Airline Bankruptcy: Broken romises & Dreams Part One - Lessons from Hi


Freight Dawg
Subject: Airline Bankruptcy: Broken romises & Dreams Part One - Lessons from History
Date: Tuesday, February 24, 2004 9:04 AM

By Ron Stowe

Airline Bankruptcy: Broken Promises & Dreams
Part One - Lessons from History

Many of America's greatest airlines no longer exist. When airline deregulation began in 1978, United, TWA, Eastern and American were the largest carriers. Three of them have gone bankrupt, along with Pan American, Allegheny, Braniff, Southern, Ozark, Piedmont, National, Frontier, TransTexas, Continental (twice) and USAirways ­ who can remember them all?

See this link for an unofficial list.

Many of the remaining carriers, along with Delta, are burning cash at unsustainable rates. Despite draconian cost-cutting and reneging on pension promises to employees, revenues cannot cover costs. Delta is on the short list of survivors because the company has historically maintained one of the best balance sheets in the industry. However, we now have a negative net worth and find ourselves approaching the same financial condition as other carriers who have filed for bankruptcy. These bankruptcies have many things in common, but in the end the companies failed because of their inability to control costs and the tremendous amounts of debt they created.
We think it is very important to look back at these failed airlines for comparison. Will Delta be able to overcome its financial problems or will we be the next one on this infamous list of bankrupt carriers?

Braniff International Airways

Braniff International Airways was certainly one of America's most colorful airlines and the first airline in U.S. history to fail under bankruptcy. Its history can be traced back to 1928, when Oklahoma insurance man and financier Thomas E. Braniff, organized and founded an aviation company with his brother Paul Revere Braniff, a former WWI pilot. In May of 1928, Paul R. Braniff Inc. was organized as a combination flying school, aircraft parts supplier and airline. It was not until June 20, 1928 that passenger service began on a 116-mile route between Tulsa and Oklahoma City.

Braniff focused its attention on the war effort during the early 1940s, surrendering half its fleet to the United States military. Facilities at Dallas Love Field and throughout the country became training sites for pilots and mechanics. Following the war in May of 1946, the Civil Aeronautics Board awarded Braniff 8,000 route miles into the Caribbean and Central and South America. The new international service required the airline to build an infrastructure throughout the continent to support the new service and aircraft. This included a half-million dollar investment in navigational beacons, construction of airports, terminals, ticket office and retrofitting of its Douglas DC-6 fleet. The company was subsequently renamed Braniff International Airways.

The airline standardized its continental jet fleet in 1972 to an all Boeing 727 fleet. Its long-haul fleet consisted of the Douglas DC-8 for its Latin American routes and Boeing 747 for its service to Hawaii. Later that year it authorized a $100,000 commission for the noted artist Alexander Calder to create an unprecedented piece of art, utilizing one of the airline's DC-8-62 aircraft as a canvas. The project, named "Flying Colors of South America", was designed to draw attention to and promote its South American destinations as colorful and exciting destinations to visit. In January of 1974, the company moved to its own terminal (2W) at the new Dallas-Fort Worth International Airport. It was the largest carrier at the airport at the time.

By October 1978, in the wake of the deregulated airline industry, Braniff embarked on what was then, the largest expansion in airline history. It seized the opportunity to expand fearing that Congress would soon reverse its decision to deregulate the industry. In a single day, December 15, 1978, Braniff introduced thirty-two new routes to sixteen cities. To cope with this growth, Braniff placed an order for $925 million for 41 new 727, 747 and 747SP aircraft. By the summer of 1978, 747-227's were flying to new European destinations. Braniff also began interline service with British Airways and Air France becoming the first and only American airline to operate the Concorde between Dallas and Washington, with continuing service to London Heathrow and Paris Charles de Gaulle airports. This service utilized BA and Air France aircraft, however the Braniff color scheme was never applied to any of these planes.

In 1979, Braniff flew the 747SP (Special Performance) aircraft into the Pacific and Asia. In tandem with its new expansion plans, a major advertising campaign "We Better Be Better, We're Braniff", was introduced focusing on the company's new destinations and its ten-point promise of new aircraft, great service and fine cuisine. However later that year, storm clouds loomed as Business Week magazine broke news of imminent financial trouble at Braniff. At this time, the airline's long-term debt increased over $305 million from 1978 to the end of 1979, aggravated by higher fuel prices, higher interest rates and a national recession that led to decreased air travel in mid-1979. In the third quarter of 1979, generally the industry's most profitable quarter, Braniff lost $9.8 million, its first loss since early 1975.

