The Impact of Airline Bankruptcies on Airports
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May 2009 AIRPORT COOPEratiVE RESEARCH PROGRAM Sponsored by the Federal Aviation Administration Subject Areas: IC Transportation Law; V Aviation Responsible Senior Program Officer: Gwen Chisholm Smith Legal Research Digest 6 THE IMPACT OF AIRLINE BANKRUPTCIES ON AIRPORTS This report was prepared under ACRP Project 11-01, “Legal Aspects of Airport Programs,” for which the Transportation Research Board (TRB) is the agency coordinating the research. The report was prepared by Jocelyn K. Waite, Waite & Associates. James B. McDaniel, TRB Counsel for Legal Research Projects, was the principal investigator and content editor. Background There are over 4,000 airports in the country and bankruptcies at an alarming rate. In 2005 alone, most of these airports are owned by governments. there were at least seven airline bankruptcies. Ma- A 2003 survey conducted by Airports Council Inter- jor network carriers began reducing operating costs national–North America concluded that city owner- and restructuring operations by cutting back on seat ship accounts for 38 percent, followed by regional capacity, reducing or withdrawing service or service airports at 25 percent, single county at 17 percent, frequency, and, in some markets, replacing large air- and multi-jurisdictional at 9 percent. Primary legal craft with smaller aircraft. services to these airports are, in most cases, provid- Bankruptcies not only impact the debtor-bank- ed by municipal, county, and state attorneys. rupt party, but they may significantly impact airports CONTENTS Reports and summaries produced by the Airport when affected airlines are dependent upon the bank- I. Introduction 3 Continuing Legal Studies Project and published as rupt airlines for a significant revenue flow. Accord- A. Scope of the Report 3 ACRP Legal Research Digests are developed to as- ingly, a significant number of airports, particularly B. Overview of Airport sist these attorneys seeking to deal with the myriad those served by major network carriers, faced cru- Financial Issues 4 of legal problems encountered during airport devel- cial financial challenges during these proceedings. II. Legal Issues 12 opment and operations. Such substantive areas as As with any legal proceeding, numerous issues A. Bankruptcy Theory 12 eminent domain, environmental concerns, leasing, were raised by these bankruptcies—questions for B. Statutes/Regulations 13 contracting, security, insurance, civil rights, and tort which the answers could greatly impact airport rev- C. Bankruptcy Process 26 liability present cutting-edge legal issues where re- enues. Such issues include: prepetition and postpe- D. Cases 27 search is useful and indeed needed. Airport legal tition amounts owed by airlines for terminal rental III. Treatment of Airport research, when conducted through the TRB’s legal fees, landing fees, fees for the rental of other airport Claims 40 studies process, either collects primary data that usu- facilities, and other amounts owed to airports by A. Under the ally are not available elsewhere or performs analysis airlines; passenger facility charges, including issues Bankruptcy Code 40 of existing literature. raised by Federal Aviation Administration regula- B. Under 49 tions created and/or proposed to protect passenger U.S.C. § 40117/FAA Regulations 45 Applications facility charge revenues; and the debtor’s acceptance IV. Conclusions 46 The basic theory of a succession of the United or rejection of leases for real property and improve- A. Summary of States Bankruptcy Acts has been to provide debtors ments at airports. Legal Issues 46 protection from their creditors while providing an This digest should provide a better understanding B. Mitigating Losses 49 orderly system for paying all creditors. Bankruptcy of the bankruptcy process. It should be helpful to C. Sounds Good, was considered so essential that it was entrusted to airport managers, attorneys, planners, aircraft own- But… 51 Congress under Article One of the Constitution of ers, financial officials, and the aviation community Appendix A 53 the United States. in general. Appendix B 55 Following the September 11, 2001 (9/11) attacks Appendix C 59 on the World Trade Center, U.S. airlines have filed TRANSPORTATION RESEARCH BOARD OF THE NATIONAL ACADEMIES 3 THE IMPACT OF AIRLINE BANKRUPTCIES ON AIRPORTS By Jocelyn K. Waite Waite & Associates, Reno, Nevada I. INTRODUCTION • Discusses bankruptcy theory. • Provides an overview of the most salient provisions of the Bankruptcy Code and relevant federal aviation A. Scope of the Report requirements. Given the importance of airline revenue to airport • Discusses the bankruptcy process. operations and the prevalence of airline bankruptcies, • Reviews bankruptcy