DesertFox
11-10-2003, 05:46 PM
<h6>29 Nov 02
United Airlines shares lost nearly one-third of their value on Friday as the nation's second-largest airline teetered on the brink of bankruptcy.
Shares of UAL sank $1.11 to close at $2.52 following a decision by machinists to reject wage concessions that would allow the financially strapped carrier to win government loan guarantees.
The airline's 13,000 mechanics Wednesday balked at helping United reach $5.2 billion in labor cost cuts after the airline's other unions agreed to help United win $1.8 billion in federal loan guarantees from the Air Transportation Stabilization Board.
The rest: http://www.upi.com/view.cfm?StoryID=20021129-021942-2802r</h6> tacitus
I hope nobody plans to fly on UAL in the near future. If UAL folds, Denver International will become a ghost town.
DesertFox
Look on the bright side, tac: Most of those leaving would be libs
Chris
I've recently priced airline tickets for bringing my son home from school over Thanksgiving and Christmas. I don't recall if it was United Airlines also, but many of the big name airlines need a lesson in Reaganomics. They've priced themselves right out of the market. Their ticket prices are over twice the price of US Air prices and a few others, for the exact same flight. Before taxpayers have to pay to bail them out, they should be forced to lower their prices and be more competitive.
ThomasMore
[ QUOTE ]
"I don't recall if it was United Airlines also, but many of the big name airlines need a lesson in Reaganomics. They've priced themselves right out of the market. Their ticket prices are over twice the price of US Air prices and a few others, for the exact same flight."
[/ QUOTE ]
United's plight is the result of unbelievably stupid and arrogant management decisions, and its labor groups' greed.
As for US Airways' ability to undercut UAL and the other major carriers, US Air has filed Chapter 11. This means that it can hold its creditors off, while the other majors must still pay their creditors. Since US Air does not have to pay all the bills its competitors do, it can fill its planes with lower fares and still generate a positive income stream. If UAL and the other majors were to do the same, they would sell each ticket below their operating costs.
Gordon Bethune, CEO of Continental Airlines and an outstanding airline manager, recently said that one of the problems of airline economics is that "all the airlines are held hostage to the stupidest competitor."
Some of the low-cost carriers can regularly offer coach travelers less-expensive tickets and make money: Southwest and AirTran are two; and for now, jetBlue, Spirit, and Frontier are doing well too. Long-term, the jury is still out on the last three. Notably, none of the low-cost carriers offer international or long-range service, and with the exception of jetBlue, none offer more than minimal cabin service.
The low-cost, low-service approach is no guarantee of success. Vanguard and National have already closed their doors, and Midway and Sun Country are in bankruptcy and barely operating.
If you want any service, your options are to fly first- or business-class on one of the majors, or fly on Midwest Express (my employer) or jetBlue. The third and fastest-growing option is to participate in a "fractional" operation in which you or your company buys a small fraction of a business jet. Whenever you need to travel, a business jet (not necessarily the one you have a share of) will be on 4-hour call to pick you up at your local airport and take you directly to your destination. No airport security and no lines. Usually, you will avoid the busy air-carrier terminals altogether and can fly from or to any airport with a medium-length runway. The biggest of the fractionals is Warren Buffett's NetJets.
Chris
[ QUOTE ]
As for US Airways' ability to undercut UAL and the other major carriers, US Air has filed Chapter 11. This means that it can hold its creditors off, while the other majors must still pay their creditors. Since US Air does not have to pay all the bills its competitors do, it can fill its planes with lower fares and still generate a positive income stream. If UAL and the other majors were to do the same, they would sell each ticket below their operating costs.
[/ QUOTE ]
A few questions: If US Air filed that Chapter 11 thing, can't they just leave their ticket holders high and dry at the drop of a hat too?
And, if all US Air can hold off its creditors that way, why do companies do business with them? It doesn't seem to be smart business to me.
And, if all the airlines file chapter 11 and operate below cost, who gets left making up the cost of operations, taxpayers?
One more. If they all did the same thing and more or less leveled the playing field, would that eventually result in all of them getting so busy that they all are able to get out of the chapter 11 thing?
