The lessors are forced to take back some aircraft but at least in the case of Us Air, those jets were redeployed to other carriers most likely at a higher lease rate.
As for BA's whining about unfair cost advantages tell me which airline is the first to dump transatlantic fares each fall? Not an American carrier - they need the international yields to come up, not go down. BA are just posturing just as Branson is with his call for cabotage in the USA. Opening our markets to European airlines would be stupid. We would never gain the benefits of doing so back. Just what we need here in America, more 3rd world workers taking jobs away. Its bad enough that my computer tech support is in India, I don't want my job outsourced overseas as well.
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In this part of the world, the New Zealand Government did take back Air NZ after some disasterous mistakes. If BA did make disasterous mistakes - the equivalent mistake to AirNZ's would be if BA bought a large US carrier, and then found that its new investment was costing its own core money. ( For the last few months of Ansett's existance, AirNZ was paying the Ansett payroll)
If BA management did disasterous things, could the rest of the British airline industry have covered what BA does if BA is not around? Could Virgin takeover 50 BA 744s and operate all the long range services?
The Canadian airline industry nearly had to ask itself the same question.
If BA management did disasterous things, could the rest of the British airline industry have covered what BA does if BA is not around? Could Virgin takeover 50 BA 744s and operate all the long range services?
The Canadian airline industry nearly had to ask itself the same question.
What's the difference between Chapter 11 and the UK "Administration"? My meagre understanding suggests that they both allow a company to "reorganise" their finances while continuing to do business. So, why is it that Chapter 11 is so much of a "big bad" when Administration doesn't seem to be?
And, while I'm on the subject, what regimes do other countries have?
And, while I'm on the subject, what regimes do other countries have?
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As derekl said in the UK the Administrator takes over the running of the company, in the US the same guys who got the business in so much trouble get to continue running the business. One of the problems with the system in the UK is that some companies (more specically their board members) are reluctant to to go into administation as they lose their jobs.
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If the Yanks want equal treatment, let them have it. However, the US must allow 5th freedon rights and foreign ownership and voting rights commensurate with shareholding. If this not possible then "Open Skies" are not possible either. I'm always wary of American business dealing with foreigners - we used to have a pretty good aerospace industry (amongst other industries) until our "Friends" helped us out.
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Ch 11 Bankrupt airlines applying to the ATSB for loans sounds like "subsidy" to me?
To be fair, federal cash injections have often been accompanied by private equity investment (Is this a pre-requisite? Certainly, UA got knocked back by the ATSB and told to approach the private sector debt/equity markets...) but nevertheless significant amounts of cash have found their way from Government accounts to airline accounts.
To be fair, federal cash injections have often been accompanied by private equity investment (Is this a pre-requisite? Certainly, UA got knocked back by the ATSB and told to approach the private sector debt/equity markets...) but nevertheless significant amounts of cash have found their way from Government accounts to airline accounts.
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I believe one year United posted a loss of nearly US$900 million
How much longer can they drag this out?
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UAL Corp entered Chapter 11 and promptly offloaded USD9,000,000,000 of pension underfunding to the US Pension Guarantee Fund, a US government agency tasked with picking up the pension tab from other US companies in similar trouble. Call it subsidy or whatever you like, but it certainly is far from a level playing field.
The real issue at stake in the current US EU Open Skies 1st round is majority non US ownership of US airlines. The Europeans argue that if this were allowed there would be such an influx of foreign capital to US airlines that Chapter 11 would not be required.
The US have allowed 25% max with control of commercial aspects only - safety, security, and availability to the US military in time of war have to remain in the hands of US citizens.
This is a US window dressing exercise and does nothing significant to encourage influx of foreign capital to US carriers.
The Heathrow card has been played too early by the EU and the US have offered little in return in the ownership arena.
The chances of all 25 EU member states accepting this deal is slim. We will know for sure by the end of March 2006.
The real issue at stake in the current US EU Open Skies 1st round is majority non US ownership of US airlines. The Europeans argue that if this were allowed there would be such an influx of foreign capital to US airlines that Chapter 11 would not be required.
The US have allowed 25% max with control of commercial aspects only - safety, security, and availability to the US military in time of war have to remain in the hands of US citizens.
This is a US window dressing exercise and does nothing significant to encourage influx of foreign capital to US carriers.
The Heathrow card has been played too early by the EU and the US have offered little in return in the ownership arena.
The chances of all 25 EU member states accepting this deal is slim. We will know for sure by the end of March 2006.
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"There is no way the Govt. would jump in to help BA now if they found themselves in trouble. Not directly anyway."
Blair tried all he could to encourage investment in Rover. British Airways is an institution and I have no doubt (with the help of the bloody unions!) that the government would do all they could to rescue the airline should if face a crisis.......
UAL Corp entered Chapter 11 and promptly offloaded USD9,000,000,000 of pension underfunding to the US Pension Guarantee Fund, a US government agency tasked with picking up the pension tab from other US companies in similar trouble
Which then translates to something considerably less for the beneficiaries due to the US Pension Guarantee Fund's cap.......
Which then translates to something considerably less for the beneficiaries due to the US Pension Guarantee Fund's cap.......
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agreed -from the point of view of the retired pilots this is a dismal prospect and my heart goes out...but that's not really the subject of this thread.
If BA was in the same financial position as these Chapter 11 airlines it would have been removed from the marketplace.
Strange that US companies are delighted to receive tax breaks, government research funding, training grants and enormous defence contracts -but mention the word "subsidy" and we're awash with denial.
If BA was in the same financial position as these Chapter 11 airlines it would have been removed from the marketplace.
Strange that US companies are delighted to receive tax breaks, government research funding, training grants and enormous defence contracts -but mention the word "subsidy" and we're awash with denial.