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Undoing Chapter 11: learning from the United Airlines deal; Gaining consensus for the deal to restructure United Airlines was not easy, with sacrifices from all its constituencies. With the airline finally pursuing its new path, the lead attorney and two partners who crafted the deal share some lessons learned.

When the Air Transportation Stabilization Board (ATSB) rejected United Airlines Inc.'s request for $1.8 billion in loan guarantees in 2002, the company sought protection from debtors by filing for Chapter 11. In doing so, it became the 11th U.S. airline bankruptcy since the industry was deregulated in 1978. The second largest U.S. airline, United was the largest airline in U.S. history to invoke Chapter 11. It had 85,000 employees worldwide and served more than 120 cities. Its 2004 revenues were $16.39 billion.

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At the time of its bankruptcy, the airline was losing more than $7 million a day and faced nearly $1 billion in deferred debt obligations.

On filing for bankruptcy Dec. 9, 2002, Chairman and CEO Glenn Tilton said, "We took the right decision to do today what is right for the company now," and said that it would emerge a different company.

On Feb. 1, 2006, after more than three years in Chapter 11, a deal was sealed, and United emerged from Chapter 11. Its restructuring was comprehensive, but focused on fixing cost and operational rigidities: aircraft debt, lease and municipal bond obligations, labor costs and collectively-bargained constraints on flexibility, retiree medical costs and pensions.

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Like air travel itself, sometimes United's case was extraordinarily smooth, and other times it was turbulent. Even though the story is still being written, most will agree that the restructuring successfully positioned the company to compete for the long term in the new--and constantly changing--industry paradigm. Even just a few months since its emergence, United's case offers the following lessons about restructuring.

Bankruptcy is merely a process, not a panacea.

Some think that bankruptcy is a solution to a company's problems. But bankruptcy is merely a forum for a troubled company to engage in collective negotiations (and potentially litigation) in a court-supervised process. Although the Chapter 11 process brings clarity, urgency and a focal point to a restructuring, it is up to the company and its stakeholders--not the court--to implement that restructuring in an organized and strategic manner.

For example, using the tools of the U.S. Bankruptcy Code, United was able to restructure certain of its labor costs in 2003, accomplishing in the first few months of its case what would have taken years of labor negotiations outside of bankruptcy. But this result would have been impossible without the hard work and sacrifices of many stakeholders. So bankruptcy is a construct, but not a substitute, for the hard work of restructuring.

Now, bankruptcy is not a free lunch. A Chapter 11 debtor lives in a fishbowl, subjecting itself and its operations to incredible levels of scrutiny. If the company is not diligently restructuring, other stakeholders may try to take control of the process. And although the bankruptcy process forces everyone to sit at one bargaining table, a "one-table" negotiation has its own unique dynamics.

Articulate your semi-immutable restructuring vision, and develop flexible strategies and tactics around that vision.

If a company files for bankruptcy, and management says "what's next?" the company is in trouble. The most important piece of any restructuring is the company's vision for its post-reorganization future. In other words, what kind of company does it want to become, and how does the company define "success" for itself?

This "vision" should be relatively immutable (subject to mid-course adjustment, naturally), developed well before the start of a restructuring and should guide the rest of the reorganization. Everything else is implementation.

United's vision was to become more than just a successful airline; it was setting the bar higher to become a successful company positioned to compete for the long term. That meant fixing its balance sheet, rationalizing its fleet, transforming its legacy costs and energizing its employees to deliver the United brand and product to its customers. From the first day of its case, United articulated its vision and a roadmap for restructuring. At the same time, United developed flexible strategies and tactics to implement its relatively constant vision. The vision helped the company discipline itself through a long restructuring. And although the vision is vital, don't forget the execution on the nuts and bolts.

Preparation is key.

Given the fact that a restructuring often involves "bet-the-company" type issues, it is critical that the company must be more prepared than anyone else. You can't always control who is smartest, or who has the best legal or financial leverage, but you always can control who is the most prepared. And, certain bankruptcy deadlines dictate an intense level of preparation.

For example, within the first 60 days of the case, United had to decide whether it wanted to keep or return each plane in its fleet (or negotiate for an extension). United also had to propose a plan of reorganization within the first six months of its case. Even though it received multiple extensions, these were granted only because United convinced the bankruptcy court that progress was being made to justify the extensions.

Moreover, preparing for the worst outcome often results in the best outcome. If the person sitting across the negotiating table knows that you are fully prepared and willing to commence hotly-contested litigation, that person will be more likely to reach a consensual resolution, thereby avoiding the very litigation that neither side wants. And don't confuse willingness to litigate with a desire to litigate.

Embrace the chaos, and you'll discover it's not so chaotic.

