Detroit May Have Missed Airline Industry Lesson

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The airline industry rule about Chapter 11 is to file whenever necessary and file early while there is still cash on the balance sheet. GM (GM) and Chrysler may be learning the hard way the their cousins in the transportation business are right.

GM may have more cash than it is letting on. It depends on how long ago it stopped paying key suppliers. But, other direct costs like labor can’t be strung out so the car companies should have looked at their legal options a long time ago.

In a reasonable economy, large companies which are, at their core, healthy, can find debtor-in-possession financing. The lenders can end up owning most or all of a company’s assets at the end of the Chapter 11 process.  During a deep recession, that may be impossible. Whatever the car companies might have done to save themselves under court protection should probably have been done last summer. No investor wants to risk that GM can be fixed even if labor and debtor costs are sharply reduced.

According to Reuters, a Morgan Stanley analysis pointed out  "The most telling evidence of the challenging DIP financing environment is that companies with significant cash levels are contemplating preemptive bankruptcy (Nortel is an example) as a means to continue to function in a DIP-less bankruptcy backdrop."

For Detroit, that leaves Washington as the only DIP, at least for now. The Big Three should have seen the judge while they still had enough month to operate for several quarters.

Douglas A. McIntyre