By 1980 interest payments rose to more than $92 million, and between 1978 and 1980 Braniff's net worth fell from roughly $250 million to just over $66 million. In 1979 Braniff withdrew from ten unprofitable routes, citing high fuel prices and low traffic levels. To raise cash the company sold its interest in fifteen new Boeing 727 aircraft to American Airlines. Layoffs in 1979-80 reduced employees from a high of 15,000 to 11,500, and in 1980 the company withdrew from its unprofitable routes in the Far East. That year Braniff lost $131 million, an industry record at the time.

Between 1980 and 1982, the company reported huge operating losses and in 1980, it mortgaged its entire aircraft fleet to secure long-term debt. Later that year Harding Lawrence, the visionary leader who oversaw Braniff's growth into a world-class airline resigned as chairman and chief executive officer. In January 1981, John J. Casey, executive vice president at Braniff since 1968, was named chairman, president, and CEO. Casey, a former American Airlines executive immediately set about reorganizing the company's operation while reducing the cost base. He scaled back the domestic route system, focused on its shorter routes, eliminated positions and succeeded in obtaining a 10 percent pay cut agreement from its union employees. Unfortunately, the debts continued to mount and resulted in the layoff of another 1,000 employees. Routes to all European destinations (except London) were also discontinued.
By the end of 1981 Braniff had a negative net worth estimated at $90 million. Pressed for cash to meet its debt obligations, the company entered into merger discussions with Eastern Airlines that were later abandoned. It also negotiated with Pan Am to "lease" its Latin American route system for $30 million.
The Pan Am deal collapsed but a similar arrangement to transfer the routes to Eastern Airlines was approved by the CAB. With a seriously limited cash flow, dwindling load factors and a 50% reduction in travel agency bookings, Putnam explored the few remaining options for the airline including possible mergers. The only reasonable option was protection under Chapter 11. Soon after the transfer of its Latin American routes, Braniff International Corporation ceased operations on May 12, 1982. It recalled its sixty-two aircraft, fired all but 225 of its 9,000 employees, and filed for Chapter 11 protection from creditors and in doing so, became the first airline in U.S. history to fail under bankruptcy.

Eastern Air Lines

Eastern Airlines was one of the "Big Four" airlines that dominated the passenger airline business in the United States for nearly 50 years. Of the four, Eastern Airlines probably also had the most turbulent history.

While most of the major airlines were focusing on transcontinental flights, Eastern's specialty was the East Coast, and it was here that it established a near monopoly. Through 1933, the airline acquired contracts for a number of routes that spanned from New York to Miami.

After World War II, Eastern became even stronger. In a move to replace its aging DC-3 fleet, in April 1950, the company ordered ten of the new Lockheed L-1049 Super Constellation airplanes. Eastern also successfully acquired a Canadian company, Colonial Airlines, in June 1956 that allowed the airline to begin service to Canadian cities such as Montreal and Ottawa. At the time of the acquisition, Eastern Airlines had an unmatched safety record: it had been operating as an airline for more than 25 years without a single passenger fatality.

In terms of its fleet, Eastern was quick to adopt jet planes. Eastern was the first of the "Big Four" to begin using the Boeing 727 jet that would revolutionize air travel. Eastern's first 727 flight took place on the Philadelphia-Washington-Miami route on February 1, 1964. Eastern also used the Douglas DC-9, beginning February 1965. Rickenbacker had already left Eastern by then, retiring on December 31, 1963 after nearly a quarter century leading the company.

In the 1970s, Eastern's big purchase was that of the European Airbus A-300. Airbus had tried unsuccessfully to break into the U.S. market for many years. After Airbus offered a very generous deal to Eastern, Eastern's new president, former NASA astronaut Frank Borman, agreed to buy 23 of the new jets in the spring of 1978.

