In the article "The Trouble I've Seen," author David N. James explored the
actions that businesses take that often result in bankruptcy.
He described these actions
as a "downward spiral," starting when companies start to prosper and see positive
Elated shareholders and analysts begin to pressure management to continue
Management, then, seeks out ways to increase production capacity,
even expanding into new markets or making acquisitions.
Banks are eager to lend to
the profitable company as they identify it as having very little credit risk, thereby
increasing the company's debt.
The company's competitors begin to do likewise, giving
customers the advantage of being able to play one company against the other.
increased competition places pressure on the company's margins and market share,
making it vulnerable to decreasing profits.
The company's new acquisitions or markets
begin to falter as the company tries to cover its higher operating costs, finding itself
unable to make required payments and in breach of its borrowing agreements, making it
a higher credit risk.
It then becomes increasingly difficult for the high-risk company to
find additional funding needed to pay the increasing costs, resulting in further defaults.
The company eventually comes face-to-face with bankruptcy as a possible certainty.
James's article described one scenario of events that often culminates in
bankruptcy; however, companies also look to bankruptcy as a possibility before they
have exhausted all other options.
This is often the case for companies seeking to file
Chapter 11 bankruptcy, which is a request for reorganization of the company's liabilities
so that a company in temporary financial distress can continue to operate independently
while creditor claims are reconciled. On September 14, 2005, faced with historically high
fuel prices, rising pension obligations, increasing competition from low-cost upstarts,
and dept approximating $23.8B, Delta filed for protection under Chapter 11 bankruptcy.
Delta wanted to reorganize under Chapter 11 because it would make it easier for the
airline to cut jobs, negotiate wages, restructure debt , and reduce pension and health
benefit liabilities for both current and retired employees.
In November 2006, the Chief Executive of US Airways, Doug Parker, sent a letter