The United Airlines Bankruptcy Plan

United Airlines will leave bankruptcy shortly with a new stock symbol UAUA, tens of thousands of fewer employees, about 100 fewer planes, lower pay for rank and file workers from pilots to flight attendants to ground crews (about 20% lower for most, with pilots taking a particularly hard hit) and no defined benefit pension plan. It will also charge more for many extra convenience services, will have a discount division out of Denver called TED, and will make greater use of regional jets.

United has not made a profit in 22 quarters (five and a half years) and does not even have an operating profit for its most recent quarter, although it is close. It also still has a cost structure higher than its discount airline competitors. Its plan for exiting bankruptcy assumed much lower fuel prices ($50 a barrel oil) than those that in fact face it right now ($68 a barrel).

I took a moment to look at who gets what now that it is all over in its reorganization plan, the official summary of which is here. It took their lawyers seventeen pages, but the gist takes far less effort:

Claims owed to airports and ground facilities during the bankruptcy will be paid inh full (DIP Facilities claims), as will all secured claims (i.e. those with collateral) and priority claims (e.g. certain claims for taxes and unpaid wages). All stock will be cancelled, with the stockholders taking nothing. Subordinated debt will get nothing (the "TOPrS" claims which get nothing are guarantees involving subordinated debt).

Most creditors will get a share of UAUA stock proportional to their claim, which United claims is worth 4%-8% of what they were owed. "Convenience class" unsecured claims (probably mostly smaller trade creditors) and certain retirees get cash rather than stock. Holders of municipal bonds related to the Chicago O'Hare Airport, and the Pension Benefit Guarantee Corporation get somewhat more favorable deals.

Who are the unsecured creditors? According to the consolidated list of the top twenty unsecured creditors filed when United originally filed for bankruptcy, about $3,342 million of the debt (92%) owed to the top twenty creditors was owed to bond holders, about $120 million (3%) was owed to "trade creditors" (i.e. firms providing goods and services to the company who bill United rather than insisting upon immediate cash payments), and $162 million (4%) involved some manner of claim with the Indiana Government.

Why do I mention this? I think that there is a good justification for providing a generalized priority for trade creditors (i.e. creditors who have in the recent past provided goods or services to the company payable shortly after the benefits are rendered), who are not in the business of lending money, generally provide credit for short time periods only, and have a time horizon considerably shorter than the duration of a long bankruptcy like this one (and whose cooperation is frequently necessary to any long term reorganzation) over long term bond creditors, who have generally carefully analyzed the long term prospects of the business, consciously decided to make a credit decision and usually have a longer term time horizon. Trade creditors also tend to be much more numerous than long term creditors, so a priority that could largely remove them from the bankruptcy process would also greatly reduce the adminstrative costs associated with the bankruptcy.

For example, if trade credit received a 100% priority (and I wouldn't actually propose a rule quite that generous), in this case, and the stock distributed now ends up being worth 6% of the claims in the aggregate, trade credit could be paid 100% on the dollar, and long term debt would get 3% instead of 6% of the amount owed to them.

In the eyes of the trade creditors, this is a huge difference and would greatly reduce the risk associated with extending short term credit to economically fragile entities (which might in turn make it easier for such entities to avoid bankruptcy in the first place), while for long term creditors, the difference would be a drop in the bucket difference in the economic decision to lend in the first place.