Costly, contentious and twice as long as expected, United Airlines' bankruptcy restructuring seems an unlikely role model for Delta Air...
CHICAGO — Costly, contentious and twice as long as expected, United Airlines’ bankruptcy restructuring seems an unlikely role model for Delta Air Lines and Northwest Airlines as they begin their overhauls in Chapter 11.
United has run up $7.5 billion in losses in a 33-month bankruptcy process bloated by legal and consulting fees, for a staggering total of $12.5 billion lost since 2000. Its forecast for a profit in 2006 is dismissed by some as too rosy since it anticipates a sharp drop in oil prices to $50 a barrel, from around $63 a barrel now.
Nonetheless, the makeover of the nation’s second-largest carrier serves as a likely blueprint for its two ailing rivals, which are expected to try to copy much of what United has done. Analysts say they have little choice but to follow the bankruptcy “leader” to keep up — and stay in business.
“I think they looked at United and saw how United was able to shed pension liabilities … and shed a lot of contracts that were burdening them and prohibiting them from making a profit,” said George Novak, an airline consultant for The Metis Group in Washington, D.C.
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“United is showing that you can use bankruptcy in an intelligent manner to restructure.”
Delta and Northwest joined the parent companies of United and US Airways in Chapter 11 on Wednesday, making for four major network carriers operating with federal protection from their creditors. The moves were prompted by near-record fuel prices and heavy debt and pension obligations combined with intensifying competition from low-cost carriers.
Similar pressures sent United into bankruptcy Dec. 9, 2002, when its attorney James Sprayregen stood before a judge and warned that the nation’s No. 2 airline was about to undergo “profound and agonizing change.”
It was no exaggeration. United has used the leverage of federal bankruptcy law to lop $7 billion off its annual expenditures — extracting heavy concessions from its unions, dumping its defined-benefit pension plans, squeezing billions of dollars in savings from equipment lessors and eliminating 20,000 jobs.
While the toll on employees has been immense, United is far less costly to run and its operating costs are among the lowest of the major network carriers, giving it a significant competitive advantage.
It also is a much leaner United that is targeting a Feb. 1 exit from bankruptcy. The carrier has simplified its fleet to five aircraft types from 10, reduced to 455 aircraft from 567, cut U.S. capacity and added more profitable international routes, which now provide half its passenger revenue.
US Airways also has used the court process to reduce costs significantly during two stints in Chapter 11 but needed help from imminent merger partner America West Airlines to restructure. It intends to emerge from Chapter 11 within a month.
United will be the “guiding light” for Delta and Northwest, according to airline analyst Roger King of CreditSights, even though he remains unconvinced the company has done enough to ensure a profit.
Piper Jaffray airline analyst Joel Denney said he thinks Northwest’s trip through bankruptcy court will look more like US Airways’ relatively short initial stay of eight months in 2002-03.
Denney called United’s Chapter 11 filing “the accidental bankruptcy. They went in and then said, ‘Now what should we do?’ “
Chapter 11 was a last resort for Delta and Northwest after they eliminated thousands of jobs, negotiated pay reductions, renegotiated debt and trimmed their flight schedules. Bankruptcy law will enable them to make such cuts deeper.
“The big thing you can do in Chapter 11 is stiff your creditors and get rid of all the airplanes you don’t want and force employees to accept givebacks,” said Michael Roach, founding president of America West and now an airline consultant with the San Francisco-based firm Roach and Sbarra. “They absolutely will do all that” and dump their pension obligations, he predicted.
But the leverage comes at a steep cost of money, morale and more.
“They [bankruptcies] take a long time, they waste a lot of money, fees are outrageous and the process is adversarial,” King said.
Fees for attorneys, consultants and accountants have cost United about $10 million a month throughout its bankruptcy. It spent $260 million on fees from the December 2002 filing date through June, according to a review of bankruptcy-court documents by the Rocky Mountain News newspaper in Denver.
United spokeswoman Jean Medina says there was no shortcut to be had in making the airline more competitive through the restructuring, which has dragged on far past the company’s estimate of 18 months.
“Fuel continues to be a huge challenge for United and the industry,” she said. “But without the hard work that we have done over the last several years to reduce our costs, improve our revenue and restructure the way we do business, United would not be positioned to compete with the strongest network carriers.”