Ophir
Well-Known Member
This is an interesting article from the Economist that accuses airlines of hiding behind Chapter 11 bankrupcy law. Obviously the answer to airline longevity is a balance of income and expense. So how can airlines, particularily the Majors sustain their current models?
I would have linked the article but it is subscription only.
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US Airways
Enough already
Sep 16th 2004
From The Economist print edition
Airlines in America are abusing Chapter 11
AP
Get article background
US AIRWAYS is coming to stand for all the mistakes of the American airline industry. Mismanaged, mired in debt and crippled by a recalcitrant workforce, the airline filed for protection from its creditors under Chapter 11 of America's bankruptcy law on September 12th. It did so despite receiving a loan guarantee for $1 billion from the government's fund set up to bail out struggling airlines in the aftermath of the September 11th attacks. As if that were not bad enough, this week's bankruptcy filing was the airline's second in two years. Even by the standards of American airlines, which have all too frequently sought Chapter 11 protection, this is somewhat over the top. Enough is enough. The bankruptcy court's judge, and the American government, should now permit economic reality to prevail by letting US Airways go into liquidation.
US Airways' egregious example, and the airline industry's frequent resort to Chapter 11, risk bringing America's generally admired bankruptcy process into disrepute. If, as seems highly possible, Delta Air Lines later this year joins United Airlines and US Airways in Chapter 11, no less than 42% of the American airline industry will be kept aloft only by the courts.
Aviation woes, contd
Sep 16th 2004
United States
The airline industry
US Airways and United post information on their restructuring. Delta may soon follow their lead.
The purpose of Chapter 11, and a reason why Europe is moving to adopt a version of it, is that it encourages risk-taking by providing firms a safe haven to survive a temporary financial crisis, and a way for creditors to avoid heavy losses through the distress sale of assets. But in the airline industry Chapter 11 is being abused simply to keep in place inefficient surplus capacity. America's airlines have lost $23 billion since 2001, and they look like losing a further $4 billion this year. Unless some airlines are allowed to go out of business, so reducing the over-capacity that is causing carriers to slash prices, the entire industry is endangered by financial failure. The business model of the big American network carriers looks badly flawed now that low-cost, low-fare carriers with simpler point-to-point networks have grabbed a third of air traffic.
The combination of September 11th, SARS, the Iraq war and high fuel prices has added to the burden of an industry already in trouble. After a brief period of profitability in the late 1990s during the dotcom boom, it again began to make losses. Even after cutting 27% of their workforce and forcing employees to accept lower pay, the big carriers still have higher operating costs than upstarts such as Southwest and JetBlue.
Now employees are balking at further cuts, even if that threatens the future of their airlines. Failure to reach agreement with unions over how to reduce costs by another $800m was the immediate trigger that sent US Airways back to Chapter 11. US Airways' employees apparently expect its creditors or the federal government to bail it out again. They may have good reason for hope. The demise of US Airways would eliminate thousands of jobs in swing states such as Pennsylvania right in the middle of a presidential election. The Bush administration has already shown itself ready to protect uneconomic jobs in the steel, textile and farming industries, as well as the airline industry, with trade protection or subsidies.
Europe has broken its habit of subsidising airlines—with the glaring exception of Italy's support for Alitalia. Finance ministers of other countries, as well as Brussels officials, have stood stony-faced as airlines looked for succour in recent years. America, the champion of free markets, surely ought to be able to do the same, and let the market take care of loss-making airlines.
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I would have linked the article but it is subscription only.
[ QUOTE ]
Printable page
E-mail this
US Airways
Enough already
Sep 16th 2004
From The Economist print edition
Airlines in America are abusing Chapter 11
AP
Get article background
US AIRWAYS is coming to stand for all the mistakes of the American airline industry. Mismanaged, mired in debt and crippled by a recalcitrant workforce, the airline filed for protection from its creditors under Chapter 11 of America's bankruptcy law on September 12th. It did so despite receiving a loan guarantee for $1 billion from the government's fund set up to bail out struggling airlines in the aftermath of the September 11th attacks. As if that were not bad enough, this week's bankruptcy filing was the airline's second in two years. Even by the standards of American airlines, which have all too frequently sought Chapter 11 protection, this is somewhat over the top. Enough is enough. The bankruptcy court's judge, and the American government, should now permit economic reality to prevail by letting US Airways go into liquidation.
US Airways' egregious example, and the airline industry's frequent resort to Chapter 11, risk bringing America's generally admired bankruptcy process into disrepute. If, as seems highly possible, Delta Air Lines later this year joins United Airlines and US Airways in Chapter 11, no less than 42% of the American airline industry will be kept aloft only by the courts.
Aviation woes, contd
Sep 16th 2004
United States
The airline industry
US Airways and United post information on their restructuring. Delta may soon follow their lead.
The purpose of Chapter 11, and a reason why Europe is moving to adopt a version of it, is that it encourages risk-taking by providing firms a safe haven to survive a temporary financial crisis, and a way for creditors to avoid heavy losses through the distress sale of assets. But in the airline industry Chapter 11 is being abused simply to keep in place inefficient surplus capacity. America's airlines have lost $23 billion since 2001, and they look like losing a further $4 billion this year. Unless some airlines are allowed to go out of business, so reducing the over-capacity that is causing carriers to slash prices, the entire industry is endangered by financial failure. The business model of the big American network carriers looks badly flawed now that low-cost, low-fare carriers with simpler point-to-point networks have grabbed a third of air traffic.
The combination of September 11th, SARS, the Iraq war and high fuel prices has added to the burden of an industry already in trouble. After a brief period of profitability in the late 1990s during the dotcom boom, it again began to make losses. Even after cutting 27% of their workforce and forcing employees to accept lower pay, the big carriers still have higher operating costs than upstarts such as Southwest and JetBlue.
Now employees are balking at further cuts, even if that threatens the future of their airlines. Failure to reach agreement with unions over how to reduce costs by another $800m was the immediate trigger that sent US Airways back to Chapter 11. US Airways' employees apparently expect its creditors or the federal government to bail it out again. They may have good reason for hope. The demise of US Airways would eliminate thousands of jobs in swing states such as Pennsylvania right in the middle of a presidential election. The Bush administration has already shown itself ready to protect uneconomic jobs in the steel, textile and farming industries, as well as the airline industry, with trade protection or subsidies.
Europe has broken its habit of subsidising airlines—with the glaring exception of Italy's support for Alitalia. Finance ministers of other countries, as well as Brussels officials, have stood stony-faced as airlines looked for succour in recent years. America, the champion of free markets, surely ought to be able to do the same, and let the market take care of loss-making airlines.
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