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.
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.
This story appears in the October 4, 2004 print edition of U.S. News & World Report.