Eastern did not fare well in the 1980s. Under Borman's shaky command, the company was in deep trouble as a result of major disagreements between management and the labor unions, and also because of major debt from purchases in the late 1970s. As Borman ineffectively tried to get pay cuts to compensate for debts, Eastern began to rack up year after year of losses until late 1985, when it had a debt of $3.5 billion. It was at this point that Frank Lorenzo, the infamous airline powerbroker who controlled Continental Airlines, stepped in. After Borman failed to get any significant concessions from his trade unions, Lorenzo bought the whole airline for only $615 million, adding Eastern to his existing prizes of People's Express, Frontier Airlines, Texas Air, and New York Air.

Lorenzo was ruthless in using Eastern's core assets for his other airlines, devising various ways to use them to make money for his other properties. He let Texas Air "purchase" Eastern's advanced reservation system but issued only an I.O.U. for it. Eastern then had to pay Texas Air a monthly fee of $10 million to use its own system. He "sold" six of Eastern's planes to Continental but paid nothing for them. The result was that, to survive, Eastern had to sell off aircraft and lay off workers in large numbers. As tensions mounted between the labor unions and Lorenzo's harsh tactics, Lorenzo slowly began to dismantle Eastern and sell off its parts. When the unions struck in March 1989, Lorenzo filed for bankruptcy. This gave him some breathing room and allowed him to use strikebreakers to continue operations. By this time, however, Eastern was collapsing under its debt, and finally in January 1991, the airline completely ran out of money to operate. In late 1991, the airline was liquidated.

Pan American Airways

In the history of American commercial aviation, there is no airline more influential, important, and better known than Pan American Airways. It was not the first American passenger airline, nor did it ever meet with much success in the domestic market, but Pan Am (as it was more commonly known), represented a new adventurous image of the United States to the world.

The U.S. government looked very favorably at Pan Am, and viewed it as its "chosen instrument" for foreign policy by using Pan Am to facilitate economic expansion into Latin America and the Caribbean. The U.S. government, in fact, awarded Pan Am every foreign airmail route for which bids were invited. These included flights to Havana, Cuba; San Juan, Puerto Rico; Nassau in the Bahamas; Mexico City; and Santiago, Chile.

Pan Am's heyday was in the 1930s when it operated its famous Clipper Ships servicing an ocean-wide network with a fleet of 25 flying boats that crisscrossed both the Pacific and the Atlantic oceans. The service flourished in the late 1930s, delivering both mail and passengers, and gained a reputation as one of the most dependable and elegant air services in the world.

Pan American was the first U.S. airline to embrace the jet era in passenger aviation. Although a British airline, the British Overseas Aircraft Corporation (BOAC), was the first to offer regular transatlantic services, Pan Am, using a combination of Boeing 707 and Douglas DC-8 aircraft, dominated the market in the 1960s while setting the standards for excellent service.

Pan American also played a key role in shaping the economics and eventual design of a new generation of wide-bodied jets. By defining requirements for size and passenger capacity, Trippe influenced the shape of Boeing's new aircraft­called the 747­which was capable of carrying as many as 490 passengers. Trippe ordered 23 passenger 747s for Pan Am in April 1966. Although Boeing faced severe delays in producing the aircraft on time, the company delivered its first flight model in December 1969. A month later, on January 22, 1970, Pan Am's first 747 took off from New York's John F. Kennedy Airport and headed for the Atlantic carrying passengers.

After a steady and sustained rise as the most important American airline, Pan American's fortunes began to dim in the 1970s. Economic problems related to over expansion and recession forced the company into debt. Deregulation and its consequences only added to Pan Am's woes. Although the company attempted to break into the domestic market by acquiring National Airlines (in October 1980), its problems only grew. Through the 1980s, it slowly sold off all its assets and was operating at a huge loss. United Air Lines purchased the soon-to-be-defunct Pan-Am Tri-Star wide body jets and acquired the airline's Pacific services in 1986. In 1990, Pan Am sold off its major hub in London and the routes that it served to United Airlines.

