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