ThomasMore
Chapter 11 reorganization is under the U.S. Bankruptcy Code.
When a company cannot pay its bills and makes the decision to use the Bankruptcy Code, it has two options:
1. File Chapter 7, which for a corporation means that it is going out of business. The instant any Bankruptcy proceeding is filed, an "automatic stay" is imposed on every creditor -- no creditor can even ask for any payment on pre-Bankruptcy debts except through the Bankruptcy Court, and under Bankruptcy procedures. Secured creditors get their security interests back; (for an individual example, your home mortgage is secured by your house and your car loan is secured by your car). If you file a personal Chapter 7, the bank would take your house and car back, but it would probably lose the other cash due it. For the unsecured creditors (who hold IOUs backed by nothing -- think of your credit cards or unsecured loans), what is left of the company is sold off, and whatever is left of the company's property, (2 cents on the dollar, 10 cents on the dollar, etc.) is divided up and given to its creditors. At the end of every corporate Chapter 7, the company is dissolved and goes away.
2. File Chapter 11 reorganization. Chapter 11 is designed to give a company some relief from its pre-Bankruptcy debts, and still get it back on its feet as a going entity financially. In a Chapter 11 reorganization, the "automatic stay" still takes place. Creditors are instantly barred from demanding any of their pre-bankruptcy money, until the Court sorts things out. The debtor company must then make up a plan that gives EACH creditor NO LESS than it would get from of a Chapter 7 dissolution. The creditors are also given a voice; if they don't like the debtor's plan, they can propose their own reorganization plans to the Court, and the Court might impose a creditor's plan or its own hybrid of different plans. If the creditors are sufficiently unhappy with the plans or the results, they might be able to persuade the Court to convert the Chapter 11 to a Chapter 7, and force the company to go out of business so they get paid as much as possible.
Special rules exist for new debts incurred after the Bankruptcy Petition has been filed -- the debtors want adequate protection that those debts will be paid, and the Court supervises the terms and conditions of those debts. It might order the company to meet a Court-imposed payment schedule for post-petition debts. Chapter 11 proceedings can drag on for years until the debts and payments are sorted out.
Almost every airline which has entered the Chapter 11 process has ultimately gone out of business -- some during the bankruptcy proceedings, others have emerged from Chapter 11 so weak that they later re-entered bankruptcy and went out of business. The following major and national airlines all filed Chapter 11, some more than once:
1. Braniff
2. TWA -- In the 1970's and 80's it was the 3d largest airline, behind United and American. It filed Chapter 11 in the mid-80's and dwindled from that point forward until only a weak shell was left when American bought it last year.
3. Eastern
4. Pan American
5. Frontier
6. Midway
7. PeopleExpress
8. Continental
Of those, only Continental is still in business, but it repeatedly came VERY close to being dissolved. Only a major managment upheaval saved it at all. It still holds much less market share than it did before it entered bankruptcy.
There are new airlines with the names "Pan American", "Frontier" and "Midway", but none of these are the "same" airlines as their namesakes. In each case, entirely new companies were founded years after the old ones had ceased to exist. They choose the "old" names because many of the employees and managers had come from the old airlines, and for marketing purposes.
In other words, the history of airline bankruptcies indicates that once an airline enters bankruptcy, its future prospects are very, very grim.
DesertFox
Thanks for that superb rundown, Thomas. You've made this a wonderfully informative thread on the airline bidness, useful for everybody.
Chris
Thanks Thomas. I've only flown a few times, because I can't stand heights and close spaces, and the combination makes me hyperventilate. Consequently the doc drugged me so they could get me on the thing without me freaking out the other passengers.
Anyway, both times I flew the planes weren't near full and I understand that happens a lot. It seems to me that if airlines cut back the amount of flights so they didn't have so many semi full flights going out, that it would save a lot of money.
ThomasMore
Each airline is balancing how much it capacity it can cut back and how much market share it can afford to lose. In other words, if Delta decides to park 200 aircraft and Northwest doesn't cut any back, Northwest can fly more frequent schedules, and Delta passengers who want to fly at their convenience may switch their loyalties to Northwest. The same consideration applies to how much an airline can discount its fares -- even below cost -- to attract customers who will stay. (Hence, Bethune's comment that the industry is hostage to the stupidest competitor.)