cases on several topics most lawyers representing airports should be cognizant of relevant to airport concerns. bankruptcy issues so that they can anticipate issues • Examines the treatment of airport claims under when negotiating agreements with airlines before the Bankruptcy Code and under federal aviation re- bankruptcies occur, and take appropriate steps in the quirements. event of airline bankruptcies, including consulting with and adequately monitoring bankruptcy counsel. After reviewing applicable legal authority, the report Airline bankruptcies not only pose significant finan- concludes by: cial hardship on airports dependent on airlines for revenue, but also raise significant legal issues concern- • Reviewing the major legal issues at play under the ing treatment of airlines’ obligations to airports under Bankruptcy Code and under federal law and regulation the bankruptcy process. The objective of this report is to that should be of greatest concern to airport counsel. examine those legal issues presented by the filing of • Offering some points for airports to consider in or- airline bankruptcies that are relevant to airports, and der to mitigate losses due to airline bankruptcy, both to explore how airport lawyers and courts have re- before and after airlines file for bankruptcy protection. sponded to those issues. The report is intended to pro- • Sounding a cautionary note about steps that ap- vide a solid understanding of the basics of bankruptcy pear helpful, but in fact may not be. theory and law relevant to airport operating agree- ments with airlines, and to identify issues such as lease The report primarily addresses federal business recharacterization and payment of stub period rent1 bankruptcy cases, although it does identify issues on that particularly affect airports dealing with airlines in which state law will govern. The analytical emphasis is bankruptcy. Such an understanding should assist air- on airline bankruptcy cases, although nonairline cases port lawyers in conducting research on bankruptcy- are also referenced. The intent is to provide a starting related issues in their own jurisdictions, in negotiating point for airport lawyers to conduct research on the law agreements that include appropriate protections of the in their specific jurisdictions in evaluating airline airport’s interests in the event of airline bankruptcy, agreements and other issues; further research is advis- and in mitigating damages to the airport’s financial able. In fact, given the complexity of bankruptcy law, interests in the event of bankruptcy under existing as airport lawyers are likely to be working with bank- well as future agreements. ruptcy counsel, and the report may be particularly use- The balance of the Introduction provides an overview ful to airport counsel in that regard. of airport financial issues, including the precarious na- The report is meant to provide an overview of bank- ture of airline finances, the importance of airlines to ruptcy basics. Readers in need of specific details of airport financing, and the Federal Aviation Administra- bankruptcy procedure should consult practice guides2 tion (FAA) study on the Impact of Air Carriers Emerg- 2 ing from Bankruptcy on Hub Airports, Airport Systems, See, e.g., PAMELA EVERETT NOLLKAMPER, BANKRUPTCY and U.S. Capital Markets. The main body of the report: COURTS AND PROCEDURES (2005) (Procedural information on Chapter 7, Chapter 11, creditors’ proceedings, adversary pro- ceedings, appeals, and U.S. Bankruptcy Courts); THOMAS J. SALERNO & JORDAN A. KROOP, BANKRUPTCY LITIGATION AND PRACTICE: A PRACTITIONER’S GUIDE (4th edition 2007). (Over- 1 Stub period rent is the rent owed for the “stub period,” view of U.S. bankruptcy law—including suggested resources, that is “the period from the bankruptcy filing date to the end of bankruptcy court system, Chapter 7, and Chapter 11; Appendi- the first month of bankruptcy administration.” In re UAL ces include forms and samples of pleadings and related docu- Corp., 291 B.R. 121, 122 (Bankr. N. D. Ill. 2003). Discussed in ments); D.M. LYNN, MICHAEL R. ROCHELLE & SANDER L. § II.D.4, Stub Period Rent, infra. ESSERMAN, HANDBOOK FOR DEBTORS IN POSSESSION (2007) , 4 and bankruptcy counsel. Rejection of collective bargain- More specifically, for example, the recent bankrupt- ing agreements, while important to airlines in bank- cies of Aloha Airlines, Skybus Airlines, and ATA Air- ruptcy,3 is also beyond the scope of this report. lines may cost Oakland International Airport over $2 It is beyond the scope of the report to render legal million in annual revenue, due to loss of gate leases and opinions or recommend specific approaches to negotiat- landing fees.5 ing operating agreements with airlines. However, the While airports draw to varying degrees on nonairline