SAS disembarks safely from Chapter 11

Scandinavia’s leading airline, SAS, is the latest non-US airline and first European airline to find its wings through the US chapter 11 process since COVID-19 related challenges first rocked the aviation industry in 2020. On August 28, 2024, SAS formally exited chapter 11 with a revamped aircraft fleet and a cash injection of US$1.2 billion from new investors Castlelake, L.P., Air France-KLM S.A., Lind Invest ApS, and the Kingdom of Denmark.¹

“And let me just say,” added Judge Michael Wiles at the hearing confirming SAS’s plan of reorganization, “that this was a particularly complicated one.” As another multinational airline navigating US chapter 11, SAS’s case treads familiar territory but also ventures into some uncharted airspace.

Like the other non-US airlines filing chapter 11, SAS harnessed formidable contract rejection tools under the Bankruptcy Code to overhaul its fleet. It also encountered complex jurisdictional issues, and (like other international debtors with respect to their own unique circumstances) implemented a bespoke strategy involving a Swedish reorganization and certain contractual arrangements with key, non-US stakeholders.

We examine these aspects of the SAS bankruptcy case in detail below.

Background: Tarmac to trouble

SAS is the flag carrier of Denmark, Norway, and Sweden and was founded by national aircraft companies owned by those governments. In 1951, SAS was reorganized into the “Consortium” (a single entity called Scandinavian Airlines System Denmark–Norway–Sweden), which is SAS’s main operating airline entity. The Consortium was owned in its entirety by a holding company incorporated in Sweden, called SAS AB.

When it entered chapter 11, SAS’s fleet consisted of 102 aircraft: 22 owned by SAS and 80 leased under different arrangements, on account of which SAS paid around US$33.5 million every month. Its route network included 113 destinations in 34 countries, with around 270 daily scheduled passenger flights.

In 2020, few sectors were more compromised by the spread of COVID-19, and the measures implemented across the globe to control its spread, than air travel. Combinations of travel bans, social distancing policies, and border closings caused SAS’s revenue to plummet 56% and 70% in 2020 and 2021, respectively, as compared to 2019. In those years, SAS was forced to lay off around 5,000 employees, and furlough a further 6,000.

Although SAS valiantly pursued various recapitalization and cost-cutting efforts in the immediate wake of the virus’ outbreak, these were no match for a confluence of other setbacks, including: low cost carriers expanding into SAS’s three main flight hubs; increased operating and jet fuel costs and the closure of Russian airspace due to the February 2022 invasion of Ukraine; and finally, a pilots’ strike commencing on July 4, 2022 involving around 900 pilots and the cancellation of 50% of flights. To avert an estimated loss of up to US$12.5 million each day the strike continued, SAS commenced its chapter 11 cases on July 5, 2022.

More mileage with Chapter 11

Why does a Scandinavia-based airline file for bankruptcy in the US? SAS’s lead debtor and parent entity (at the time of filing) was incorporated in Sweden. 12 out of 13 of the other debtor affiliates were organized in Sweden, Norway, Denmark, and Ireland, with only one incorporated in the US.

SAS is not the first multinational airline to choose chapter 11 in recent years: Avianca, LATAM, and AeroMexico each filed for chapter 11 protection in 2020, at the height of the COVID-19 pandemic; then followed by Philippine Airlines in September 2021; and GOL in January 2024.

Of course, chapter 11 is a famously restructuring friendly process. However, let’s take a closer look at the aspects that are particularly attractive to an international air carrier:

Fleet Optimization

The keystone of a successful airline restructuring is the successful rightsizing of its fleet and restructuring of its fleet obligations. This involves phasing out older aircraft and introducing modern, more efficient models, as well as amending aircraft leases that are above the market rate. In this regard, these features of chapter 11 are most helpful:

• Broad rejection powers: Chapter 11 debtors have extraordinary latitude to “assume” (i.e. continue performing) or “reject” (i.e. get out of) leases and certain other contracts, based on the exercise of their reasonable business judgment. A counterparty’s claim for rejection damages is treated as a non-priority “general unsecured claim.” In SAS’s case, the Bankruptcy Court approved SAS’s rejection of leases for eight surplus aircraft and six spare engines.
• Lease re-negotiation leverage: Debtors can often leverage the threat of rejection to renegotiate agreements, especially when market conditions are unfavorable to the counterparty. Due to the lingering impact of COVID-19 and other factors in 2022 mentioned above, aircraft lessors may have had limited ability to secure alternative homes for certain aircraft. In this context, SAS renegotiated leases with respect to 59 aircraft with 15 lessors through its chapter 11 process, for annual cost savings of approximately US$98 million.
• Disregard of lease return conditions: Courts have held that, when a lease is rejected, debtors need not comply with contractual termination conditions as a priority administrative expense obligation (for example, relating to the state of returned aircraft and the manner of return) as it would “eviscerate” rejection provisions which are designed to assist the debtor to extricate itself from burdensome obligations. Indeed, in SAS, the parties entered into stipulations or the Bankruptcy Court entered orders whereby, upon rejection, SAS only needed to make leased aircraft equipment and related records available to lessors on an “as is, where is” basis. SAS was not required to make representations as to the state of the equipment or its title, nor undertake certifications, audits, or independent verification with respect to the records. Lessors were then obliged to retrieve the equipment within a specified timeframe of a few weeks. The rejection damage and return condition claims were pre-bankruptcy general unsecured claims. Similar stipulations and orders were agreed and entered into in the other recent foreign airline chapter 11 cases.

Foreign debtor friendly

Aviation is by nature a business with creditors and market participants located all around the globe. Chapter 11 is well-suited to such debtors due to the following:

• Low eligibility threshold: Subject to limited exceptions, a company may file for chapter 11 if it has any US asset (including a bank account or a retainer with an attorney or financial advisor). Eligibility was grounded through retainers and fee advance payments provided by SAS to certain professionals, leases for space and an airport lounge, and permits for gates and slots at various US airports, as well as 100% of the equity in a US based subsidiary that was a chapter 11 debtor.
• Worldwide automatic stay: Filing a chapter 11 case triggers the automatic stay, which, under US law, operates as an automatic injunction stopping almost all proceedings and acts against a debtor and their property located anywhere in the world.

Crossing borders of Bankruptcy Court jurisdiction

Despite the many advantages of the chapter 11 process, SAS undertook a separate Swedish reorganization to implement its plan with respect to its parent entity, SAS AB. This spotlights the potential parameters of the Bankruptcy Court’s power with respect to non-US stakeholders and the types of strategies debtors may employ to nevertheless effect their reorganization.

Jurisdiction over foreign creditors

Chapter 11 is only an effective restructuring mechanism if creditors and other relevant parties are required to comply with orders of the US Bankruptcy Court (i.e. if they are subject to penalties for violating a court order). Generally, this can achieved in one of two ways: (a) if a foreign court recognizes and agrees to enforce the US Bankruptcy Court decision, or (b) if the US court has personal jurisdiction over the foreign creditor (e.g., authority to hold the party in contempt and assess and collect penalties). Overall, US Bankruptcy Courts can have “general” personal jurisdiction over persons with continuous and systematic business affiliations with the US or “specific” personal jurisdiction, if a party “purposefully directs [their] activities at residents of the forum” and the underlying claim arises out of such activities. A party may submit itself to the court’s authority for personal jurisdiction in a number of ways, including by participating in the bankruptcy case.

If a debtor intends to bind important creditors in a country where prospects of recognition by the foreign court and the bases for personal jurisdiction (e.g. because the creditors’ activities appear remote from the US and they do not voluntarily submit to US jurisdiction) are uncertain, commencing proceedings in the foreign country with respect to such creditors may be a safer option (depending on the insolvency laws of such country).

The commercial hybrid bonds Forbearance Agreement

SAS AB’s Swedish reorganization may have been foreshadowed by SAS’s entry into a Forbearance Agreement in February 2023, in connection with the commercial hybrid bonds issued by SAS AB in 2020 during the COVID-19 pandemic. Under the Forbearance Agreement, SAS AB agreed to pay certain legal advisor fees incurred by the bondholders’ agent, in exchange for the agent’s forbearance from taking certain legal actions against SAS. SAS informed the court that the agreement aimed to avoid disputes regarding (among other things) whether the agent was stayed from enforcing the bonds’ terms and conditions against SAS in Sweden, and whether the agent was subject to US Bankruptcy Court jurisdiction. The Forbearance Agreement expressly provided that nothing in the agreement “shall be deemed to subject the agent or any bondholder to the jurisdiction of any US Court, including the Bankruptcy Court.”

