Delta Air Lines and Northwest Airlines, hobbled by soaring fuel costs and heavy debt and pension obligations, filed for bankruptcy protection...
Delta Air Lines and Northwest Airlines, hobbled by soaring fuel costs and heavy debt and pension obligations, filed for bankruptcy protection yesterday, becoming the third and fourth major carriers to enter Chapter 11 since the 2001 terrorist attacks.
The dual filings in U.S. Bankruptcy Court in New York bring into focus the magnitude of the difficulties facing the nation’s big airlines, which have lost more than $30 billion in four years even as they slashed thousands of jobs and raised questions about the viability of their employee pension plans.
A spike in fuel prices after Hurricane Katrina was the final blow for both.
By joining the parents of United Airlines and US Airways in bankruptcy, the four major carriers represent more than 40 percent of all available seat miles in the U.S., according to analysts.
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“We are reading the first page in a thriller that will end either in resurrection or the death and burial of an entire industry as we know it today,” said William Rochelle, an airline-bankruptcy lawyer in New York.
Delta said it plans to reduce its fleet size and Chief Executive Gerald Grinstein said it’s likely more job reductions will be needed on top of the 24,000 job cuts the Atlanta-based carrier has announced since 2001.
Northwest CEO Doug Steenland said his airline also would shrink in bankruptcy, with layoffs expected before the end of the year, and fewer flights.
Chapter 11 protection will allow the airlines to pursue cuts in wages, restructuring of debt as well as make changes to pension and health benefits for workers and retirees. Not yet clear is whether they will seek to turn over their pension plans to the federal government, as United’s parent won permission to do from a judge in Chicago.
Delta promised to honor all tickets and sent a letter to frequent-flier customers seeking to reassure them. Northwest said it would continue to operate normally its frequent-flier and WorldPerks Visa programs.
Delta, the nation’s third-largest carrier, has lost nearly $10 billion over the past four years.
Northwest, the country’s fourth-largest airline, had been in better financial shape than some of its competitors, but that changed after 9/11, the rise in fuel prices and the epidemic of SARS, a virus that spread through several Asian countries, which cut into a core Northwest business.
Delta’s late-afternoon bankruptcy filing included its low-fare subsidiary Song, feeder carrier Comair and 16 other affiliates.
Delta listed its total debt at $28.3 billion and assets at $21.6 billion. Northwest listed assets of $14.35 billion.
Delta and Northwest follow into bankruptcy United Airlines, and US Airways, which is undergoing reorganization for the second time in three years.
American Airlines, the nation’s biggest carrier, teetered on the verge of bankruptcy before winning deep concessions from its employees. The other so-called legacy carrier, among those with a large presence in multiple regions before deregulation in 1978, is Continental Airlines.
Continental and American are in no immediate danger of bankruptcy. Continental had a big cost advantage over other traditional airlines after it slashed expenses during two bankruptcy reorganizations in the 1990s.
American may be the strongest financially of the traditional airlines, thanks to $1.8 billion in annual labor concessions it won in 2003. Its parent company actually turned a profit in the second quarter.
Before its filing, Northwest for months had sought more than $1.1 billion in union concessions, warning that bankruptcy was a possibility, but only pilots agreed.
Mechanics went on strike last month rather than accept deep layoffs and pay cuts, and though the airline stayed aloft with replacements, it switched to a reduced fall schedule early and saw more delays and cancellations than usual.
Northwest also faces $2.5 billion in payments due to its underfunded pensions in the next couple of years, and has so far unsuccessfully pursued a change to federal law that would allow it to spread the payments over a longer term.
Likewise, Delta faces billions in pension payments over the next three years, and it said yesterday it does not plan to make its next funding contribution to its defined-benefit pension plan.
By filing for Chapter 11 now, Northwest and Delta beat an Oct. 17 deadline, when the bankruptcy laws become more restrictive and make it harder for companies to cancel their debts.
US Airways yesterday won approval from creditors to exit through a merger with America West.
ATA Airlines and Aloha are also under court protection.
“Bankruptcy is allowing airlines to emerge with a clean slate, but it’s bad news for workers,” said Harley Shaiken, a professor of labor relations at the University of California, Berkeley. “Pensions will be affected and it will mean lower wages and probably fewer jobs.”
“This is the irony: Among the most unionized carriers is Southwest,” Shaiken said.
The industry faced similar circumstances in the early 1990s, with high oil prices pushing up fuel costs and dying carriers cutting fares to stay afloat.
Some airlines had to die off to reduce the industry’s overall seating capacity and help some carriers survive, said Julius Maldutis, who has been an analyst or consultant in the industry for 42 years.
“Unless we see the liquidation or the mass shrinkage of capacity we’re not going to see the industry return to profitability, barring a collapse in oil prices,” Maldutis said.
Comments from Shaiken and Maldutis provided by Bloomberg News.