UAL case
First of all, there were increases of the operation costs such as employee wage, which consists of the largest expense for an airline, and fuel prices. Secondly, there existed decline in passenger air travel because of the September 11 terrorist attacks. These 2 main reasons made UAL bankrupt. However, the court ordered the firm to reorganize under Chapter 11 rather than liquidation. Compared to liquidation, reorganization process allows the company to operate its business with some restriction. On the other hand, lenders who borrow their money to UAL also have to follow ¡®Automatic stay¡¯ which keeps creditors from pursuing their claims. This process prohibits immediate claims on liabilities (including periodic cash payments and an additional or replacement lien on the property) from creditors so that the company (=borrowers) can have some breathing time to continue operating while restructuring its capital structure, or developing a new business plan.
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sign in restructuring process. Therefore, they may dislike to having UAL restructure.
Although UAL may relieve an emergency by reorganizing process, its ways to go forward are not favorable. The company is facing $10 million per month fees for involvements including professionals, bankers and lawyers. Furthermore, the firm has a problem in liquidating some of its aircraft and the distressed sellers sold aircraft at 30% to 50% discounted than ordinary prices. Also, the company ruined its relationships with important long-standing partners because of its bankruptcy. However, the most important cost to the firm is exposing to increases in fuel prices. Forcing more collateral requirements from counter party leads UAL¡¯s swap contracts to be terminated and leaves exposing to potential increase in fuel prices. This will cost a lot in the future when the oil price which is inevitable to the operation increases. Generally, when a company is in reorganizing process, high costs for involvements