What is Chapter 11 bankruptcy protection and how can it benefit airlines?
September 28, 2025
In August, US low-cost carrier Spirit Airlines entered into Chapter 11 bankruptcy protection for the second time in just 12 months. The unprecedented move will allow the airline time to reorganise its finances without the threat of creditors seeking to enforce payment of outstanding debts.
Spirit is not alone in seeking the protection provided by the provisions of Chapter 11 of the US Bankruptcy Code to allow it time to restructure.
Airlines across many parts of the world have used the tool in recent years to reorganise their finances, many of which have exited the process fitter and stronger to re-enter the market as a leaner, more efficient operator. Yet, a future is not always guaranteed under Chapter 11.
So why do airlines choose Chapter 11, and what benefits can it bring them?
Why is Chapter 11 bankruptcy protection needed?
The international airline industry has long been considered to be one of the most volatile industries there is.
Having to deal with super-slim margins, ever-increasing costs, geopolitical changes, and even a global health pandemic, the airline history books are littered with stories of failed airlines that tried, but ultimately failed, to make their mark and survive.
The usual procedure when an airline runs out of money is that suppliers withhold further services, such as fuel supplies, or aircraft lessors seize aircraft under the authority of a court order – both of which can ground an airline instantly.
However, even when an airline runs out (or looks like it will run out) of cash, there is still one avenue of recourse that could save it.
What exactly is Chapter 11 bankruptcy protection?
Chapter 11 bankruptcy proceedings are a strategic tool that allows an airline (or indeed any company) the time it needs from creditors to restructure its financials and reorganise its operations to become a leaner, more efficient organisation.
The key benefit of Chapter 11 is that, unlike liquidation, the company is permitted to continue trading while it undergoes the process, to keep generating revenue and to maintain goodwill amongst its customer base.
The ability to continue trading is crucial, not just for an airline, but for any business where fixed costs are high and margins are slim, and where a pause to operations could mean cutting off the only revenue source available and potentially leading to the company’s demise.
The ultimate aim of Chapter 11 proceedings is for a company to return to profitability while also negotiating and agreeing payment schedules with creditors to settle outstanding debts over an agreed period of time without facing legal redress.
Any airline seeking bankruptcy protection has to file an application for Chapter 11 with the US bankruptcy court.
If the application is granted following the court’s analysis of the airline’s financial position and its short-term prospects, then the airline effectively becomes under the ultimate control of the court and can only exit the proceedings with the court’s approval.
Under Chapter 11, companies can propose reorganisation plans, which often involve the disposal of assets, reduction in employee numbers, and the cutting back or streamlining of their operations. Every action taken can only be carried out with the court’s approval.
While most countries operate their own version of Chapter 11, many international companies still choose to file for protection in the US courts for the stringent protections that are put in place and for the strict protocols that prevail.
How Chapter 11 helps airlines
Four major pillars of support provide the framework for how Chapter 11 can protect airlines in financial distress. While each of these can work independently, many airlines choose to employ more than one support system to strengthen their chances of emerging from Chapter 11 as a fitter and stronger organisation.
Possibly the most important of these five pillars is the granting of an automatic stay of enforcement action from creditors. Upon the carrier having its filing for Chapter 11 accepted, from that point on, the company is at arm’s length from litigation or other enforcement action (such as the seizure of assets) from those it owes money to.
Second on the list of benefits of Chapter 11 is the availability of debtor-in-possession (DIP) financing. This is a form of refinancing that allows for the continuation of operations while the Chapter 11 process continues.
It provides the vitally needed cash injection, thereby funding the continuity of operations, which keeps a revenue stream going for the airline involved. In return for providing the lifeline cash, specialist DIP lenders take a higher position on the airline’s list of creditors and impose higher-than-market-average interest rates.
The lenders are also permitted to take liens on the airline’s assets (such as aircraft that are wholly-owned by the carrier). Without this access to bridging finance, many airlines that enter Chapter 11 would not survive and would be forced to cease operating.
Thirdly, there is the flexibility to renegotiate executory contracts. The provisions of Chapter 11 allow airlines to reject or renegotiate previously signed contracts or agreements under which both parties still have ongoing obligations.
For airlines, this can include aircraft lease contracts, airport gate hire agreements, and other legal obligations for the long-standing provision of goods and/or services.