At the hearing approving SAS’s entry into the Forbearance Agreement on February 22, 2023, Judge Wiles zeroed in on the key issue: “Are we going to have any issue in Sweden?”

While the Forbearance Agreement represented the parties’ desire to avert immediate litigation on the issue, it also revealed that the Swedish commercial hybrid bondholders did not consider themselves bound by the Bankruptcy Court’s orders, and were not inclined to voluntarily submit to such jurisdiction. Though it temporarily deferred the fight, the necessity for a Forbearance Agreement created uncertainty as to—as queried by Judge Wiles—whether “whatever I do under a plan of reorganization is going to be recognized?” i.e., how a chapter 11 plan would be enforced as to the Swedish bondholders. SAS responded that many alternatives were under consideration including recognition by the Swedish court, litigation, or a Swedish proceeding.

The Swedish reorganization

In the end, Judge Wiles’s question as to the Swedish bondholders was ultimately answered by the Swedish reorganization. SAS’s chapter 11 plan provided that the effectiveness of the plan was conditioned upon the successful reorganization of SAS AB under Swedish law. A week after SAS’s chapter 11 plan was approved by the US Bankruptcy Court, SAS AB applied for reorganization under the Swedish Company Reorganization Act, on March 27, 2024.

This approach was not risk-free. As SAS cautioned in its chapter 11 plan disclosure statement, the Swedish Company Reorganization Act is not completely compatible with the Bankruptcy Code, including with respect to rules on class composition, voting thresholds, and the meaning of an “allowed claim.” Accordingly, the Swedish reorganization may have resulted in outcomes for creditors misaligned with the US chapter 11 plan. In addition, parties not bound by the chapter 11 plan (e.g. the commercial hybrid bondholders, as asserted in the Forbearance Agreement) could challenge the Swedish reorganization of SAS AB or take actions against the other debtors.

Indeed, the agent for the commercial hybrid bondholders did object to the Swedish reorganization on several grounds, including that the bondholders suffered unequal treatment with respect to claims in the same category. Under the Swedish reorganization plan, the commercial hybrid bondholders would receive contingent value notes, while the Danish and Swedish states could expect to recover cash on account of their separately issued hybrid bonds. Fortunately for SAS, the objections were overruled. Not only did the Stockholm District Court clarify that the cash received by the States constituted contribution payments from the investor coalition and not distributions under the restructuring plan (and were therefore, not a reflection of creditor treatment), but it also determined that the agent lacked authority to represent the commercial hybrid bondholders under Swedish law.

On July 19, 2024, SAS AB’s Swedish reorganization plan was approved on terms “materially consistent” with the chapter 11 plan, and pursuant to which SAS AB’s existing common shares and listed commercial hybrid bonds were redeemed and cancelled, with new unlisted shares issued to the new investors and other creditors of SAS.

Denmark, Sweden and Norway—contractual cooperation

The Swedish bondholders were not SAS’s only jurisdictional complication involving foreign parties. In SAS’s chapter 11 plan, the Kingdom of Denmark (and one of SAS’s new investors) expressed support of the plan, but indicated that it would not vote in support of the plan because it did not consent to the jurisdiction of the Bankruptcy Court. At the chapter 11 plan confirmation hearing on March 29, 2024, SAS clarified that while the Danish state was technically preserving certain jurisdiction-related rights, it had in fact entered a contract with SAS agreeing to the plan and releasing its rights to challenge it and that Swedish and Norwegian states also were signing similar agreements. At the end of the hearing, Judge Wiles praised the parties for “smoothly” navigating “the overlap of all the other different state authorities and jurisdictional issues.”

Takeaways

The SAS chapter 11 case showcases both the main advantages for international airlines seeking US chapter 11 protection, but also limits of that process that must be addressed by the airline and its stakeholders. While the US Bankruptcy Code’s contract restructuring tools are always attractive to aviation debtors to restructure their fleet, the effectiveness of those tools and any chapter 11 plan approved by the US Bankruptcy Court is contingent on the complex intersection of relevant parties, jurisdictions, market conditions, and the solutions debtors like SAS can devise to overcome such challenges.

1 Norton Rose Fulbright served as special aircraft finance counsel to SAS in its chapter 11 case.