Yes, Mr. Anderson, Chapter 11 is a ‘government subsidy’


And no, 9/11 didn't cause US airlines to enter Chapter 11.

Delta Air Lines CEO Richard Anderson is getting knocked around for his controversial statement on CNN regarding United Arab Emirates airlines, 9/11 and government subsidies. Delta has issued an apology for part of his statement, but doubled down on the less controversial portion of Anderson’s remarks. Actually, the focus on the first part of Anderson’s statement lets him off the hook for making two dubious claims in the second part of his comments.

A lot is being said about the first part of his statement, but I’d like to focus on the second part. First, via the CNN transcript, below is the full statement by Anderson. I’ve added emphasis to the claims I want to address. The context here is Anderson being asked by CNN’s Richard Quest to respond to the argument made by UAE carriers Emirates Airline and Etihad Airways that Delta and other major US airlines like American and United “in your own ways have your hand in the bailout trough” through Chapter 11 bankruptcy restructuring.

Anderson’s response: “That is categorically false. And it’s a great irony to have the United Arab Emirates from the Arabian Peninsula talk about that, given the fact that our industry was really shocked by the terrorism of 9/11, which came from terrorists from the Arabian Peninsula, that caused us to go through a massive restructuring. And in the United States, our restructuring process is transparent and there is no government subsidy. And in fact, there were billions of dollars of equity and unsecured debt that were wiped out through that process.”

The whole reason Anderson brings up 9/11 is that 9/11 “caused us to go through a massive restructuring.” To call this oversimplified, revisionist history would be kind. Yes, 9/11 was a terrible blow for US airlines and carriers did get direct bailout money from the US government to compensate for the post-9/11 airspace closure. But the US airline industry was already headed for a financial disaster before 9/11 because of long-term structural problems and misguided practices imbedded in US airlines’ business models.

And no one has been more vocal about this than Richard Anderson. To say that the tragic events of September 11, 2001 caused Delta to enter bankruptcy protection four years later and American to enter the Chapter 11 process 10 years later is highly misleading. Anderson has been lauded for clearly talking about the profound mistakes US airline management made in the past—blindly chasing market share at the expense of profitability, placing imprudent orders for expensive aircraft, planning for best-case rather than worst-case scenarios, etc.—and the industry’s need to avoid repeating those mistakes. Delta, Northwest, United, Continental, US Airways and American all would have very likely been forced to restructure through Chapter 11, 9/11 or no 9/11, and Anderson knows this.

That brings me to the Chapter 11 process itself. After American became the last of the US major international airlines to enter Chapter 11 in November 2011, I argued that US airlines had secured a “backdoor bailout” via the bankruptcy protection process. As I wrote then:

“The industry has achieved via the courts what it could never have through lobbying the US Congress: a huge bailout. While Congress did provide US carriers with financial assistance in the immediate aftermath of 9/11 (which could be sold in part as compensation for the government temporarily shutting down US airspace), an airline industry bailout would have surely been a complete non-starter on Capitol Hill if proposed at any time over the last 10 years.

“US airlines’ foreign competitors have often grumbled that the Chapter 11 process serves the same purpose as a bailout, practically speaking, and it’s hard to argue otherwise … Filing for Chapter 11 allows US airlines to shed many [cost] burdens and receive heavy labor concessions, long-term structural savings that likely benefit carriers more than a direct government bailout would. Instead of Congress passing a politically unpopular ‘Airline Bailout Act’ in which billions of dollars are handed to the industry, airlines one by one have used US bankruptcy laws to, in essence, receive a backdoor bailout.”

Chapter 11 bankruptcy protection is not generally viewed in the US as a company getting “government assistance.” I’ve long wondered why this is—part of it, I suppose, is ignorance of bankruptcy laws, part of it is people seeing the US judiciary as less of a “government” apparatus than Congress or the executive branch, and part of it is how smooth and noncontroversial the process often is. Anderson’s assertion that “there is no government subsidy” in Chapter 11 plays into widely-held American perceptions about the Chapter 11 process, but the argument sounds quite foolish outside the US.

This is what Chapter 11 is: A company (such as Delta) goes to a government institution (a federal court) and is protected by that court, acting under bankruptcy laws written by Congress, from the marketplace. While the company is shielded from having to pay debts and other money owed for a considerable amount of time (often 1-2 years), it is able to significantly remake its long-term cost structure, including renegotiating labor contracts under court supervision. And all while continuing to operate and generate revenue.

I’m not arguing for or against Chapter 11, but pointing out that by any reasonable definition it is a government bailout, or subsidy, or whatever term you want to use for getting substantial financial assistance from the government. The fact that the process is “transparent” and overseen by a judge doesn’t make it less so.

Anderson is too smart, and has taken Delta too far, to engage in such facile arguments.

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