In most industries, it works this way: The successful thrive and the sick don't survive. But in the airline business, it isn't so simple...
CHICAGO — In most industries, it works this way: The successful thrive and the sick don’t survive.
But in the airline business, it isn’t so simple. The sick take refuge in bankruptcy court — sometimes more than once — and survive in a smaller, usually weaker form, to fly another day.
That’s the potential scenario behind yesterday’s bizarre coincidence in which both Delta Air Lines and Northwest Airlines filed for Chapter 11 protection, becoming the third and fourth major U.S. carriers to file for bankruptcy even as the overall economy is healthy.
Some economists and restructuring experts look at the phenomenon of airline bankruptcies and argue that the U.S. court system isn’t doing the industry any favors by intervening in what should be a Darwinian process.
For one thing, they say, it’s not fair to other airlines that don’t take advantage of what bankruptcy has to offer: the chance to ditch costly labor contracts and pension plans and simply not pay some bills.
It also doesn’t solve the fundamental problem facing the industry: There are too many airlines selling too many seats.
The simple solution should be for the weakest carriers to go out of business, allowing strong ones or upstarts to move in.
“The whole industry needs to get smaller,” said Sam Peltzman, a professor of economics at the University of Chicago Graduate School of Business.
“The problematic aspect is that the bankruptcy laws that are designed to facilitate that sometimes stretch things out.”
The reason U.S. bankruptcy courts function as they do, said James Schrager, who teaches entrepreneurship and strategy at the University of Chicago, is a mixture of the government’s interest in saving jobs and bankruptcy laws favoring companies that can come up with outside financing.
Regional pride factor
It also is likely a reflection of regional pride. The loss of Northwest would be a blow to the Twin Cities’ civic pride as well as the many towns that count on the airline.
Likewise, Atlanta has a vested interest in keeping Delta alive, just as Chicago has in the fate of hometown carrier United Airlines.
But others say the bankruptcy system gets a bum rap.
David LeMay, a New York bankruptcy attorney who represented Continental Airlines in the mid-1990s, bristles at the suggestion court protection conveys an unfair advantage.
“Bankruptcy doesn’t put a dime in the till,” LeMay said.
Airlines would prefer to restructure their business out of court, he noted, citing the example of American Airlines, the nation’s largest airline, which was able to achieve deep pay and benefit cuts with its work force two years ago, avoiding a trip to bankruptcy court.
Other supporters of the bankruptcy system note that as a country, we have always been sympathetic to debtors, a reflection of our humble beginnings.
“In Europe, bankruptcy laws are designed to protect creditors. We’re a nation founded by debtors, people who were trying to get away from debtors’ prison,” said Carl Steidtmann, chief economist with Deloitte Research.
From a worker’s perspective, a bankruptcy system that preserves jobs and keeps companies intact is beneficial and promotes economic stability, he added.
And there’s no question consumers have benefited from plunging ticket prices and expanding travel options as competing carriers have battled it out.
It’s really the capital markets that deserve a flogging, some transportation experts say. Pension funds, hedge funds, investment banks and other lenders keep riding to the rescue of bankrupt carriers with exit financing in the form of equity investments or debt.
“It’s ultimately the responsibility of the capital markets” to make judgments about what carriers are viable, said Deloitte’s Steidtmann. “Nobody puts a gun to their head and says, ‘You have to lend money to these guys.’ “
Fallout from bailout
Although unintentional, the government didn’t help the situation by bailing out airlines after the Sept. 11 attacks, and again after the start of the Iraq war, said Joseph Schwieterman, a transportation expert at DePaul University.
The cash grants and loan guarantees allowed struggling carriers to postpone the day of reckoning, a fact now surfacing four years after the attacks, he said.
One thing nearly everyone agrees on is that it’s the end of an era for the full-service so-called legacy carriers.
“They have to completely revamp their operations to survive,” said Schwieterman.
The nation’s major airlines have run into a nasty trifecta.
Their best customers are increasingly avoiding the airport check-in hassle by flying in private and corporate jets.
Budget-minded customers are flying discount carriers, which now serve almost every region of the country.
And sky-high fuel costs have torpedoed the airlines’ best-laid business plans to return to profitability.