Skymark May Face the "Worst Scenario"

By Ryuko Sugimoto : Reporter of Toyokeizai
July 14,2015
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Skymark may face the worst-case senario (Photo by Fumishige Ogata)

It was January 28 when Skymark Airline, the independent low-cost carrier that once took the Japanese civil aviation industry by storm, has applied to Tokyo District Court for bankruptcy protection from its creditors under the Civil Rehabilitation Law. Since then, the company has been seeking a way to reconstruct itself. 

According to the information gathered by Toyo Keizai, however, the reconstruction plans briefed to the creditors on July 7 may reach a deadlock. One of the company’s attorneys implied that it may, in the worst case, become incapable of recovering from its moribund state.

In this briefing session, two reconstruction plans have been presented to the creditors. One plan was drawn up by Skymark that focused on establishing capital alliance with ANA Holdings. The other was set forth by the largest creditor, US-based aircraft lessor Intrepid Aviation that proposed inviting an alternative airline partner other than ANA as the sponsor.

Both plans will be placed before the creditors at their first official meeting scheduled on August 5, and the scheme that is favored over the other by receiving majority support in terms of both the number of voting rights distributed to the debt holders in proportion to the amount of credit they hold (which add up to a total of 308.9 billion yen) and the number of creditors (197 in all) will be adopted to revitalize the bankrupt carrier.

If both plans are rejected in the August meeting, the creditors will have to meet again within two months to reach a resolution on a revised scheme. But what concerns the interested parties is that such meeting by nature is not held repeatedly.

All-or-nothing bet

From a legal standpoint, there is no restriction set on how many times a creditors’ meeting can be convened. Yet many lawyers who are knowledgeable about corporate revival share the same view that a creditors’ meeting is normally held only once, and even when it has to be reconvened, twice would be the most.

In other words, if the revised plans get both rejected again in the second creditors’ meeting, it is very likely that the court would decide to nullify the habilitation proceedings at that point.

In the July 7 briefing session, one of the creditors asked the current management of Skymark what may happen if no reconstruction scheme is approved by majority vote. The attorney representing the company has reportedly made it clear in his reply to this inquiry that “such result would lead to a conclusion that we would not be able to rehabilitate”, and urged the creditors to “vote in favor of our plan (organized by Skymark) to prevent us from falling into that worst situation.”

As this attorney’s comment suggests, the management of Skymark is already fearing from even before holding the first creditors’ meeting that the rejection of both plans may become a reality after all.

Based on the proportion of liabilities, the largest creditor, Intrepid, holds approximately 38% of all the voting rights, followed by Airbus (approximately 29%), Rolls Royce (approximately 16%) and CIT (approximately 14%). When combined, these major US and European creditors hold 96% of the entire voting rights.

Considering the fact that Airbus and CIT have requested Tokyo District Court to include the reconstruction scheme organized by Intrepid as another matter to be resolved in the coming creditors’ meeting, it is quite likely these two major creditors will reject Skymark’s plan to seek alliance with ANA and vote in favor of the alternative scheme submitted by the biggest creditor.

In terms of the number of debt holders, domestic creditors make up the vast majority. Unlike the major non-Japanese creditors, they are apparently inclined to take the side of Skymark’s plan, based on the reason that the alternative airline sponsor proposed in Intrepid’s scheme is still not disclosed(It is reported on July 14 that Delta Airlines has offered to invest in Skymark).

Also, according to a corporate creditor who asked not to be identified, all domestic creditors are “being strongly encouraged by Skymark to support the company’s plan.” 

What happens if the differences between the conflicting plans cannot be resolved and the court decides to discontinue the rehabilitation proceedings? The remaining viable options would be to reorient the course to legal liquidation that is handled in accordance with either the Corporate Reorganization Act or the Bankruptcy Act.

Compared to civil rehabilitation, corporate rehabilitation proceedings usually take longer to put the bankrupt company back on feet. The main fear of this option is that increasing number of Skymark patrons may, in the meantime, start feeling anxious about this airline and stop using it. If so, Skymark’s fiscal conditions will obviously deteriorate further.

On the other hand, if Skymark opts to proceed with the liquidation under the Bankruptcy Act, its businesses and assets will be placed under receivership and the trustees will most likely complete the liquidation in a relatively shorter period of time. But even when its airline businesses are transferred to a different air carrier, it is still uncertain whether the landing slots allocated to Skymark in all the airports will also be inherited as they are to the transferee.

Can both sides meet each other halfway?

In addition, confusion may arise in the flight operations while Skymark’s businesses are being sold off, making new and existing users hesitant of becoming or continuing to stay loyal to this carrier. The increase of customer churn will naturally lead to the decline in the LCC’s business and asset value, and may consequently impede its liquidation process.

For Skymark to be able to continue its flight operations without much hindrance and proceed smoothly with the liquidation, there is no better way than to put either one of the two rehabilitation plans into action and drive the turnaround as soon as possible.

If the current management of Skymark shows its willingness to reconsider using the aircrafts that it had announced earlier to annul the contract, it is highly foreseeable that the major creditors including Intrepid will receive this message positively as the carrier’s sign of softening.

On the other hand, the domestic creditors will become more eager to lend their ears to the plan proposed by Intrepid, if this leading creditor reveals the name of the airline company it is intending to establish a sponsorship agreement with, and make proactive efforts to explain to them more clearly and extensively about its concrete reconstruction plan and roadmap.

Unless both parties move in the direction of seeking mutually acceptable compromise, the road to revitalize Skymark will inevitably continue to remain extremely low in visibility.