Covid-related shutdowns initially caused a drastic halt in travel and tourism, decimating revenues for related companies. In 2021, the advent of vaccines and the scaling back of restrictions led many to believe that a surge in pent-up demand would help travel-related businesses make up for the losses suffered in the darkest days of the pandemic. However, with the Delta variant causing a surge in infections and vaccine hesitancy still prevalent, some pandemic restrictions and economic effects have lingered on. For most of 2021, travel still had not reached pre-pandemic levels. And as we move into 2022, hotels, airlines, and travel management companies will be worth watching for signs of restructuring activity and Chapter 11 bankruptcy filings.
Are We There Yet?
Passenger throughput at TSA checkpoints provides an indication of travel demand. From the beginning of 2019 to date, it is apparent that passenger totals for 2021 have improved over 2020. However, 2021’s levels still lagged behind 2019 levels for much of the year. While it looks like passenger counts are now approaching 2019 levels, the fact that these have remained well below for nearly two years could spell continued trouble for travel-related companies.
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It was hoped that the Covid-19 vaccines would bring a return to normalcy. But rates of vaccination are still low in parts of the United States, and the Delta variant resulted in an uptick in cases during the summer of 2021. This delayed full reopenings and caused cancellation of some major events. Notably, several other countries have maintained travel restrictions. In light of these developments, it is unsurprising that demand for travel has lagged behind pre-pandemic levels.
In 2022, we may begin to receive answers to some outstanding questions concerning the recovery of travel industry:
- Will business travel ever return to pre-pandemic levels?
- How will companies that were able to access funding through government programs fare without this assistance?
- When will the Covid-19 pandemic stop having a major effect on travel demand?
Although we might not see a massive wave of Chapter 11 filings in 2022, practitioners should look out for restructuring and Chapter 11 opportunities with respect to hotels, airlines, and travel management companies.
Hospitality: Delinquencies Down, But Still High
Earlier this year, we examined hotel bankruptcies and noted the potential for more filings, due to a high percentage of hospitality commercial real estate loans being delinquent for 90 days or more, according to Bloomberg data.
While 90-day delinquencies have tapered off somewhat over 2021, dropping from 14.1% in January 2021 to 6.7% in October, the current rate is still quite high compared with the rate in October of 2019 (0.25%). Hospitality lenders might still be trying to wait out the pandemic and willing to offer forbearance terms. However, they may begin to lose patience with some debtors if they are not able to sustain revenues sufficient to service their debt.
Certain types of hotels may be more financially vulnerable than others. For example, if business travelers or international tourists do not return to pre-pandemic activity soon, more hotels dependent on those types of guests may begin considering restructuring or bankruptcy solutions.
Aviation: Foreign Carriers Are Frequent Filers
Airlines have historically been frequent customers of the bankruptcy courts, especially in the wake of major economic downturns. However, this time, the major United States carriers have managed to avoid trips to bankruptcy court, largely thanks to billions in payroll support.
Most airlines are optimistic about their ability to weather these volatile times, and believe their long-term prospects are sound. Nevertheless, this is an important area to watch in 2022, especially with respect to rising fuel prices, low levels of international travel, and continuing uncertainty with respect to the pandemic.
Interestingly, several foreign airlines have chosen the U.S. bankruptcy courts as a forum for their reorganization efforts. Some of these carriers were unable to access government assistance. Airlines filing Chapter 11 in the U.S. recently include AeroMexico, LATAM Airlines, Philippine Airlines, and Avianca Airlines. With the pandemic still resulting in travel restrictions, we may see more foreign airlines making a trip to the U.S. to file Chapter 11.
If there are more airline bankruptcies, they will likely be pre-packaged bankruptcies. 2021 saw an overall trend towards these types of Chapter 11 cases, some even lasting only 24 hours. In a pre-packaged case, solicitation of a Chapter 11 plan is accomplished prior to the actual bankruptcy filing, resulting in a much shorter and less costly stay in bankruptcy than a traditional case. Airlines will likely choose this speedy option to minimize consumer concerns and save on professional fees.
Travel Management: Relying on Pre-Packaged Plans
Companies that provide services related to the travel sector also have suffered from the effects of the pandemic. CWT, a travel management company, is preparing to file a pre-packaged Chapter 11 filing in early November with the hopes of reducing its debt by $900 million. The proposed plan reportedly has overwhelming support.
However, other travel management companies have not been as fortunate. Lola.com, a corporate travel startup that focused on serving smaller or mid-size companies, shut down business completely in September and is being acquired by Capital One Financial Corp. In August, Upside Business Travel shut down its operations, citing the continued effects of the pandemic. Larger companies like CWT, however, can more easily access capital and may have more restructuring options.
If these types of companies file bankruptcy cases, they are also more likely to file pre-packaged cases and work to reassure customers with existing travel bookings. These types of companies are also of drastically less value to lenders if they shut down completely, so creditors may be interested in providing enough of a lifeline to get the company through the next few years.
In 2022, Covid-19 infections will hopefully be on the wane. However, the lasting effects of the pandemic will likely continue to affect the already hard-hit travel sector. Debtors and creditors in this area will need experienced bankruptcy and restructuring professionals who understand the industry to help them navigate what lies ahead.
Access additional analyses from our Bloomberg Law 2022 series here, including pieces covering trends in Litigation, Regulatory & Compliance, Transactions & Contracts, and the Future of the Legal Industry.
Bloomberg Law subscribers can find related content in our Bankruptcy Practice Center.
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