Case Questions for United Airlines Bankruptcy Case
1. Define financial distress and discuss the major reasons United was faced with financial distress/bankruptcy?
2. Why has leverage in the airline industry been high relative to other industries? Do you think that high leverage is a consequence of Unionization in the Industry? Explain why? Or why not?
3. What were the major consequences for United due its financial distress/bankruptcy?
4. How did United handle its financial distress/bankruptcy? Discuss how effective United was in emerging out of bankruptcy.
5. What are the potential advantages of a private workout versus a formal bankruptcy? Why do you think private workout was not a feasible solution for United?
6. Discuss the difference between reorganization and liquidation and the relevant provision of the U.S. Bankruptcy code that applies to each situation. Was United part of the reorganization or liquidation process?
7. What do you understand by the absolute priority rule? Was the absolute priority rule strictly followed in the case of United or was it violated.
8. What do you understand by ‘Debtor- in- possession financing (DIP)? What is the rationale for allowing this type of financing to enjoy seniority?
Theoretical Issues
1. What does the Modigliani-Miller Theory tell us about capital structure?
2. What is the J effect in bankruptcy (Hint: This is not the J-Curve effect)?
3. What is the static trade-off theory and how can you represent this graphically?
4. For a firm in financial distress (Value at or below debt) is Equity an option? What type of projects would a firm's equity owners want to pursue? What type of projects would a firm's debt investors want the firm to reject?
5. Use the Z-Score model to see if it could have predicted financial distress/bankruptcy for United. Can you use any other valuation tool to predict or forecast bankruptcy?