"Flying in the red: Passengers are really feeling the pain of airline bankruptcies"

Monday, October 4, 2004 Issue

Flying in the red 
Passengers are really feeling the pain of airline bankruptcies 
By Richard J. Newman and James M. Pethokoukis 
US News and World Report


Everybody complains about airline food, but thousands of Delta Air Lines
passengers wished they had some last week. With the company threatening to
declare bankruptcy in coming weeks, one of the airline's caterers at
Atlanta's Hartsfield International Airport demanded quicker payment, instead
of waiting for its invoices to clear accounting. When Delta balked, the
caterer refused to service the carrier's planes. Hundreds of flights took
off short of snacks, beverages, and first-class meals, while Delta handed
out $8 vouchers redeemable at airport food shops.
 
Recent airline bankruptcies have been ho-hum events for travelers, with
minimal impact on flights or frequent-flier accounts. At long last, however,
the airline shakeout widely forecast after the 2001 terrorist attacks is
starting to rattle the flying public. U.S. Airways, the nation's
seventh-biggest carrier--which declared bankruptcy for the second time in
two years on September 12--may end up with no choice but to sell its assets
and liquidate. Given the company's listing balance sheet, the last-minute
arrival of a white-knight investor seems unlikely. United, still in
bankruptcy, scares away investors, too, thanks to a pension plan that
devours cash and a nagging inability to prove it can be profitable. Delta
and most of the other big airlines are stripping away perks and driving
their customers straight into the arms of lower-cost competitors like
JetBlue and Frontier that offer cheap fares and smiling on-board employees.
The big airlines "are all holding on by their fingernails," says Clark
Orsky, an airline analyst with KDP Investment Advisors in Montpelier, Vt.
"Who wants to invest in an airline today?"

This is an industry, of course, that has been in duress before--in the early
1990s, Pan Am and Eastern shut down their engines. But steps taken after the
September 11 attacks were supposed to forestall another industry meltdown.
The government took over responsibility for airport security--along with the
cost--and established the Air Transportation Stabilization Board, a kind of
bank of last resort for troubled carriers that couldn't get financing in the
marketplace. The board guaranteed a $900 million loan to U.S. Airways in
2002, prior to its first bankruptcy filing, with planes and other assets
pledged as collateral.

Once in bankruptcy, U.S. Airways wiped $2 billion in debt off its books and
forced $1 billion worth of pay cuts on its pilots. The airline made a
miscalculation, though--one that is now reverberating with other "legacy"
airlines. In its reorganization plan, U.S. Airways assumed that its revenue
stream, along with that of the industry as a whole, would bounce back to
prior levels once the economy recovered and the airlines regained altitude.

Crowded aisles. Traffic has returned, and as regular travelers know, planes
have become full once again. But fares have stayed low--a curse plaguing all
the big airlines. And there's no sign they'll go up anytime soon. Internet
pricing that simplifies comparison-shopping is one reason. Cut-rate carriers
modeled after Southwest Airlines have also grabbed a much bigger portion of
key markets than the big airlines ever expected. JetBlue, for example, runs
17 daily round trips between New York and California, offering fares as low
as $200 while still turning a profit. The big carriers often sell their
seats at a loss when they match those fares.

When Southwest began service earlier this year out of Philadelphia--a key
U.S. Airways hub--it was "a big blow at the core of U.S. Airways," says
William Warlick, senior airline analyst at Fitch Ratings. The airline,
running out of options, is now asking the bankruptcy court to cut pilot pay
an additional 23 percent. Pilots, not surprisingly, are infuriated, their
union riven with disputes between last-stand stalwarts and pragmatic
negotiators.
 
This time, U.S. Airways passengers realize it's not just bankruptcy as
usual. Charles Wysor, president of Ambassador Travel in Pittsburgh, has been
telling customers they should book flights with another airline if they're
planning travel after January 1. Businesses in Pittsburgh, where U.S.
Airways is the dominant carrier and offers nonstop service to 91 cities, are
still flying the airline, hoping to help keep it afloat. But they're doing
contingency planning. "I'm very concerned," says one corporate travel
manager. She has analyzed alternative service to the 70 cities where her
company typically flies and has come up with a mishmash of bad options that
would normally require connections instead of the usual U.S. Airways
nonstops. "I can't imagine what we'd do without them," she frets.

United and Delta aren't in a tailspin the way U.S. Airways is, but they're
right behind in the slipstream. After nearly two years under bankruptcy
protection and widespread pay cuts, United still says it needs to slash more
than $1 billion in costs. And it would like to wriggle out of pension plans
likely to cost $4.1 billion over the next five years--a dire development for
employees that United tried to avert in its initial bankruptcy requests.
United made a critical error, says Daniel Kasper of the consulting firm LECG
in Cambridge, Mass., by comparing its costs with those of other legacy
carriers instead of dis-counters like Southwest Airlines and JetBlue.
"United believed that most travelers--particularly business travelers--would
not switch to [low-cost carriers]," Kasper explains. "Those assumptions
turned out to be wrong."

Pay cuts. Ditto Delta. The huge Atlanta-based carrier has relied on its
extensive route network and frequent-flier program, and big-league amenities
like business- and first-class seating, to keep revenues high and customers
returning. But discounters like AirTran in Atlanta and JetBlue in New York
have been nibbling right into the core of Delta's business. Delta's pilots
negotiated the most generous contract in the industry in the late 1990s,
when the airlines were flush. But now there is a vast disparity between
labor costs at Delta and at other airlines. A senior Delta captain flying a
Boeing 737 earns $257 per hour, for instance, according to
airlinepilotpay.com , a database compiled by a pilot for one of the major
cargo carriers. The top pay rate for a JetBlue captain flying the slightly
bigger Airbus A320 is $139 per hour. Now, Delta CEO Gerald Grinstein has
said the company needs at least $1 billion in pay cuts. "The pilots are
going to give in," predicts analyst Jim Parker of Raymond James &
Associates. "They have much more to lose in bankruptcy, including their
pensions."

That alone won't fix Delta. The company is likely to lose nearly $2 billion
this year. It has acknowledged it needs to cut costs nearly that much but
hasn't signaled where the money will come from. Bankruptcy might be
appealing, since it would allow Delta to erase nearly $4 billion in
unsecured debt. Meanwhile, a restructuring plan will close the carrier's
Dallas hub--which could benefit American, the other huge tenant there--and
consolidate more flights in Atlanta. It will also expand its low-fare Song
subsidiary to compete better with JetBlue in the Northeast. "We need to be
able to make money in both good times and bad," Grinstein told analysts in a
recent conference call.

Meanwhile, Delta is making quick fixes to keep operations stable. Last week
the company made a deal with its pilots that would keep them in the cockpit
in the event of mass early retirements by those hoping to lock in pension
benefits prior to a bankruptcy filing. And the airline raced into court to
force its caterer back to work, after two days of disruptions. Passengers
can now relax: Cokes and pretzels are back.


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