The restructuring process is its own unique world, and can be messy and uncertain, particularly with issues of the bet-the-company variety. But don't run from the chaos; embrace it and make it work for you. If you try to button everything up neat and clean, and get 100 percent clarity on every issue, you are likely to become paralyzed and make little progress.

For example, in a bankruptcy there are often negotiated settlements containing what appears to be dangerously ambiguous language. Why, then, did the parties sign on to these deals? Because they knew that if they bargained for absolute clarity to protect against the small chance of a dispute, they would never reach a deal.

Admittedly, ambiguities sometimes result in their own disputes. But more times than not, the desire for an overall deal should trump the need for absolute certainty.

Embracing the chaos will help you understand the need for flexibility. Understand that as much as you can try to predict the course of a restructuring, there are necessarily going to be bumps and unforeseen events down the road. Thus, you must be flexible to change as events change, and try to leave yourself as many outs and options as you can--this is know as "optionality."

Restructuring is a marathon, not a sprint.

It is often said that a large corporate restructuring, whether in or outside of bankruptcy, consists of thousands of smaller negotiations that lead to one big negotiated settlement among all stakeholders. Understand that the restructuring process is a long road, and you are in it for the long haul. So take it in stages, and recognize that you are not going to get everything you want (otherwise, it wasn't really a negotiation).

Also remember that negotiations are never really over, even after the handshake. There will always be implementation and follow-up issues that require the parties to work together. This is particularly true with key stakeholders and repeat players.

Your weakness is your strength.

In the restructuring world, a debtor's weakness creates the urgency that is the catalyst for the reorganization. Healthy companies have tough times asking creditors for debt forgiveness, but if a financially weak company tells its creditors that it will liquidate absent a restructuring, wiping out creditor recoveries, those creditors will pay attention if they are confident that management is competent, resolute and well advised. In a restructuring, therefore, it is important for the debtor to use its weakness to its advantage to obtain the relief it needs, but not to overplay its hand.

Leave no stone unturned, but don't overreach.

It is not often that a company goes into restructuring mode, so when it occurs, make sure that you comprehensively examine the organization and undertake a complete overhaul. This is the one time where you have the chance to fix the company, so fix it completely. And don't be afraid to go where few have gone before.

United sought to restructure debt that no one ever thought to restructure, including seeking to recharacterize its municipal bond debt. Moreover, United sought to restructure certain aircraft debt, and people wondered whether United had stumbled upon theories that no one had ever examined before. In the end, United stuck to its vision, and achieved results for the benefit of all stakeholders. But having said this, don't overreach. One can and should take principled positions without being frivolous.

Understand the people sitting on the other side of the table.

A reorganizing entity needs to understand that many of its stakeholders have their own stakeholders and internal politics as well. Understand your opponent's needs to "go through the motions" of a heated negotiation even though both parties know the outcome ahead of time. And understand how your opponent may need to sell the deal to others.

Credibility and respect are not just words.

In any restructuring, you are asking for compromise, often voluntary, for the good of the overall enterprise. It is critical that the company restructure in an honest, respectful and principled manner, and with humility. The reorganizing company must keep all stakeholders informed, even those who normally don't come to mind. People have long memories, so a slash-and-burn mentality may achieve short-term gains but is disastrous for the long term.

Finally, it is unrealistic that the company should or even needs to win every point; the other side will remember if you left it with some dignity.

Fight on substance, but establish a fair and organized process.

During a restructuring--whether the company is in or out of Chapter 11--it is critical that the company develop an organized process so that stakeholders can focus on substance. United's restructuring was known as an organized, inclusive process, with no administrative snafus. This allowed all stakeholders to focus on the restructuring rather than on process. The lesson is simple: you can fight tooth and nail on substance, but go easy on process.

James H.M. Sprayregen (jsprayregen@kirkland.com) is the global head of restructuring for law firm Kirkland & Ellis LLP in Chicago. He represented United Airlines in its restructuring, together with his partners Marc Kieselstein (mkieselstein@kirkland.com) and David Seligman (dseligman@kirkland.com).

RELATED ARTICLE: takeaways

* When United Airlines, the second largest U.S. airline, invoked Chapter 11 in 2002, it was the largest carrier in U.S. history to do so.

* Bankruptcy is a not solution, but rather a forum for a troubled company to engage in collective negotiations (and potential litigation) in a court-supervised process.

* United's deal focused on fixing cost and operational rigidities: aircraft debt, lease and municipal bond obligations, labor costs and collectively-bargained constraints on flexibility, retiree medical costs and pensions.

* One thing to remember in a restructuring is that negotiations are never really over, even after the handshake.
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Title Annotation:Restructuring of United Airlines
Author:Seligman, David R.
Publication:Financial Executive
Geographic Code:1USA
Date:Jun 1, 2006
Words:1860
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