Most of the airlines have already reduced capacity. Hundreds of airliners are parked in the desert (where the dry air slows deterioration), and thousands of airline employees are still on furlough.
My airline's managers tell me that we are currently operating below cost (and rapidly burning cash) partly to get people used to flying again and partly to keep passengers from defecting elsewhere, in the hope that we can soon raise fares to a profitable level. All new aircraft deliveries (already scheduled before 9/11/01) that we could get the manufacturer's permission to postpone, have been postponed, and we have parked some of our older aircraft. To say managers across the industry are in a state of panic is no exaggeration.
A Chapter 11 at United will exacerbate our industry's problems; we will now have not one, but two major airlines operating free of many of the normal costs and debt issues associated with operating an airline. To a greater degree, the other airlines will be under continued pressure to operate below cost.
DesertFox
So the mechanics of bankruptcy for one threaten the rest. I'd never have suspected that.
RayChuang
ThomasMore,
Personally, my big worry is that if United files for Chapter 11 bankruptcy and then eventually ceases operations, it could eventually lead to at least three airlines going out of business in a matter of 24 months. Imagine United, US Airways and American gone two years from now--there will be a very nasty scramble by the remaining airlines to fill in the huge gap caused by the loss of these three airlines.
I would not be surprised if the US Government steps in and possibly force the entire industry to undergo massive changes to save the industry.
ThomasMore
[ QUOTE ]
By RayChuang:
"Personally, my big worry is that if United files for Chapter 11 bankruptcy and then eventually ceases operations, it could eventually lead to at least three airlines going out of business in a matter of 24 months."
[/ QUOTE ]
Ray, I don't think either USAirways or United will close their doors in the next 12 months. The history of large-airline bankruptcies suggests that they will struggle along and wane over a period of years. (TWA, Pan Am, Braniff and Continental are all good examples.)
American, Delta and Northwest are each in serious financial straits, but I do not expect them to file bankruptcy unless trends turn worse than they are now. However, the smaller carriers are very vulnerable, and if they go into bankruptcy, their demise is likely to be quick (e.g., the original Midway, Vanguard, National, etc.)
The entire industry has been watching carefully to see what happens on several fronts:
1. United's bankruptcy would be expected to depress air fares across the industry, for reasons stated previously.
2. War in Iraq could have several bad effects for the industry. During the 1991 Gulf War, fuel prices increased substantially (fuel is a major cost for airlines), passengers were leery about flying, and the economy as a whole dipped, further depressing both the numbers of passengers and the fares they were willing to pay. Increasing costs and depressing both fares and loads would not be good in an industry already losing money.
3. The federalization of airport security has resulted in vastly increased passenger delays and inconvenience. It has been causing frequent and business fliers (the airlines' bread-and-butter) to find other alternatives to flying commercially: teleconferencing, fractional and business aircraft flying, or driving on shorter routes. Unless this is resolved, many of the airlines' best passengers may never return.
4. Another terrorist event could have drastic effects on passenger confidence, and therefore on the industry.
[ QUOTE ]
By Desert Fox:
"So the mechanics of bankruptcy for one threaten the rest. I'd never have suspected that."
[/ QUOTE ]
Fox, there is another aspect of the USAir and United bankruptcies which I haven't even discussed yet, one which is likely to reshape the entire U.S. airline industry.
Each of the major airlines has negotiated compensation and retirement packages with its employee groups. Both the airlines and the labor groups get very rigid with these agreements because they are governed by a law called the Railway Labor Act (RLA). Under the RLA, once a contract is signed, it cannot be amended until it expires (usually about 4-5 years later). Only at the end of the contract do new-contract negotiations begin. The RLA strictly prohibits strikes, slowdowns, "sick-outs" or any other kind of employee action during the contract or even the negotiation process. If the parties reach an impasse in their direct negotiations, then they are compelled to submit their matter to a federally-appointed mediator. The negotiation and mediation process can take two years or more, during which time the employees are working under expired contract terms. Only after mediation is exhausted and the mediator gives up, may the company and the labor groups resort to "self-help", i.e., lockouts, strikes, etc. Because the process is excruciatingly time-consuming, neither side is usually willing to make concessions -- it is likely never to recover any concessions it makes. (There is history on both sides -- company concessions to labor never returned when times got bad, labor concessions to management never returned when times got good.) In my opinion, this is an unholy synergy between a bad law and the arrogant view of many managers and labor leaders who express the view that "you could have negotiated a different deal, so live with it."