On August 12, 1991 a bankrupt Pan Am sold off the last of the crown jewels. Delta essentially purchased the remaining assets of Pan Am for $416 million, assumed $389 million in liabilities, and infused PA with $80 million cash, then a second installment of $35 million. In return, Delta took the entire European operation (except for a lone Paris-Miami route), the A-310's, the New York JFK Worldport, and the profitable Shuttle. A much smaller carrier serving the U.S., Caribbean, and Latin American would remain. On December 3rd, With Pan Am continuing to hemorrhage cash, Delta decided not to pump any more money in. Although the airline operated for a very short while on emergency funding from Delta Air Lines, it collapsed into bankruptcy in December 1991 - "The World's Most Experienced Airline" was gone.

Trans World Airlines

Like the other major airlines of the United States, TWA traces its history back to the airmail delivery companies of the 1920s. Transcontinental Air Transport (TAT), formed on May 16, 1928, to offer a coast-to-coast service for passengers that would combine both air and rail travel was merged with another airline, Western Air Express, formed in July 1925. The two companies merged on July 24, 1930, to form the new Transcontinental and Western Air, Inc. (TWA). The new airline received its first mail contract immediately and began flying coast-to-coast flights on October 25, 1930, with an overnight stop at Kansas City.

Like other national airlines, TWA used its planes in support of the U.S. military during World War II. After the war, TWA's most prized target was the transcontinental route, a route that American Airlines, TWA, and United battled over for a decade. Of these airlines, TWA was the most aggressive in its business strategy. The airline put the new and modern Lockheed Constellation into service from New York to Los Angeles on March 1, 1946. Although United also introduced transcontinental service on the same day with its DC-4 aircraft, TWA came out the winner since the Constellation was much superior to the DC-4. In 1950, the airline retained its old acronym, but officially changed its name to Trans World Airlines.

TWA continued to remain a powerful player, both in the international and national markets, through the 1960s and 1970s. In 1961, it became the first airline to introduce in-flight movies. In 1967, it acquired the entire chain of Hilton Hotels. In July 1969, TWA managed to do what no one could have predicted a few years before: overtake Pan American as the world's number one transatlantic airline. In February 1970, only one month after Pan Am, TWA began flying the Boeing 747 jumbo jet on the New York-to-Los Angeles route.

TWA's fortunes began to dim in the 1980s in the wake of deregulation of the commercial aviation industry. TWA's management even briefly considered selling to the infamous Frank Lorenzo, the man at the helm of Continental Airlines who had gained a reputation for his hardheaded financial dealings. In the end, in September, 1985, TWA accepted a bid from another corporate raider, Carl Icahn, who bought up most of the TWA stock. The following year, the new TWA acquired Ozark Airlines.

Although TWA gained by the demise of Pan Am by acquiring its international routes, the airline eventually filed for bankruptcy in January 1992 after problems with increasing debt. It sold some of its key routes to other airlines at the time. In January 1993, Icahn finally relinquished all control over the company, which was now under the control of a management committee appointed by employees, unions, and creditors. After several reorganizations in the 1990s, TWA's financial outlook seemed to improve by the end of the decade. In December 1998, as part of plans to expand its routes and flights, it announced the order of 125 new aircraft, the largest acquisition in the company's history.

Hopes for a new future were thwarted once again by financial problems and bankruptcy. On April 9, 2001, TWA's 75-year existence as an independent airline came to an end when American Airlines purchased TWA's assets. TWA flew its last official flight on December 1, 2001, ending an era in American commercial aviation.

United Air Lines

United Airlines was one of the "Big Four" airlines in the United States that dominated commercial travel for much of the 20th century and has remained one of the major U.S. airlines. It was originally formed by United Aircraft and Transport Corporation, a partnership between Boeing Airplane Company and Pratt & Whitney. The larger corporation officially established an operating division known as United Air Lines on July 1, 1931. At the time, the company advertised United as the "World's Largest Air Transport System."

The Air Mail Act of 1934 stipulated that all existing aviation holding companies had to break up, so United Aircraft and Transport Corporation split into its three parts - Boeing, United Aircraft, and United Air Lines. By the time of this split, United Air Lines could boast complete coast-to-coast service across the country, from New York to San Francisco and Los Angeles (with major stops in Salt Lake City, Omaha, Chicago, and Cleveland).

Through most of its early history, United Air Lines was led by Bill Patterson, a former accountant, who assumed presidency of the airline in 1933 and remained in that position until 1963. He remained chairman of the airline until 1966. By the time of his departure, he had left the airline in the enviable position of having the highest number of passenger-miles of any U.S. airline --­ beating out tough contenders such as American, Eastern, and TWA.

