Possible US airport restructuring in the wake of Covid-19
The world has now spent nearly all of 2020 fighting the coronavirus pandemic. This crisis, along with its related stay-at-home orders and travel restrictions, has upended the previously strong travel industry. Air travel in particular has suffered immensely. At the peak of the shutdowns this spring, air passenger travel dropped nearly 100%. While there has been some improvement since then, full recovery is not expected for some time: United CEO Scott Kirby recently suggested that demand for business travel may not fully recover before August 2024.
This dramatic loss of air traffic, and the revenues that come with it, has a massive effect on the airline industry. Less attention has been paid to the impact it has on the financial strength of the U.S. governmental entities that own and operate airports. These entities are typically entirely reliant on terminal concession and parking revenues, airline gate rentals, and landing fees to maintain operations and pay debt service.
If traffic levels continue to reduce these revenues to a trickle, many airports may find themselves in an unsustainable financial position. While the Coronavirus Aid, Relief, and Economic Security Act, enacted by Congress on March 27, 2020, provided $10 billion for aid to airports, the CEO of the American Association of Airport Executives testified to Congress less than two months later that airports need additional federal assistance at least as large as that initial amount. No additional federal aid has since materialized and there is no clear path for it coming any time in the near future. It also is not clear whether the level of additional federal assistance will be sufficient to address the imbalance between projected traffic and consequent revenues and airport operating costs and debt liabilities.
Private corporations facing these situations, including many airlines, have often turned to Chapter 11 reorganization under the Federal Bankruptcy Code to restructure their future debt obligations and emerge from reorganization with a fresh start. A similar option is available for U.S. public entities under Chapter 9 of the Bankruptcy Code, but historically it has been little used. The circumstances now facing U.S. airports could change that.
While a decision to seek protection under Chapter 9 has historically come with significant stigma—no public official wants to be known as the one who presided over a bankrupt government entity—the current environment, with nationwide financial distress and a generally recognized lack of responsibility on the part of any local authority, makes such a filing more politically plausible. Additionally, bondholders for airport debt may be more willing to participate in a reorganization process because of their quite limited remedies in the event of a default. For instance, airport debt bondholders generally have no lien or ability to foreclose on airport properties and no right to take over airport operations or direct the sale or lease of assets. Further, airport authorities generally do not have the right to levy property, sales, or excise taxes that could provide additional streams of revenue to pay debt service.
Before filing under Chapter 9, an airport authority will likely consider alternatives, most likely refunding and restructuring outstanding debt and amending indenture covenants to provide additional financial flexibility. These alternatives, however, may or may not accomplish the desired results: Refunding and restructuring may not be able to achieve the required level of debt service savings, and indenture amendments may require difficult to achieve super-majority or unanimous consent.
Chapter 9 is available to any political subdivision or public agency or instrumentality of a state that has been authorized to file under relevant state law. If an airport authority is a separate agency, that agency itself could file for Chapter 9. If, however, the airport is operated directly by a city or county through an enterprise fund, the fund itself would not file but the city or county could do so with a reorganization plan that is limited to the adjustment of airport debt.
The airport authority must be “insolvent” within the meaning of the Bankruptcy Code to be eligible, meaning it is “unable to pay its debts as they become due.” Courts have interpreted this as a forward-looking test of cash flow, and recent case law has suggested that there is no set future time period that is required as long as the projections are credible.
If an airport authority meets these eligibility factors, a key benefit of Chapter 9 is that the authority will remain in total control of the process. The process is totally voluntary, so other stakeholders cannot force involuntary filings under Chapter 9. In other words, unlike chapter 11, where all “major actions” require court approval, there would be no control over airport operations by the bankruptcy court during Chapter 9 proceedings. Additionally, only the airport authority is allowed to present a plan of adjustment so it can never be forced to do anything to which it objects. For example, a plan of adjustment could also include the privatization of selected airport operations, such as terminals or parking, with proceeds used to reduce outstanding debt, or even the privatization of the entire airport under the FAA’s Airport Investment Partnership Program. But again, none of these quite significant actions can be imposed on the airport authority.
In the event the authority cannot obtain approval from all impaired creditor classes, the court can impose approval of a plan that is “fair and equitable” and “in the best interests of creditors.” This is a more favorable test than Chapter 11’s requirement that each class must get at least as much value as it would in liquidation.
Airport authorities could also consider a “pre-packaged” approach that has become common under Chapter 11, where all the necessary consents to approval—50% in number and two-thirds in principal amount of each impaired class of creditors—is obtained in advance of the filing. This reduces the time of the actual bankruptcy court process to a matter of just weeks, or even days, and again with no disruption of ongoing operations.
Airlines will naturally play a significant consultative role in any Chapter 9 proceeding for an airport authority. Airlines have a huge stake in the financial structure of airports, since it is their terminal rentals and landing fees, along with other expenditures by their passengers, that are the source of funding for operations and debt service. Additionally, airline consent may be necessary to revise or adopt a new use agreement, which would likely be a key element of any credible long range plan for a debtor airport authority.
While Chapter 9 has remained a little-used restructuring option for nearly 90 years, the depth of the crisis facing air travel—with no clear end in sight—may provide an opportunity for public officials to reconsider the benefits that it provides and allow their airports to emerge in a better position for their benefit and for the benefit of debtholders, airlines, and the traveling public.