The major airlines also employ "regional" airlines to serve markets too small for the main lines. Some regionals are actually owned by the parent (my employer, Skyway, is 100% owned by Midwest Express), and some are contracted. (United contracts its regional service from several regional airlines, Air Wisconsin, Atlantic Coast, and SkyWest.) These regionals generally fly smaller jets and turboprops, generally in the 19-70 seat range. They also pay their employees much less (a typical airline captain at a regional makes $40,000 - $60,000).
To protect their own job security and negotiating positions, employees at the major airlines negotiate "scope" clauses with management, limiting the amount of flying that a major airline can assign to its regionals. Without a scope clause, for example, United could reassign much of its flying to a regional carrier and furlough most of its own employees. It might thus play one employee group off against another or bypass its contract entirely by reassigning the work. Employees find scope clauses necessary to retain any negotiating leverage with their employers; the major airlines find themselves less able to quickly reassign a route which from an unprofitable 150-seat plane to a profitable 50-seat regional plane when they need to.
Filing bankruptcy allows the airline to void its labor contracts. This throws the employees' compensation and retirement packages open, and allows the airline to avoid its scope clauses. US Airways has already announced that it will retire many of its mainline aircraft and vastly increase its regional aircraft use. Many USAir employees will find themselves out of work, but USAir's regionals like Chautauqua Airlines will get very busy. I expect United to do the same if it files Chapter 11.
Competitive pressures will probably cause Delta, Northwest, America West and the other major airlines to follow suit and shift much of their flying to regionals. The net result of this trend will be a shrinkage in all the major airlines while many more of their passengers travel on regional aircraft.
United Airlines shares lost nearly one-third of their value on Friday as the nation's second-largest airline teetered on the brink of bankruptcy.
Shares of UAL sank $1.11 to close at $2.52 following a decision by machinists to reject wage concessions that would allow the financially strapped carrier to win government loan guarantees.
The airline's 13,000 mechanics Wednesday balked at helping United reach $5.2 billion in labor cost cuts after the airline's other unions agreed to help United win $1.8 billion in federal loan guarantees from the Air Transportation Stabilization Board.
The rest: http://www.upi.com/view.cfm?StoryID=20021129-021942-2802r</h6> tacitus
I hope nobody plans to fly on UAL in the near future. If UAL folds, Denver International will become a ghost town.
DesertFox
Look on the bright side, tac: Most of those leaving would be libs
Chris
I've recently priced airline tickets for bringing my son home from school over Thanksgiving and Christmas. I don't recall if it was United Airlines also, but many of the big name airlines need a lesson in Reaganomics. They've priced themselves right out of the market. Their ticket prices are over twice the price of US Air prices and a few others, for the exact same flight. Before taxpayers have to pay to bail them out, they should be forced to lower their prices and be more competitive.
ThomasMore
[ QUOTE ]
"I don't recall if it was United Airlines also, but many of the big name airlines need a lesson in Reaganomics. They've priced themselves right out of the market. Their ticket prices are over twice the price of US Air prices and a few others, for the exact same flight."
[/ QUOTE ]
United's plight is the result of unbelievably stupid and arrogant management decisions, and its labor groups' greed.
As for US Airways' ability to undercut UAL and the other major carriers, US Air has filed Chapter 11. This means that it can hold its creditors off, while the other majors must still pay their creditors. Since US Air does not have to pay all the bills its competitors do, it can fill its planes with lower fares and still generate a positive income stream. If UAL and the other majors were to do the same, they would sell each ticket below their operating costs.
Gordon Bethune, CEO of Continental Airlines and an outstanding airline manager, recently said that one of the problems of airline economics is that "all the airlines are held hostage to the stupidest competitor."
