Thoughts of an American Centrist

Thursday, April 21, 2005

There is something missing from this Bankruptcy Bill. Part 1, Corporate Bankruptcy Reform

I am not one of those critics who believe that any type of individual bankruptcy reform is an affront to human dignity. Indeed, I believe that we could all benefit from a proper does of responsibility. Still, I maintain that the just-signed-into-law Bankruptcy Bill of 2005 is, well, missing something. I'm launching a series of posts detailing all of the issues I would have liked this bill to have addressed, because without them, the bill seems incomplete.

What exactly is it missing? How about one the unbroached issues that is raised by the "personal responsibility" argument, namely, corporate bankruptcy. Under current Chapter 11 bankruptcy law, a corporation is allowed to duck its creditors and effectively cancel its debts in much the same way a consumer can. The difference? Corporations can use their bankruptcy protection to cancel benefits and pensions to its present and former employees, as well as implement wide-scale lay-offs to curb costs, thus contributing to one of the two biggest reasons for personal bankruptcy filings, unemployment. Doesn't that provision seem a bit counterproductive?

Of course, it is valuable for a corporation to have some bankruptcy protection in order that it may have to opportunity to right itself continue to provide valuable services to its customers, value to its shareholders, tax dollars to its government, and further employment to its employees (if they haven't been laid off). This is right and proper. All too often, however, we see a company abuse these protections by shifting the burden of their net operating loss onto its employees, calling this robbery a "fix," and reopening its doors for business. All this occurs despite having an outmoded business model.

I see no better example of this than with the traditional airline carriers. Delta, United, US Air, and all the rest are filing for bankruptcy because they can't pull in a profit. Boo friggin hoo. I have no sympathy for these carriers because they are operating on faulty business models. Jet Blue, Southwest, and others are raking in huge profits while these ancient behemoths are floundering. Why? Because the new cut-rate carriers have killer business models. Lower fares, a simple fleet, and great service all keep costs low and customers happy. If the older models can't keep up, it's time for them to shut their doors, not hide under Chapter 11 so that they can lose money for just a little bit longer.

"But Mr. American Centrist," you say, "what happens to all the employees of the big airlines if they close their doors? Won't they all be unemployed, thus continuing the cycle of bankruptcy?" Well, my good friend, the answer is "not necessarily." What do you think is going to happen to all the capitol these outmoded airlines possess in abundance? It's not all going to be driven to the city dump. Why, it'll be sold, of course. Either a failing company could be bought outright by another airline that has a better business model, or someone else will buy the closed company's planes. The purchaser will need someone to fly those planes, serve the customers, man the gates, load the baggage, fix the engines, and all the other myriad operations essential to keeping an airline in business. In short, the people who keep the airline in the air will be needed as long as successful companies control the planes.

Unfortunately, the current Chapter 11 laws are stalling this overdue transition. Using corporate bankruptcy laws to extend the life of a bad business model is an affront to capitalism, and it's costing us, as consumers and taxpayers, billions.

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