As Hawker Beechcraft headed to a 3 p.m. hearing May 4 in U.S. Bankruptcy Court, Southern District of New York, an attorney well-versed in aviation law and aviation bankruptcies said the company’s assurances of a trouble-free path ahead for owners, customers, vendors, and staff ring true.
Eric T. Smith, chairman of the aviation group at Schnader Harrison Segal & Lewis, said aircraft owners should see no trouble with warranty and other services during a process that could wrap up in a year or less, based on early indications, with a restructured company emerging.
“They’ve been able to accomplish a lot of restructuring before they entered bankruptcy,” said Smith, who was personally involved in the 2007 bankruptcy of Columbia Aircraft Manufacturing Corp., and the company’s near-simultaneous purchase by Cessna Aircraft Co. (owned, in turn, by Textron).
“Those warranty claims were on everybody’s mind,” Smith recalled of the Columbia case, noting that Cessna has honored the Columbia warranties. Much the same is expected from Hawker Beechcraft, with respect to existing customers.
“At this point I would say there’s no reason for alarm on the part of aircraft owners,” Smith said. “There’s no reason to believe that Hawker isn’t going to successfully reorganize.”
Hawker Beechcraft on May 4 announced its legal team has secured court permission to continue operations during the bankruptcy case.
There are some protections in place for pensioners, as well as those with valid legal claims against the company, Smith said. A company spokesperson confirmed May 3 that liability insurance coverage remains in place; Smith said bankruptcy courts usually allow litigants to pursue damages up to the insurance limits, based on the merits of their individual cases as adjudicated in civil courts. The Chapter 11 process does, typically, block plaintiffs from pursuing assets of the company beyond the insured limits.
Protection for pension holders is likewise limited. Smith said Chapter 11 gives companies the right to terminate defined-benefit plans, though it was not immediately clear if the company will exercise that option.
The Pension Benefit Guaranty Corp., the government agency which insures public and private defined-benefit pensions, issued a statement May 3:
“We are committed to working with Hawker Beechcraft and its creditors so that the company can reorganize successfully, while also maintaining the retirement security of its nearly 20,000 workers and retirees,” said PBGC Director of Communications J. Jioni Palmer in a written statement.
PBGC stated that Hawker Beechcraft’s three pension plans are 56 percent funded, with $769 million in assets to cover $1.4 billion in benefits. If Hawker Beechcraft ended the plans, PBGC would pay $533 million of the $611 million shortfall, the PBGC statement said.
Smith said it was a very different story when U.S. Airways declared bankruptcy: Payments were capped, and “all those people did take some significant hits.”
Investors remain the most likely to lose significant sums in the Hawker Beechcraft bankruptcy. The company on May 3 announced that two thirds of its creditors had agreed to a restructuring plan which ultimately would allow creditors to exchange their portion of roughly $2.5 billion in outstanding debt for a stake in the company. Goldman Sachs Capital Partners and Onex bought the firm, then known as Raytheon, in 2007, and renamed it Hawker Beechcraft (legally, a collection of more than a dozen entities, each with a separate petition filed in the case).
“The equity security holders in companies that get reorganized usually get nothing,” Smith said. It is not yet clear whether Goldman Sachs and Onex have non-equity interest, and the firms may also “double down,” Smith said, opting to invest more dollars to maintain a stake in the reorganized company.
“If they actually had debt secured by assets of the company, that would be treated differently,” Smith said. “Shareholders in Hawker Beechcraft are likely to be wiped out.”
Even bankruptcies that are planned in detail, in advance, are still subject to agreement by various parties involved, and approval of the court.
“In this case to call it a pre-packaged bankruptcy isn’t quite accurate,” Smith said, noting the lack of agreement from some creditors. “It’s that other one-third that probably is their problem.”