Is bankruptcy a bad thing?

[I_moved]

I remeber hearing somewere that bankruptcy can be a bad thing since, the gov. will bring the airline who files for it out of bankruptcy, whereas airlines who arn't in bankruptcy, such as Continental and JetBlue, now have more comepetition since the bankrupt airline is now even for example.

Airline Alpha is bankcrupt $3,000,000 and airline Bravo is making money and has $2,000,000. So when airline Alpha files for bankruptcy the gov puts them back at $0 (correct me if I am wrong, I am only assuming). This in return makes airline Bravo only have a $2,000,000,000 advantage on airline Alpha from having a $5,000,000.

 

[WAFlyBoy]

Bankruptcy (especially corporate cases) can be very complicated. There are several "types" of bankruptcy. Delta and NWA recently filed Chapter 11 bankruptcy, which means that they get temporary relief of debt payments and are allowed to continue operations. The purpose of this is to allow the airline management and councel to work with the company's creditors and create a repayment plan that is amicable to both parties.

If the parties cannot agree to a restructure plan, several things can happen, including the creditors forcing the airline into a liquidation of assets. (Basically what happened to Pan Am in 1991)

Bankruptcy itself does not create a more favorable financial position for a company. However, it affords the company an opportunity to restructure their debt payments in a way that increases the probability of continuing operations in the long run.

So, to answer your question quite plainly: the answer is no, the government does not "wipe out" a bankrupt airline's debt. If it were that easy, nobody would be willing to make loans to airlines (or any other business for that matter).

 

[flyover]

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since, the gov. will bring the airline who files for it out of bankruptcy,

[/ QUOTE ]

Not sure how "the gov." brings anyone out of bankruptcy. The filing is under federal codes. "The gov." is one of the creditors. But it's basically the creditors and a judge who determine if an airline makes it out. Of course the company needs to make it's case by showing it can be viable. Something UAL is having problems doing 3 years in.

But your original point is right on. Bankruptcy codes and courts are keeping dead companies alive, thereby damaging companies who could be quite viable if some competition would simply leave the market. It could drag Continental and AMR into Chapter 11.