Airline Restructuring Across Borders: The AirBaltic Case
Airlines operate with substantial long-term contractual commitments: aircraft and engine leases, financing arrangements, maintenance obligations, manufacturer commitments and other agreements that may extend over many years.
The assumptions underlying those commitments can change considerably during their term. Fuel and financing costs may increase, aircraft or engines may become unavailable, geopolitical developments may affect networks, and supply-chain constraints may disrupt capacity and operating plans.
Where those changes materially affect an airline’s ability to meet its existing obligations, the issue moves beyond operational resilience and becomes one of financial distress. The legal question then is what restructuring mechanisms are available to preserve the operating business while reorganising obligations that can no longer be sustained on their existing terms.
The airBaltic Chapter 11 proceedings provide a useful case study of how restructuring law can be used to address that mismatch.
airBaltic is a Latvian airline operating an all-Airbus A220 fleet across Europe. Like many airlines, it came under financial pressure as a combination of financial, operational and geopolitical factors placed increasing strain on its existing obligations. It has now commenced a direct Chapter 11 proceeding before a U.S. bankruptcy court.
A European airline using U.S. Chapter 11?
Chapter 11 of the U.S. Bankruptcy Code is a reorganisation procedure designed to allow a financially distressed company to continue operating while restructuring its obligations under court supervision. Unlike liquidation, management generally remains in control of the business as a “debtor in possession.”
The filing provides an automatic stay against many creditor enforcement actions and gives the company tools to obtain court-approved new financing, assume or reject burdensome contracts and leases, restructure creditor claims and ultimately propose a reorganisation plan. If the statutory requirements are satisfied, the plan can also bind dissenting creditors through the Chapter 11 voting and cramdown mechanisms.
Importantly, Chapter 11 is not limited to companies incorporated in the United States. A foreign company may qualify as a Chapter 11 debtor where the requirements of the U.S. Bankruptcy Code are satisfied, including the required connection through property in the United States. In a direct Chapter 11 case, the foreign company itself becomes the debtor under the U.S. Bankruptcy Code and obtains access to the substantive restructuring mechanisms available under Chapter 11.
DIP financing: a legal mechanism for continuation of the business
One financial element deserves particular attention because it is itself a distinctive legal feature of Chapter 11: debtor-in-possession, or “DIP financing”. An airline entering restructuring still requires liquidity to continue operating. Fuel, payroll, maintenance, airport charges and other operational obligations continue while the restructuring is taking place. Ordinary lenders may be unwilling to provide new money to a distressed debtor without additional legal protection.
The U.S. Bankruptcy Code addresses this problem by allowing the court, subject to statutory requirements, to grant different levels of priority and security to new financing. In its Chapter 11 restructuring, airBaltic obtained access to a DIP financing facility of up to €350 million, involving Barclays, Hayfin Capital Management, Morgan Stanley, Oaktree Capital Management and Strategic Value Partners. The facility is structured in several tranches at 12-month Term SOFR + 8%. It also includes commitment, backstop and exit fees and is subject to restructuring milestones and collateral requirements.
A particularly important feature is that part of the initial DIP proceeds is intended to refinance existing financing over certain aircraft, engines and simulator assets. Once the existing financing is discharged, those assets can become part of the collateral package securing the DIP lenders. This illustrates that DIP financing is not simply a source of emergency liquidity. Its priority, collateral arrangements and restructuring milestones can also influence the course of the reorganisation itself.
Aircraft leases and aircraft creditor rights
Under the U.S. Bankruptcy Code, a debtor may, subject to statutory requirements, assume or reject executory contracts and unexpired leases. This can provide an airline with an important restructuring tool.
Aircraft required for the reorganised business may be retained through assumption of the relevant leases, often following negotiations with lessors. Aircraft that no longer fit the airline’s operating model may potentially be returned and the relevant leases rejected, with resulting contractual claims dealt with through the bankruptcy process. For example AirBaltic’s restructuring plan envisages the cancellation or indefinite deferral of 40 outstanding A220-300 orders, representing an aggregate list-price value of approximately US$3.5 billion.
The cross-border dimension
The interesting legal aspect of the AirBaltic case may ultimately be the interaction between Chapter 11 and European law. A U.S. bankruptcy court can determine claims and contractual rights within its jurisdiction, but an international airline operates through aircraft, licences, contracts and counterparties located across several jurisdictions. airBaltic therefore illustrates why cross-border airline restructuring requires more than conventional insolvency analysis: several legal regimes may operate simultaneously.
For an international airline, successful financial reorganisation depends on whether insolvency protection, aircraft rights, creditor priorities, restructuring finance, cross-border recognition and aviation regulation can be made to operate together. Understanding those legal options before financial pressure becomes critical may be just as important as understanding the airline’s contractual and financial exposure itself. In a cross-border industry, the availability and choice of restructuring framework can itself become an important part of an airline’s financial resilience.
