Chapter 11 bankruptcy protection has been portrayed as a useful restructuring tool for high-cost US carriers, but as US Airways files for a second time, its survival is far from certain. And even if it were to fail, that may be little cheer for stressed competitors.
Filing for Chapter 11 bankruptcy protection has, over the years, become almost a routine feature of US airline recessions. When TWA went back into Chapter 11 for the second time in the early 1990s, Wall Street joked that it had become founder member of the frequent filers club. Now US Airways has joined the club, re-entering bankruptcy reorganisation for the second time in two years. United is already there and Delta Air Lines has been making warning noises.
In times past, Chapter 11 has been seen as something of a safe haven and a place from which to force through the labour concessions and cost reductions needed to get back in contention. From across the Atlantic it is often caricatured as the US equivalent to European state aid. Even the worst performers have often hung on in Chapter 11 for an age. Witness TWA as it lurched from one reorganisation to the next for a decade before finally bowing to the inevitable and being absorbed by the American Airlines group in 2001. All that is left are a few lingering court cases on retiree benefits and a minor regional operation at its St Louis hub. But perhaps it also offers a cautionary tale.
The lesson is that bankruptcy is rarely the cure that the indebted believe it to be. Some previous filers have since re-emerged to good effect, such as Continental and America West, but success is not getting any easier. Although US Airways vows that it can and will reorganise, few observers are optimistic. Even Glenn Tilton, chief executive of long-standing US Airways partner United Airlines, concedes that for a filing to work "you have to do it once and do it right".
US Airways has already lost hopes of taking on the regional jets that have been the basis of its transformation plans of the past several years, as both Embraer and Bombardier quickly suspended deliveries and GECAS shut off the flow of funds at least until or if the airline again emerges from bankruptcy court protection. By contrast, airframers and lessors kept a lifeline going to TWA a decade ago in spite of rapidly diminishing hopes of any return.
But US Airways is not without a saviour, at least a possible one. The Air Transportation Stabilisation Board, created after the 9/11 terrorist attacks, was a primary lender to US Airways as it came out of its first reorganisation in March 2003 with a loan guarantee of nearly a billion dollars. This is the kind of support that has a lot more staying power than the various loans, incentives and guarantees that state and local and municipal governments had used to help prop up TWA toward the end.
The ATSB has said it will "work with" US Airways, and left it vague at that, raising the same question that greeted the board's establishment and the creation of a $10 billion pool to support loan guarantees. Will this federal entity keep alive the terminally ill? Will it become a "barrier to exit" for those carriers that otherwise would be gone without its aid and support? That is an open question, although Congress made it clear in the first hours after US Airways' court filing that it would not back any more airline support at all.
The larger question is what the eventual fate of US Airways could mean for the others who survive its demise or live to see it shrink so dramatically that it ceases to be a factor in the larger equation. A school of thought has emerged on Wall Street and among some talking heads in Washington that a liquidation or two would be the cure for what plagues the airline industry, its unquenchable overcapacity.
This surfeit of seats is not a new theme - it was true in spades during the last downturn a decade or more ago. The difference now is that the overcapacity is not coming from the desperate offerings of the weak, as it was then when short-lived new entrants and the chronically ill such as TWA itself kept a flood of cheap seats on the market. The cheap seats now come from new entrants such as AirTran or JetBlue, which can survive and thrive at such fare levels. A decade ago, the dark of recession was followed for the majors with a controlled ascent back to decent growth and improving yields. The presence of low-fares carriers and online sales make that an unlikely prospect in today's unruly market.
Taking US Airways out of the equation changes little. This is especially so, observes JP Morgan's Jamie Baker, on such already alarmingly crowded markets as the northeast-to-Florida market, where US Airways is a major force with its north-south flow out of its Philadelphia and Charlotte hubs. This is not to wish ill to come to US Airways and its long-suffering workers and managers in their likely quixotic quest to become, as their own company's new advertisements put it, "another low-fare airline". But for US Airways, and all other US majors in or out of bankruptcy, the trick is not peddling the low fares but producing the low costs to match.
Source: Airline Business