United remained the most powerful domestic airline in the United States through the 1970s. The Deregulation Act of 1978 had important implications for United. For example, the airline cut back on its operations where it was no longer profitable. United pulled out of cities such as Chattanooga, Tennessee and Bakersfield, California, that it had previously served. Instead, like the other major airlines, it focused its activities around several major hubs such as Los Angeles, Chicago, and Tokyo. United purchased the soon-to-be-defunct Pan-Am Tri-Star wide body jets and acquired the airline's Pacific services in 1986. United also entered new markets in the Pacific, Australia, and Europe using a fleet of Boeing 747-400 jumbo jets. The fall of Pan American offered new opportunities for United. In 1991, it was United that bought Pan Am's coveted Heathrow Airport hub in London and acquired Pan Am's Latin American routes later that same year, thus becoming one of the most important international airlines in North America.

After the catastrophic bankruptcies of the 1980s and early 1990s, United remained standing as one of the three airlines (along with Delta and American) that dominated the American airline industry. By 1991, the "Big Three" controlled over half the market in the United States. But the news was not all good for United. By 1992, fuel costs, interest rates, and a recession forced United to sell some its travel subsidiaries and cancel orders for new aircraft. During pilot contract negotiations in 1999-2000 the UAL pilots learned of the B777/B767-400 settlement at Delta, they withdrew their table position and increased their demands. The UAL CEO, fearing the impact of a strike, personally negotiated with the pilots and agreed to a contract that was financially unsustainable. The pay rates contained in Delta's contract 2000 were a direct result of the UAL contract.

In December of 2002, UAL Corporation filed for chapter 11 protection against bankruptcy. It has been commented that this development was triggered in part by the repercussions that the events of September 11th had on the North American airline industry as a whole and on United in particular. However the rise of low-cost competitors and problems with unions and within the management structure of the company were also significant. The immediate reason for the filing was the US government's refusal to grant United a $1.5 billion loan from the government airline aid program. The company was then forced to seek debtor-in-possession financing from commercial sources to cover the expected future loses.

United Airlines has asked to extend its current deadline to exit bankruptcy from October 6, 2003 to April 6, 2004, as well as extend the period in which creditors can approve the plan.

It's the second time UAL has sought an extension. Usually a company seeking Chapter 11 protection has 120 days to submit a plan and another 60 days in which to have creditors agree. United said it has been increasing passenger loads but it has been hurt by the war in Iraq, continuing unrest in the Middle East and the stagnant economy.

US Airways

US Airways can trace its history back to 1937 when it flew the US Postal Service routes under the title of All American Aviation along-side classic airlines like American, United, Eastern, TWA, Braniff, Western, Delta and Continental. All American Aviation brings the first airmail service to many small western Pennsylvania and Ohio Valley communities with introduction of a unique "flying post office" service.

By 1949 the airline was renamed All American Airways and makes the transition from airmail to passenger service with introduction of the DC-3 and an expansion of its service. All American's route system grows and the name is changed to Allegheny Airlines, recognizing the mountains and river of the same name that lie in the heart of the airline's network. Allegheny merges with Indianapolis-based Lake Central Airlines, expanding the growing route network beyond Pittsburgh to the Midwest including Dayton, Columbus and Cincinnati, Ohio; Indianapolis, Indiana; and St. Louis, Missouri in 1968. Four years later, Allegheny acquires Mohawk Airlines, a Utica, N.Y., airline with service to most cities throughout New York and New England.

In 1979, Allegheny changes its name to USAir to reflect its expanding network, including post-deregulation entry into Arizona, Texas, Colorado, Florida and later, California. Large-scale airline consolidation, a partial product of deregulation, continues. Competition for the lucrative California market intensifies as local carriers are bought and merged into larger partners. Pacific Southwest Airlines of San Diego becomes a wholly-owned subsidiary of USAir Group in May. Piedmont Airlines, the dominant carrier throughout the mid-Atlantic region of the United States, also becomes a subsidiary of USAir Group in November 1987. The next year PSA is merged into USAir and one year later, Piedmont is integrated into USAir, the largest merger in airline history. The merger brings with it Piedmont's international routes as well as its Charlotte, Baltimore, Dayton and Syracuse hubs. Baltimore and Charlotte remain hubs. The merger also brings USAir's first wide body jets, the Boeing 767-200ERs now used on its transatlantic and some transcontinental routes.

