Judge Indicates Likely Approval of American Airlines Bankruptcy Plan

A federal bankruptcy judge indicated on Thursday that while he is not ready to rule on American Airlines’ plan to emerge from bankruptcy protection and merge with US Airways that he was leaning toward approving the plan.

“My thought is that I’m not going to rule today,” noted Judge Sean Lane after an hour-long hearing today in New York.  “I will say I find the arguments in favor of confirmation to be fairly persuasive.  But I’d like to reflect on that and go back and read the transcripts.”

If Judge Lane decides to approve the plan, he could issue his decision at the next hearing scheduled for September 12 if not sooner.

American Airlines filed Chapter 11 bankruptcy in November 2011.  If Judge Lane rules in favor of American Airlines in the coming weeks, the airline still has to address the antitrust lawsuit filed earlier in August by the government.

What is the concern noted in the antitrust lawsuit?

In the antitrust lawsuit filed by the United States Department of Justice, six states, and the District of Columbia, the plaintiffs noted that if the merger between American Airlines and US Airways is allowed to proceed, there would be only four airlines handling more than 80 percent of flights in the United States.  In addition, the number of available flights between over 1,000 cities would not have sufficient competition.

The government’s concern is that the lack of competition would likely drive up prices of airline tickets across a significant number of routes in the United States.  Therefore, the merger would not be in the best interest of consumers if it is allowed to proceed.

Attorneys for American Airlines argued before Judge Lane that any ruling on the airlines’ restructuring plan could and should be evaluated independently from the antitrust issue raised by the government.  In addition, American Airlines’ creditors and shareholders had already approved the bankruptcy restructuring plan.  Apparently these arguments may be sufficient to convince Judge Lane to rule in the Airlines’ favor.

“We are pleased the judge found our arguments in favor of confirmation persuasive,” noted Mike Trevino, spokesperson for American Airlines.  “While we await the Court’s decision on our Plan of Reorganization, we are focused on the need for a mid-November trial and challenging the DOJ’s position so we can complete our planned merger with US Airways.”

But there are arguments against the restructure and merger as planned, the foremost of which may be the payout planned to American Airlines’ current CEO Tom Horton.  In the current plan, Horton would receive almost $20 million in the event the merger goes forward and he steps aside as CEO.

Attorneys for American Airlines noted that even if Judge Lane rejected the restructuring plan, it was unlikely that the airline would have to liquidate its assets.  But attorneys did express concern at the likely timing before any ruling related to the antitrust matter would be rendered.

When will the antitrust matter be resolved?

Despite American Airlines’ stated desire to begin addressing the antitrust matter in November, the Department of Justice has indicated they need until at least March 2014 before they are ready to bring the antitrust case to trial.  It is possible American Airlines can reach a settlement with the government before the case goes to trial.  However, attorneys for American Airlines and US Airways have indicated a delay until March will cost the airlines millions of dollars in lost expense savings and may make it impossible to move forward with the merger.

It is unclear what the terms of a settlement between the Department of Justice and American Airlines would involve.

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Mark has been a contributor to legal web sites related to bankruptcy, tax, and criminal law since 2011. He has an Accounting degree from Texas A&M University.