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