The mid-September Chapter 11 filings of Delta Air Lines and Northwest Airlines followed a well-trod path of US carriers seeking the shelter of the bankruptcy courts, but are unlikely to herald a new era of consolidation or reregulation
On Capitol Hill they speak of a revolving door that keeps a familiar cast of characters in business whether they are in Congress, the federal agencies or the lobbyist power corridor of Washington’s K Street. The issues might change, but the same players continue to play the same old game.
Airlines too exhibit the same staying power as the Washington establishment with their ability to successfully play the bankruptcy game and in their refusal to call time on their struggle to survive. Now Delta and Northwest, two of the largest US carriers, have entered bankruptcy just as one of the oldest names in the business, United Airlines, is poised to exit. It will join US Airways, a two-time Chapter 11 bankruptcy filer, in the unprotected world.
United’s future is uncertain but the fate of US Airways is likely assured as it became part of the much healthier America West, itself a veteran of a long bankruptcy. To these entities there is no shame or embarrassment in going into Chapter 11. Why should there be? Since airline deregulation in the US in 1978, more than 100 carriers have filed for bankruptcy reorganisation, according to the Air Transport Association, the US airline trade group. Some, like Continental Airlines, another double-dip filer, are still in business, while others like twice-in twice-out Braniff, or thrice around TWA, are not.
The 1990s was a significant time for filings. Eastern, Pan American and America West all went into Chapter 11, with only America West emerging. This era teaches an important lesson. While Eastern and Pan Am may be gone as operating entities, their assets are not. Eastern’s northeastern shuttle, a pioneer of the high-frequency, short-sector model started in the 1960s, is now part of America West. Delta has most of Pan Am’s assets. Eastern’s Latin operations, inherited in part from Braniff, are now in other hands. That is the point, a point made with authority by former American Airlines chief Bob Crandall. He says publicly that good assets – such as the shuttle – survive and others go away, thinning out the system.
Thinning out the herd is a much-desired goal of the airlines themselves who hope that someday they will actually test on a large scale the theory that shrinking capacity really does push up prices. But it may be a while before those who have just entered bankruptcy go back out the door into unprotected competition. New bankruptcy laws take effect in mid-October to limit the time a company can enjoy protection and so do not apply to Delta or Northwest.
But as United has discovered, patience can eventually run out, even with the old rules. It was largely a creditor revolt that led a Chicago bankruptcy court to force United to come up with an exit plan after 33 months and more than a dozen time extensions of its period of exclusivity. If there is to be a bankruptcy revolution, it may well begin with creditors like these.
That revolution could also be spurred by the rest of the industry and the rest of the world. Shortly after the Delta and Northwest filings, Continental issued a statement that “when competitors enter Chapter 11 and default on their financial obligations, including their employees’ hard-earned pensions, it puts us at a cost disadvantage”. The US Pension Benefit Guaranty Corp, the quasi-federal retirement-funds guardian, came out with a sternly worded warning that Delta and Northwest still had pension obligations, while a somewhat more subtle American – the only major that has never sought the shield of bankruptcy – noted that it had recently made a substantial payment to its pension funds.
Richard Aboulafia, a veteran airline observer, says that the domestic reaction – that bankruptcy is an artificial and indirect subsidy, giving unfair advantages and allowing companies to continue below-cost pricing to bring in cash – is rapidly becoming a global one. British Airways chairman Martin Broughton said that the “iniquitous US bankruptcy laws prop up the walking dead”.
In society as a whole, the critics argue that bankruptcy transfers wealth from workers, retirees, pensioners and investors to airline passengers who gain the advantage of low fares. Some have called for a new national aviation policy with a goal other than that of low fares for the largest number of consumers, the stated goal of deregulation. This ignores the fact that low-fare carriers do make money.
From some quarters there is a call for reregulation. But the fact remains that the policy door, unlike the revolving door, is firmly closed. Airlines that have just entered reorganisation have done so precisely because they offered the benefits of competition to consumers. No matter how difficult this evolving stage of deregulation is for all players, it is far preferable to the unthinkable task of trying to go back.
Source: Airline Business
