As a turnaround professional I have an opportunity to see people at both their best and their worst. I have seen stakeholders rise to meet challenges that seemed insurmountable, and I have seen others (many very pedigreed) crumble under the pressure of impending failure and horrendous losses. But there is a constant in distressed situations that, I think, is the key to my love of these situations: in the end of every distressed situation, reality must be stared in the face and acknowledged.
The turnaround industry is unique in its extreme concentration of nakedly honest moments about the prospects of a company. Hockey stick growth projections are thrown out. Illusory gains from synergies are discounted to irrelevance. Financial engineering, in many cases the practice that caused the trouble in the first place, is off the table. There is nowhere to hide, no alchemy that will spin lead into gold.
There are few more perfect moments of acknowledging financial reality than when a publicly traded company files for bankruptcy, as AMR, parent company of American Airlines, did today. The pressures facing executive teams of publicly traded companies are numerous, and when that company is the sole legacy airline to have escaped the last round of industry doldrums without a trip through the bankruptcy courts, the pressure to prove that that avoidance was a matter of fundamental strength and not a severe failure of judgment must be incredible.
American was in a horrible competitive position, as The Deal writer Lou Whiteman explored in an interview with industry consultant Robert Herbst:
- The difference in profitability between AMR rivals Delta and United has reached an unsustainable level ($2 billion).
- Pension obligations at AMR totaled $8 billion.
- There is no feasible path to successfully renegotiating existing aircraft leases out of bankruptcy.
- The cash position of AMR is comparable to that of Northwest Airlines before that company filed for chapter 11 in 2005.
Bankruptcy was necessary and in the end that simple fact prevailed. This is a beauty of the turnaround industry. Rationality prevails. Companies file bankruptcy (or restructure out of court) when they have to, but it is the very fact that these options are not the preferred solutions that lends them a certain purity when they are pursued. Sometimes turnaround may not be glamorous, but there is a philosophic beauty to it.
About the author:
David Johnson is a partner with ACM Partners, a boutique financial advisory firm providing due diligence, performance improvement, restructuring and turnaround services to companies and municipalities. He can be reached at 312-505-7238 or at [email protected].