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Airline woes persist despite past aid

September 16, 2005

By Peter Kaplan

WASHINGTON (Reuters) – Bankruptcy filings this week by two
more major U.S. airlines illustrate the futility of past
government efforts to prop up the industry, according to
airline analysts.

Delta Air Lines Inc. and Northwest Airlines Corp. were the
latest to succumb to underlying financial weakness, filing for
protection from creditors on Wednesday.

Despite billions of dollars in financial aid granted by the
government since the September 11, 2001, attacks in New York
and Washington, four of the seven major U.S. carriers are now
in bankruptcy proceedings.

“The government pumped an awful lot of liquidity into an
industry that was already suffering,” said Darryl Jenkins of
Embry-Riddle Aeronautical University. “We should have just
taken the hit then and gotten it over with.”

Congress approved a $15 billion bailout of cash and loan
guarantees in 2001 after the September 11 attacks crippled the
U.S. travel industry.

“What we did when we did it was necessary,” said Rep. John
Mica, a Florida Republican and chairman of the House aviation
subcommittee, who is wary of further aid. “We didn’t want the
industry to totally collapse.”

Although passenger traffic has recovered, the biggest
airlines face fierce competition from low-cost rivals with
newer, more fuel-efficient aircraft, better route strategies
and lower wage and benefit costs.

Bankruptcy offers struggling carriers a chance to trim
their fleets, cut wages, shed pension obligations and reach
deals with creditors and new investors.

United Airlines has been in bankruptcy proceedings since
late 2002. US Airways has taken the bankruptcy route twice
since the 2001 attacks and is poised to emerge for a second
time as an even slimmer operation that will merge with America
West Airlines.

Efforts to aid the industry may have just delayed the
inevitable crisis, experts say.

“It turned out that their problems were far more
fundamental (than September 11),” said Alfred Kahn, an
economics professor at Cornell University who was a key
architect of U.S. airline deregulation during the 1970s.

The current crisis worsened when refinery outages caused by
Hurricane Katrina sent already-high fuel prices even higher.
The nation’s airlines are expected to post some $10 billion in
losses this year.

Major airlines are seeking help again from Congress in the
form of a one-year break from fuel taxes. They also want the
government to let them stretch their pension contributions
further and shore up the federal agency facing the possibility
of more pension defaults by bankrupt carriers.

Mica said he has “great concerns” about relieving the
airlines of their pension liabilities. But he said Congress may
have to step in to help bolster the deficit-ridden pension
insurance system because of the broad impact it has on the
economy.

Mica said he plans to meet with representatives of the
airline industry next week. but he is opposed to any further
airline-specific aid.

“There’s no reason for Congress to step in with any kind of
a bailout,” he said.

However, some U.S. senators with influence over aviation
matters, including Republican John McCain of Arizona, have
expressed sympathy for fuel tax cuts and possibly more help,
especially as it relates to high fuel prices. The airlines say
they would be profitable today if fuel were not so expensive.

But industry experts say reorganization under bankruptcy is
where the heavy lifting will be done to slim down old-line
airlines carrying crushing debt obligations.

Delta owes about $28 billion and Northwest almost $18
billion to bondholders, trade creditors and other lenders,
according to court documents.

“This is going to be a very, very long and painful
process,” said Embry-Riddle’s Jenkins. “In the next five years,
all the mainline carriers will have been in bankruptcy at least
once.”




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