Some of the low-cost carriers can regularly offer coach travelers less-expensive tickets and make money: Southwest and AirTran are two; and for now, jetBlue, Spirit, and Frontier are doing well too. Long-term, the jury is still out on the last three. Notably, none of the low-cost carriers offer international or long-range service, and with the exception of jetBlue, none offer more than minimal cabin service.
The low-cost, low-service approach is no guarantee of success. Vanguard and National have already closed their doors, and Midway and Sun Country are in bankruptcy and barely operating.
If you want any service, your options are to fly first- or business-class on one of the majors, or fly on Midwest Express (my employer) or jetBlue. The third and fastest-growing option is to participate in a "fractional" operation in which you or your company buys a small fraction of a business jet. Whenever you need to travel, a business jet (not necessarily the one you have a share of) will be on 4-hour call to pick you up at your local airport and take you directly to your destination. No airport security and no lines. Usually, you will avoid the busy air-carrier terminals altogether and can fly from or to any airport with a medium-length runway. The biggest of the fractionals is Warren Buffett's NetJets.
Chris
[ QUOTE ]
As for US Airways' ability to undercut UAL and the other major carriers, US Air has filed Chapter 11. This means that it can hold its creditors off, while the other majors must still pay their creditors. Since US Air does not have to pay all the bills its competitors do, it can fill its planes with lower fares and still generate a positive income stream. If UAL and the other majors were to do the same, they would sell each ticket below their operating costs.
[/ QUOTE ]
A few questions: If US Air filed that Chapter 11 thing, can't they just leave their ticket holders high and dry at the drop of a hat too?
And, if all US Air can hold off its creditors that way, why do companies do business with them? It doesn't seem to be smart business to me.
And, if all the airlines file chapter 11 and operate below cost, who gets left making up the cost of operations, taxpayers?
One more. If they all did the same thing and more or less leveled the playing field, would that eventually result in all of them getting so busy that they all are able to get out of the chapter 11 thing?
ThomasMore
Chapter 11 reorganization is under the U.S. Bankruptcy Code.
When a company cannot pay its bills and makes the decision to use the Bankruptcy Code, it has two options:
1. File Chapter 7, which for a corporation means that it is going out of business. The instant any Bankruptcy proceeding is filed, an "automatic stay" is imposed on every creditor -- no creditor can even ask for any payment on pre-Bankruptcy debts except through the Bankruptcy Court, and under Bankruptcy procedures. Secured creditors get their security interests back; (for an individual example, your home mortgage is secured by your house and your car loan is secured by your car). If you file a personal Chapter 7, the bank would take your house and car back, but it would probably lose the other cash due it. For the unsecured creditors (who hold IOUs backed by nothing -- think of your credit cards or unsecured loans), what is left of the company is sold off, and whatever is left of the company's property, (2 cents on the dollar, 10 cents on the dollar, etc.) is divided up and given to its creditors. At the end of every corporate Chapter 7, the company is dissolved and goes away.
2. File Chapter 11 reorganization. Chapter 11 is designed to give a company some relief from its pre-Bankruptcy debts, and still get it back on its feet as a going entity financially. In a Chapter 11 reorganization, the "automatic stay" still takes place. Creditors are instantly barred from demanding any of their pre-bankruptcy money, until the Court sorts things out. The debtor company must then make up a plan that gives EACH creditor NO LESS than it would get from of a Chapter 7 dissolution. The creditors are also given a voice; if they don't like the debtor's plan, they can propose their own reorganization plans to the Court, and the Court might impose a creditor's plan or its own hybrid of different plans. If the creditors are sufficiently unhappy with the plans or the results, they might be able to persuade the Court to convert the Chapter 11 to a Chapter 7, and force the company to go out of business so they get paid as much as possible.
Special rules exist for new debts incurred after the Bankruptcy Petition has been filed -- the debtors want adequate protection that those debts will be paid, and the Court supervises the terms and conditions of those debts. It might order the company to meet a Court-imposed payment schedule for post-petition debts. Chapter 11 proceedings can drag on for years until the debts and payments are sorted out.
