- The Washington Times - Friday, September 10, 2004

Two major airlines are teetering on the edge of bankruptcy while another struggles to pull out of it three years after the September 11 terrorist attacks sent the already hurting industry into a tailspin. US Airways is likely to file for bankruptcy as soon as tomorrow while Delta Air Lines is hoping to avoid a bankruptcy filing through labor concessions from its pilots. United Airlines went into Chapter 11 protection in December 2002 and is facing an employee revolt as it tries to end its pension plans. Meanwhile, their spry, low-cost competitors are thriving with business models that undercut the competition on expenses and fares. “A major correction is being taken right now in the airline industry,” said Terry Trippler, an airline consumer advocate. The major carriers are grappling with soaring fuel prices, high labor expenses from union contracts, too many airplanes competing on the same routes, the rough economy, issues like the terrorist attacks and severe acute respiratory syndrome virus, as well as their outdated business models. Their low-cost rivals deal with some of the same issues, but their flexible flight schedules and lower labor costs help them remain profitable. “I think there’s definitely a sense that there has to be some consolidation in the industry,” said Jack Evans, spokesman for the Air Transport Association, a trade group for major airlines. Industrywide, an average of 76.6 percent of airline seats have been filled by paying passengers so far this year, according to the ATA. Last year, it was 74.2 percent. In 2001, it was 70.4 percent. The most troubled airlines are the “legacy carriers,” or large airlines that base their operations at a few airports and fly mostly between major cities. They include American Airlines, Continental Airlines, Delta, Northwest Airlines, US Airways and United. The more profitable low-cost carriers shift their flights frequently between cities that offer them the greatest number of passengers. They also avoid the pension costs that are crippling the finances of legacy carriers by offering employees 401(k) retirement plans, in which they match employees’ contributions in a retirement fund, instead of pensions. The legacy carriers are trying to reorganize to operate more like low-cost airlines. Delta, for example, has created a subsidiary, called Song, that operates with the same kind of point-to-point system as Southwest and JetBlue. In its turnaround plan announced Wednesday, Delta said it would increase Song’s routes. US Airways also has been trying to operate more like a low-cost carrier and has been putting increasing emphasis on its Caribbean routes as it negotiates with its unions for $800 million in labor concessions. But those efforts may be too little, too late. “We could have a double whammy here, with two filing fairly quickly,” Bill Warlick, an analyst for Fitch Ratings credit-rating service, said about the potential bankruptcies of US Airways and Delta. When US Airways filed for bankruptcy two years ago, it had plenty of tangible assets and government loan guarantees it could use as collateral to emerge from court protection from creditors after only eight months. Now, much of its collateral has been liquidated in bankruptcy, meaning it would need to operate only with some of the $975 million cash on hand it reported at the end of the second quarter. Industry analysts are saying a liquidation is possible for US Airways, bringing a reshuffling of flights and airline capacity throughout the airline industry. “The failure of a major airline would create many more problems than it would solve,” Mr. Trippler said. “Communities they serve would be hurt, their employees, their business partners. To me the answer is not the failure of a major airline, the answer is a more sensible and rational approach to pricing in which you make money when people fly your airline.” Other airlines would get only a short-term benefit if a major carrier liquidates and reduces industry competition, analysts said. “Let’s say US Air decides to go out of business,” said Michael Boyd, an airline industry consultant in Evergreen, Colo. “The reduction in overcapacity will take place in small markets, not large ones.” Airlines would keep their fleets concentrated on the most profitable routes between major cities, but cities like Roanoke and Ithaca, N.Y., would lose some service, he said. By comparison, United Airlines has many as 52 daily flights between Los Angeles and the Washington area. Other analysts say the routes and fleets of any failed airline would quickly be taken over by its competitors, resulting in little decrease in the industry’s overcapacity problems. An example is Delta’s reorganization plan announced last week, which includes drastically reduced flights at Dallas-Fort Worth International Airport and laying off about 7,000 employees. American Airlines already has announced it would increase its flights at the Dallas airport to make up for the ones Delta is cutting. “It’s very difficult to get rid of airline capacity permanently,” Mr. Warlick said. For awhile, the airplanes of a failed airline might get parked in a Mojave Desert storage lot, but only briefly, he said. “We’re talking about assets that are easy to move around and can be brought back into other carriers’ networks in fairly short order,” Mr. Warlick said. “Many carriers around the world, including some in the U.S., would be happy to bring them back into their fleets.” One theory among industry officials is that an airline liquidation would drive up fares by reducing the pressure on carriers to beat the prices of the competition. “If you have less supply out there and high demand, it could influence fares,” said the ATA’s Mr. Evans.

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