The ability to renegotiate the specific terms of these agreements without facing financial penalty or immediate termination of the deal can be highly beneficial to airlines where the continuation of operations is vital for long-term survival.
The last of the four main benefits of Chapter 11 is voting provisions. This realigns the voting process under Chapter 11 in favour of creditors, whereby the division of voting rights reflects the debts owed to each stakeholder.
To approve a reorganisation plan, the proposed restructuring plan must be accepted by at least two-thirds (in dollar amount) of creditors and more than half of the voting creditors in each class.
Therefore, if an airline has a major creditor who is owed much more than the rest of the creditors, then that company assumes the highest voting power and will dominate the process. If the bankrupt career can get that creditor on side, then it improves the chances of re-emerging from Chapter 11.
The flexibility offered by this process can make the difference between a rescue plan being accepted or rejected at the crucial time.
Chapter 11 is an internationally recognised process
The US Chapter 11 protection system is widely recognised and is followed by many airlines throughout the US and beyond for its recognised benefits, along with the body of cases where it has been used previously.
The familiarity among creditors and stakeholders, as well as the airlines themselves, provides a well-trodden pathway where all parties involved understand the process itself, the nuances and provisions of the scheme, and how the optimum outcome is to be reached for all those involved.
Over the course of history, numerous US airlines have used the protections provided by Chapter 11. However, due to the process having earned international recognition and respect, increasing numbers of airlines based outside the US are now initiating the process as a way to restructure their finances and operations.
This is often the case where the carrier concerned has US-based creditors, making the whole Chapter 11 process easier to manage.
Additionally, the creditor has the reassurance that the US court retains jurisdiction over the airline’s assets worldwide, which it can rely on for confidence as the process progresses. This can have a ‘trickle-down’ effect on other smaller creditors, not just based in the US but worldwide.
A foreign operator only needs minimal ties to the US to be valid for the benefit of the country’s Chapter 11 bankruptcy code. In practice, even if an airline group has one property in the US or a trading office address, it can be chosen as the company’s principal place of business or where its core assets are based.
Although Spirit Airlines is the biggest airline name undergoing Chapter 11 protection at the moment, notable US airlines that have used the process in the past have included Pan Am, TWA, American Airlines, United, and US Airways.
The list of airlines using Chapter 11 in recent years includes LATAM Airlines, Azul, Aeroméxico, GOL, and Avianca. Over in Europe, following the COVID-19 pandemic, SAS Scandinavian Airlines undertook a financial restructure under the provisions of the code from July 2022 until August 2024.
The preferred option for airlines in distress
The comprehensiveness of the Chapter 11 process, including its globally recognised DIP financing structure, broad automatic stays, and international recognition, often outweighs the benefits of a local or national-level scheme, especially for global airlines with complex international operations, such as SAS Scandinavian.
But while Chapter 11 often offers the best chance of an airline’s survival, the decision to file for bankruptcy protection is never taken lightly. One reason for this is the amount of time the prioress can take with the related uncertainty. One thing that both airline investors and creditors do not like is uncertainty.
However, all stakeholders are required to buy into the process so that debts can be repaid, and the airline can emerge as a more efficient and more competitive airline company.
Chapter 11’s comprehensive nature and proven track record in the aviation sector often make it the preferred choice for airlines seeking to navigate a period of serious financial distress.
For many airlines facing a crisis, the option of filing for Chapter 11 is taken out of their hands, as creditors can file winding-up petitions at any stage if debts remain unpaid.
Happy endings are not guaranteed
It should be noted that Chapter 11 does not always finish with the airline emerging stronger and better organised. A good example of this is when Pan Am filed for Chapter 11 in early 1991, only to cease trading completely by the end of that year.
Airline history shows that some airlines, once they have emerged from Chapter 11, become targets for hostile takeovers. In these cases, their asset are acquired by another carrier but they cease to exist in their own right.
An example of this was TWA, which, after filing for Chapter 11 for a third time in 1995, had its assets bought by the parent company of American Airlines. TWA subsequently closed down.
With Spirit Airlines entering Chapter 11 for the second time in less than 12 months, the carrier, along with its creditors, will be hoping for a better outcome than its earlier filing, which the current CEO, Dave Davis, said, “did not go far enough to fix the airline’s balance sheet and operations”. Time will tell if this proves to be the case.