Almost every airline which has entered the Chapter 11 process has ultimately gone out of business -- some during the bankruptcy proceedings, others have emerged from Chapter 11 so weak that they later re-entered bankruptcy and went out of business. The following major and national airlines all filed Chapter 11, some more than once:
1. Braniff
2. TWA -- In the 1970's and 80's it was the 3d largest airline, behind United and American. It filed Chapter 11 in the mid-80's and dwindled from that point forward until only a weak shell was left when American bought it last year.
3. Eastern
4. Pan American
5. Frontier
6. Midway
7. PeopleExpress
8. Continental
Of those, only Continental is still in business, but it repeatedly came VERY close to being dissolved. Only a major managment upheaval saved it at all. It still holds much less market share than it did before it entered bankruptcy.
There are new airlines with the names "Pan American", "Frontier" and "Midway", but none of these are the "same" airlines as their namesakes. In each case, entirely new companies were founded years after the old ones had ceased to exist. They choose the "old" names because many of the employees and managers had come from the old airlines, and for marketing purposes.
In other words, the history of airline bankruptcies indicates that once an airline enters bankruptcy, its future prospects are very, very grim.
DesertFox
Thanks for that superb rundown, Thomas. You've made this a wonderfully informative thread on the airline bidness, useful for everybody.
Chris
Thanks Thomas. I've only flown a few times, because I can't stand heights and close spaces, and the combination makes me hyperventilate. Consequently the doc drugged me so they could get me on the thing without me freaking out the other passengers.
Anyway, both times I flew the planes weren't near full and I understand that happens a lot. It seems to me that if airlines cut back the amount of flights so they didn't have so many semi full flights going out, that it would save a lot of money.
ThomasMore
Each airline is balancing how much it capacity it can cut back and how much market share it can afford to lose. In other words, if Delta decides to park 200 aircraft and Northwest doesn't cut any back, Northwest can fly more frequent schedules, and Delta passengers who want to fly at their convenience may switch their loyalties to Northwest. The same consideration applies to how much an airline can discount its fares -- even below cost -- to attract customers who will stay. (Hence, Bethune's comment that the industry is hostage to the stupidest competitor.)
Most of the airlines have already reduced capacity. Hundreds of airliners are parked in the desert (where the dry air slows deterioration), and thousands of airline employees are still on furlough.
My airline's managers tell me that we are currently operating below cost (and rapidly burning cash) partly to get people used to flying again and partly to keep passengers from defecting elsewhere, in the hope that we can soon raise fares to a profitable level. All new aircraft deliveries (already scheduled before 9/11/01) that we could get the manufacturer's permission to postpone, have been postponed, and we have parked some of our older aircraft. To say managers across the industry are in a state of panic is no exaggeration.
A Chapter 11 at United will exacerbate our industry's problems; we will now have not one, but two major airlines operating free of many of the normal costs and debt issues associated with operating an airline. To a greater degree, the other airlines will be under continued pressure to operate below cost.
DesertFox
So the mechanics of bankruptcy for one threaten the rest. I'd never have suspected that.
RayChuang
ThomasMore,
Personally, my big worry is that if United files for Chapter 11 bankruptcy and then eventually ceases operations, it could eventually lead to at least three airlines going out of business in a matter of 24 months. Imagine United, US Airways and American gone two years from now--there will be a very nasty scramble by the remaining airlines to fill in the huge gap caused by the loss of these three airlines.
I would not be surprised if the US Government steps in and possibly force the entire industry to undergo massive changes to save the industry.
ThomasMore
[ QUOTE ]
By RayChuang:
"Personally, my big worry is that if United files for Chapter 11 bankruptcy and then eventually ceases operations, it could eventually lead to at least three airlines going out of business in a matter of 24 months."
[/ QUOTE ]
Ray, I don't think either USAirways or United will close their doors in the next 12 months. The history of large-airline bankruptcies suggests that they will struggle along and wane over a period of years. (TWA, Pan Am, Braniff and Continental are all good examples.)
