Airline industry in dire straits as majors risk collapse


Airlines in bankruptcy

Aloha -- Dec. 2004

ATA -- Oct. 2004

US Airways* -- Sept. 2004

Hawaiian -- March 2003

United -- Dec. 2002

* second time

What happens if a major U.S. airline dies? Or two or three? At the moment, a multicarrier collapse seems unlikely -- but, then again, so did oil prices per barrel remaining in the high $40s or an airline losing $2.2 billion in a quarter or $5.2 billion in a year, as Delta just reported.

Most industry analysts think United has too much value and investor interest to die -- assuming it cuts pension costs by terminating its defined-benefit plans -- and US Airways received a new lease on life through at least June, thanks to the federal Air Transportation Stabilization Board.

Nonetheless, rarely if ever has the industry seen so many U.S. airlines in such dire straits. Five carriers are in Chapter 11 and others are losing hundreds of millions of dollars per year.

Many are shaky enough that they may be one labor strike, economic downturn, major oil-price spike or terrorist act away from financial collapse. Their margin of error is slim.

It is precarious, and something could snap, said aviation consultant Michael Boyd, who considers a multicarrier liquidation highly unlikely, but possible. Boyd is president of the Boyd Group in Evergreen, Col., a consulting firm that just completed an analysis of the likely impact of a US Airways failure.

The Business Travel Coalition is concerned enough that it has urged the U.S. government, so far to no apparent avail, to do some advance work to consider its policy options in the event of an airline industry collapse.

Different conditions

Previous airline liquidations, such as Eastern and Pan Am in the late 80s and early 90s, prove only partly instructive because the conditions now are so different. Low-cost airlines were not the force they are today, and most airlines dont have the money to acquire a dying airlines assets.

International route rights -- big prizes in previous liquidations such as Easterns in 1989, when American acquired its South American routes -- arent what they used to be.

Thats because the U.S. has signed open-skies agreements with more than 60 countries in the past decade. Those deals give every U.S. airline the right to operate air service from any point in the U.S. to any point in that country and beyond.

Robert Cohn, a former regulatory counsel for Delta, remembers the bidding frenzy that followed prior liquidations. But Cohn, aviation group chair for the Shaw Pittman law firm in Washington, isnt leaning on the lessons of history.

Past is not prologue to the current state of events, he said.

So what are the possible scenarios if one or more of the major airlines fail?

Picking up the pieces

Airline assets arent what they used to be, but some still would be tempting.

For example, Jon Ash, president of InterVistas-ga2 Consulting, believes at least a half-dozen legacy and low-cost carriers, including AirTran and JetBlue, would be interested in US Airways landing and takeoff slots at Washingtons Reagan National and New Yorks LaGuardia and, to a lesser extent, its gates in Boston.

Also, airlines might grab some US Airways Airbus and 737-300 aircraft. But one asset once regarded as a prize -- the US Airways Shuttle -- has lost much of its luster.

In fact, some analysts consider shuttles money-losers. The Boyd Group concluded the value in the US Airways Shuttle is its ability to raise brand loyalty for its operator.

Experts said a United liquidation would lead to a bigger scramble for assets, particularly regarding international service to countries without open-skies agreements. United not only has prized access to London Heathrow but also Tokyo, including the right to carry local traffic from Tokyo to other foreign destinations as part of continuous service from the U.S.

Any discussion of acquiring assets, however, also begs the question: Who can afford it? There isnt a lot of cash lying around. Delta is more than $20 billion in debt. American lost $761 million last year; Northwest, $878 million; Continental, $363 million.

The biggest difference [from previous liquidations] is its hard to see anybody but Southwest that could easily step forward and pay a lot of money for anything, said former Pan Am executive Richard Mathias, now a partner at the law firm Zuckert Scoutt & Rasenberger.  Its hard to see American and Delta, the presumed survivors, coming up with a lot of financing.

Could airlines find some creative way to finance an acquisition? Could a private interest do it and lease the asset? Would foreign carriers buy anything? No one really knows.

Community service

Its easy for airlines and financial analysts to proclaim the benefits of liquidation -- although some of their assumptions are being challenged -- but there would be pain for employees and some of the communities the airline served.

The most evident effect would be on small communities that are served only by the liquidating carrier and might have trouble finding a replacement.

A Transportation Department spokesman said the DOT would fast-track any requests under its Essential Air Service program, which subsidizes service to small communities. But the impact would be felt in other ways, too.

For example, a US Airways collapse would leave some communities, such as Erie, Pa., and Huntington, W. Va., without any reasonable access to Boston, New York and Philadelphia, concluded the Boyd Group in an analysis. The US Airways hubs at Charlotte, Pittsburgh and Philadelphia have been major connecting gateways for such communities, which dont generate enough demand to support nonstops.

Erie, which has spread its service among several carriers, would continue to have strong air service overall, the Boyd Group said, but when it comes to access to the Northeast, it may end up having better connectivity to Beijing than to Boston.

Experts agree that service to most large cities would scarcely be affected beyond the short-term because other airlines would rush in to fill the gaps.

The Business Travel Coalition believes that, too, but worries what would happen in the short run if two or three airlines failed in a short time frame, leaving too many holes for other carriers to fill immediately.

It would create a lot of havoc for corporations that need to move people, BTC Chairman Kevin Mitchell said.

Mitchell opposes airline bailouts but said the government might have to figure out a way to keep business routes open, even if it reduces leisure service.

What is more important, he asked: Is it Kevin Mitchell going to Disney, or DaimlerChrysler being able to move its people around the country?

Even large markets could be affected for the longer term. At some hubs, service might never return to previous levels.

I dont think youll see anyone go to Charlotte to set up a new hub, Ash said.

Southwest, which already has expressed interest in Charlotte, might move in. But Southwest doesnt do hubs, at least not in the traditional sense, so it wouldnt fill the entire gap.

Ash said a hub at least doubles the flight frequency a city could support on its own. Even if Southwest moves in and other airlines add Charlotte service, Ash said, Charlotte could see a third fewer frequencies and seats for six months to three years, if not longer.

A United collapse could not only lessen service but also create problems for airports, particularly ones with high expenses such as San Francisco, Boyd said. He speculated Denver Airport might be forced to file for the equivalent of Chapter 11.

For airport and community officials, the options are limited. They can aggressively court carriers, as Pittsburgh did with Southwest. But the experience at Dallas/Fort Worth, where Delta just eliminated its hub and left it to American, could be telling.

DFW is offering a sweetheart deal to entice airlines, but, faced with a dominant incumbent, no one seems eager to grab it.

Flights and fares

Some airlines seem to be rooting for a major competitor or two to liquidate, on the theory it will remove capacity from the system, leave passengers chasing fewer seats and enable the survivors to raise fares.

Former Continental CEO Gordon Bethune talked often about Continentals strategy to prosper by being one of the survivors. A few analysts say part of Deltas motive for simplifying fares is the hope it will drive US Airways out of business.

Perhaps airlines should be careful what they wish for. Industry veterans note airlines would be hard-pressed to provide an example where a liquidation created the conditions, beyond a short term, for fare increases by reducing capacity.

Thats not the way the airlines behave when they see an opportunity to be somewhere first, said Mathias.

Weve never seen the liquidation of a large airline rationalize capacity, said Darryl Jenkins, visiting professor at Embry Riddle Aeronautical University. A liquidation would not bring pricing relief for any more than a month or so.

To contact reporter Andrew Compart, send e-mail to [email protected].

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