In the early 1990s, it swallowed up smaller airlines on both the West and East coasts to become the nation's sixth largest airline. In a predictable cycle of profits and losses, USAir was eventually plagued by large amounts of debt and unhappy unions.

In 1995, USAir posts its first profitable year since 1988, with earnings of $119.3 million on sales of $7.474 billion. Stephen M. Wolf is elected chairman effective January 22, 1966 and Seth E. Schofield retires as chairman after 38 years' service to the company and three and a half years as chief executive. USAir continues its transatlantic expansion, winning the right to serve Munich, Rome and Madrid from Philadelphia beginning in 1996.

USAir, in a dramatic two-week period, announces what might in time be the largest single order for airliners; then announces a new name, image, identity designed to carry the airline aggressively into the next century. The airline ordered up to 400 new Airbus A319, A320 and A321 narrow body twin jets for delivery starting in 1998 and continuing through 2009; then within days announced its new identity as US Airways. The airline challenged its relationship with British Airways in court, seeking rights to London Heathrow Airport from four U.S. gateways and to require British Airways to dispose of its USAir stock. USAir notifies BA the code-share between the two will end in March, 1997, and in December, British Airways announces it will sell its shares in USAir and that its three directors will resign.

In 2002, David N. Siegel takes over as US Airways president and CEO in March, naming other new members of the senior management team over the next several months and undertaking a proactive restructuring plan for the company. As part of the restructuring, US Airways enters Chapter 11 bankruptcy reorganization on August 11, with the stated goal to emerge as a leaner, more competitive carrier in March 2003. The eventual bankruptcy at US Air was attributable to the fact that seat mile costs were appreciably higher than that of their competitors with the exception of Delta Air Lines.

As US Airways prepared to leave bankruptcy on March 31, 2003, its chief executive warned that the airline is still in a fragile state. In January 2004, the airline has asked its pilots for additional concessions and is reported to be seeking buyers for the Shuttle and other assets.

Almost 10 months after exiting bankruptcy court, US Airways (UAIR) is losing more money than expected. Fuel prices are 22% higher than budgeted. Other costs remain stubbornly high, and last year's revenue projections are falling short. Low-fare airlines plan to invade more of US Airways' routes than its managers ever dreamed ­ including from Philadelphia, US Airways' third-biggest hub. CEO David Siegel, who was taking bows in spring for whisking the airline through a quick reorganization and landing a federally guaranteed loan, has so alienated the pilots union that it wants him out.)

Without bold action, more losses this quarter and next would likely thrust US Airways into default on the government's $900 million loan guarantee. If the government were to call the loan, it would be the airline's death sentence.
"We don't want this to be another Eastern Airlines," says Capt. Jack Stephan, spokesman for the pilots union. "We have our lives invested in this company. We want to be here long after these (management) guys are gone."

On-Line References: Information contained in this report was compiled by the Delta Pilots Pension Preservation Organization (DP3) and was obtained from the sources listed below.

An eye-opening list of airline bankruptcies.

This information was compiled by the Delta Pilots Pension Preservation Organization (DP3). Although the information in this report is believed to be accurate, no guaranties or warranties are made or implied as to correctness of the author's opinions, the accuracy of the answers or legal implications of the material contained herein. The readers of this report are advised that the author and members of the DP3 Organization are not legal counsel and are not offering legal advice, financial advice or advice of any nature whatsoever. The reader should independently verify the answers prior to making any decisions, financial or otherwise. Furthermore, by reading the information contained herein, the reader agrees to hold harmless the author and the DP3 Organization from any claims, or whatsoever nature, relating to the information.
Re: Airline Bankruptcy: Broken romises & Dreams Part One - Lessons fro

Just one tiny, teeny little correction. Ozark didn't go bankrupt.

They were simply sold to TWA. Ozark was in the black and doing, actually, very well. And ironically, at one point in their history Ozark considered buying TWA!