Trustee suggests Direct Air’s liquidation - Doesn’t believe airline can rebuild itself

Direct Air’s prospects for a comeback are all but over, after a federal official requested a judge convert the airline’s bankruptcy case to a Chapter 7 liquidation.

“In light of the fact that [Direct Air] has ceased operations and is apparently incurring post-petition liabilities, the [U. S. Trustee] believes that it is unlikely that the debtor will be able to file a confirmable plan of reorganization,” the U.S. Trustee, William K. Harrington, said in a court filing on Friday.

Harrington recommended appointing a trustee for a Chapter 11 reorganization as an alternate option, should the judge decide that is in the best interest of the bankruptcy estate.

The Myrtle Beach, S.C.-based airline, which abruptly halted flights earlier this month, served airports including Niagara Falls International. It filed for Chapter 11 bankruptcy on March 15 in Massachusetts, under the name Southern Sky Air & Tours.

The airline owes other airlines about $1 million, as well as state and federal taxes of $1.4 million and security costs of about $970,000 to U.S. Transportation Security Administration, according to court documents.

The Niagara Frontier Transportation Authority, which runs the Niagara Falls airport, is listed in court documents as being owed $91,654, making it one of the 20 largest unsecured creditors in the case. Also among the 20 is WUTV-Fox 29 in Buffalo, which is listed as owed $49,065.

Since the bankruptcy filing, Direct Air has kept six employees and furloughed others, the trustee said. The airline continues to incur liabilities since the bankruptcy filing, in the form of contractual obligations for leases in airport terminals and equipment.

The fact that the airline is still incurring administrative costs while not operating “is cause for conversion of the case” to Chapter 7, Harrington wrote. He also cited the fact that Direct Air’s management team resigned earlier this month as raising “serious issues as to the continued management” of the airline.

Direct Air, in keeping with U.S. Department of Transportation guidelines, had established an escrow account to protect consumers, Harrington said. As of Friday, about $1 million was in the escrow account, but the amounts owed to consumers was “unknown,” he said.

“The [trustee] believes, based on discussions with different creditors, that the claims of consumers and others seeking reimbursement from the accounts are significantly more than the amounts held in the escrow account,” Harrington said.

Transportation Secretary Ray La- Hood is looking into Direct Air’s shutdown, and Rep. Kathy Hochul, D-Amherst, wants to know whether the company complied with procedures to protect consumers.

“Western New Yorkers purchased flights to spend the Easter holiday with their families, and once all travel arrangements were finalized they were told Direct Air would no longer be living up to their end of the bargain,” Hochul said.

Airlines are required to store the funds customers pay for flights in an escrow account until services are rendered. It’s not clear whether Direct Air sufficiently funded those accounts.

Hochul also wants to be sure customers who booked flights with debit cards will receive their refunds as easily as those who booked with credit cards.

Source:  http://www.buffalonews.com