ALEXANDER CAMPBELL / LONDON & DAVID FIELD / WASHINGTON DC
Three major carriers have made moves to turn aroundtheir catastrophic financial positions. Will they work?
The US airline sector plunged deeper into turmoil last week as US Airways filed for Chapter 11 bankruptcy protection, United Airlines threatened to follow suit and American Airlines took dramatic action to staunch its losses.
US Airways had long been expected to be first among the US majors to seek Chapter 11 protection, but United's threat to join the list of bankrupt airlines came from chairman and chief executive Jack Creighton. He said the world's second largest airline could enter Chapter 11 as early as next month to avoid hundreds of millions of dollars in debt payments.
US Airways filed for Chapter 11 on 11 August, just hours after it agreed a new concessionary contract with its pilots. The move to seek bankruptcy protection came after aircraft lessors baulked at renegotiating lease terms. A restructured fleet plan is expected to phase out several aircraft types, probably Boeing 737s and 757s as it focuses mainline operations on the Airbus A320 family. The future of the airline's Boeing 767s and Airbus A330s is also in doubt.
Maintaining that an expanded regional jet operation is key to its survival, the airline is continuing negotiations with Bombardier and Embraer. US Airways says it plans "to execute an order for up to 200 firm deliveries and 300 options for regional jets, consistent with the scope-clause provisions negotiated in the recently ratified agreement with the Air Line Pilots Association".
Despite being the first US major to file for Chapter 11 since 11 September, US Airways is still ahead of its counterparts - including United Airlines - in securing federal loan guarantees from the Air Transportation Stabilization Board (ATSB). The board has granted a tentative $900 million loan guarantee to US Airways and says the offer stands as long as the airline can successfully restructure its operations. The carrier expects to emerge from Chapter 11 in the first quarter of next year.
Airbus, the major aircraft supplier to US Airways, says it expects the airline to emerge a healthy company. With outstanding orders for more than 140 aircraft from US Airways, United and American alone, Airbus and Boeing are concerned about their exposure, both in terms of deliveries and customer financing. United is the largest customer for Boeing Capital, with $1.27 billion in customer financing, but is current on its payments.
Chapter 11 is a serious step, but not necessarily fatal. A decade ago five of the 12 largest US carriers sought bankruptcy, but only two, Eastern and Pan Am, folded. Many airlines have entered Chapter 11 and re-emerged in better condition - some, such as Continental Airlines, more than once. "Carriers tend to trade themselves out of Chapter 11," one industry observer says. "If US Airways makes a success of it, then others may be more ready to follow," says Tim Coombs of consultancy Aviation Economics.
US Airways seems to be banking on two things in its quest for survival - that the US economy will slowly recover rather than falling again into a "double-dip" recession, and that its massive regional jet expansion will pay off. Analysts are doubtful. "Regional jet operators make money because they are cross-subsidised...and guaranteed passenger transfers from larger parent companies. I'm not sure this will work with the US Airways model," says Coombs.
Just three days after US Airways' move, United's Creighton warned that, without concessions from lessors, lenders and employees and a loan guarantee from the federal government, the carrier will have to follow US Airways into Chapter 11. The airline has $875 million in debt payments due in the fourth quarter and will be unable to meet them without dramatic cost cuts.
United has resubmitted its application for a $1.8 billion loan guarantee to the ATSB, which turned down the first application in June. While the airline still has large cash reserves - estimated at $2 billion, which may have turned the ATSB against its initial application - many observers suspect its status and size mean political pressure will ensure that the rejection is reversed. "Failure of [United] would send out bad messages about the US economy," says one analyst, suggesting the airline could be too big to be allowed to fail.
Details of United's recovery plan, led by chief financial officer Jake Brace, have not been revealed, but the first step will be meetings with employees. Cost-cutting efforts have centred on reducing staff costs since United signed industry-leading pay agreements in 2001, and again earlier this year. United is 55% employee-owned.
American plans to slash a further 7,000 jobs, retire its entire fleet of 74 Fokker 100s, defer at least 35 aircraft deliveries and retire nine Boeing 767-300s earlier than planned. The changes are designed to simplify the fleet structure, reduce costs and cut overall capacity 9% by November. "American Airlines is showing how much difficulty US carriers are in," says one analyst. "This is trying to...reassure shareholders and analysts by making a positive statement."
The deferrals - 28 737s, five 767s and two 777s - were announced last year, but the airline is continuing talks with Boeing on deferring or cancelling orders for another 67 jets scheduled for delivery between 2003 and 2008. The Fokker 100 retirement will do little for an already collapsed used aircraft market. Dumping such a large number of aircraft over two years starting in the third quarter of 2003, will drastically depress resale prices.
American also plans to decongest its Dallas/Fort Worth hub by spreading arrivals out over the day, increasing productivity at the expense of rapid connections. With other US carriers cutting capacity this winter, the move is unlikely to cost American market share.
Source: Flight International