American, Delta and Northwest are each in serious financial straits, but I do not expect them to file bankruptcy unless trends turn worse than they are now. However, the smaller carriers are very vulnerable, and if they go into bankruptcy, their demise is likely to be quick (e.g., the original Midway, Vanguard, National, etc.)
The entire industry has been watching carefully to see what happens on several fronts:
1. United's bankruptcy would be expected to depress air fares across the industry, for reasons stated previously.
2. War in Iraq could have several bad effects for the industry. During the 1991 Gulf War, fuel prices increased substantially (fuel is a major cost for airlines), passengers were leery about flying, and the economy as a whole dipped, further depressing both the numbers of passengers and the fares they were willing to pay. Increasing costs and depressing both fares and loads would not be good in an industry already losing money.
3. The federalization of airport security has resulted in vastly increased passenger delays and inconvenience. It has been causing frequent and business fliers (the airlines' bread-and-butter) to find other alternatives to flying commercially: teleconferencing, fractional and business aircraft flying, or driving on shorter routes. Unless this is resolved, many of the airlines' best passengers may never return.
4. Another terrorist event could have drastic effects on passenger confidence, and therefore on the industry.
[ QUOTE ]
By Desert Fox:
"So the mechanics of bankruptcy for one threaten the rest. I'd never have suspected that."
[/ QUOTE ]
Fox, there is another aspect of the USAir and United bankruptcies which I haven't even discussed yet, one which is likely to reshape the entire U.S. airline industry.
Each of the major airlines has negotiated compensation and retirement packages with its employee groups. Both the airlines and the labor groups get very rigid with these agreements because they are governed by a law called the Railway Labor Act (RLA). Under the RLA, once a contract is signed, it cannot be amended until it expires (usually about 4-5 years later). Only at the end of the contract do new-contract negotiations begin. The RLA strictly prohibits strikes, slowdowns, "sick-outs" or any other kind of employee action during the contract or even the negotiation process. If the parties reach an impasse in their direct negotiations, then they are compelled to submit their matter to a federally-appointed mediator. The negotiation and mediation process can take two years or more, during which time the employees are working under expired contract terms. Only after mediation is exhausted and the mediator gives up, may the company and the labor groups resort to "self-help", i.e., lockouts, strikes, etc. Because the process is excruciatingly time-consuming, neither side is usually willing to make concessions -- it is likely never to recover any concessions it makes. (There is history on both sides -- company concessions to labor never returned when times got bad, labor concessions to management never returned when times got good.) In my opinion, this is an unholy synergy between a bad law and the arrogant view of many managers and labor leaders who express the view that "you could have negotiated a different deal, so live with it."
The major airlines also employ "regional" airlines to serve markets too small for the main lines. Some regionals are actually owned by the parent (my employer, Skyway, is 100% owned by Midwest Express), and some are contracted. (United contracts its regional service from several regional airlines, Air Wisconsin, Atlantic Coast, and SkyWest.) These regionals generally fly smaller jets and turboprops, generally in the 19-70 seat range. They also pay their employees much less (a typical airline captain at a regional makes $40,000 - $60,000).
To protect their own job security and negotiating positions, employees at the major airlines negotiate "scope" clauses with management, limiting the amount of flying that a major airline can assign to its regionals. Without a scope clause, for example, United could reassign much of its flying to a regional carrier and furlough most of its own employees. It might thus play one employee group off against another or bypass its contract entirely by reassigning the work. Employees find scope clauses necessary to retain any negotiating leverage with their employers; the major airlines find themselves less able to quickly reassign a route which from an unprofitable 150-seat plane to a profitable 50-seat regional plane when they need to.
Filing bankruptcy allows the airline to void its labor contracts. This throws the employees' compensation and retirement packages open, and allows the airline to avoid its scope clauses. US Airways has already announced that it will retire many of its mainline aircraft and vastly increase its regional aircraft use. Many USAir employees will find themselves out of work, but USAir's regionals like Chautauqua Airlines will get very busy. I expect United to do the same if it files Chapter 11.
Competitive pressures will probably cause Delta, Northwest, America West and the other major airlines to follow suit and shift much of their flying to regionals. The net result of this trend will be a shrinkage in all the major airlines while many more of their passengers travel on regional aircraft.