Aviation Industry and AA


May 26, 2006
Kyle Peterson

Reuters News Agency

CHICAGO–The threat of another round of major U.S. airline bankruptcies
seems to have diminished, but it's not just because of tumbling fuel
prices and sweeping downsizing. For most of the top airlines,
Chapter 11 simply isn't feasible considering the high cost of
bankruptcy and the relatively small savings to be wrung. "It's
too expensive without the commensurate cost savings to gain," said Pia
Thompson, partner at Reed Smith, the law firm formerly known as
Sachnoff & Weaver, which represented creditors during the
bankruptcy of United Airlines parent UAL Corp. "There's almost nowhere left to cut," Thompson said. "They've really done everything they can."
Since 2002, four of the top seven U.S. airlines have restructured in
bankruptcy. Two others – AMR Corp. and Continental Airlines – cut costs
outside of Chapter 11. During these large-scale reorganizations,
airlines reined in expenses related to labour, airplane leases and
facilities. Those steps, plus a series of fare increases, put the
industry back on sure footing after a wave of low-cost competition
pummelled large carriers. But the good times didn't last. A jump
in oil prices sent the price of jet fuel soaring and erased nearly all
the gains airlines had made. By the time crude oil notched a
record $147.27 (U.S.) a barrel in July, analysts were predicting a
fresh wave of airline bankruptcies. In the first half of 2008, industry
analysts combed airline financial statements for signs that insolvency
was near. In April, Frontier Airlines filed for Chapter 11,
joining a string of smaller carriers that either declared bankruptcy or
shut down altogether. Oil prices have retreated some 26 per cent
since July, but a barrel of crude remains above $100, a price
unthinkable to airline managers a year ago. New fees and plans
for sweeping downsizing in the fourth quarter have given carriers new
traction and bolstered their share prices. But by no means is this a
healthy industry. "At this point, the big carriers ... can
probably dodge the bullet and make it through the winter," said Ray
Neidl, airline analyst at Calyon Securities. "The next time some of these airlines go into bankruptcy, they will go pretty quickly into liquidation," he said. Reed Smith's Thompson said that despite talk to the contrary, Chapter 11 reorganization is not a viable option for airlines. The enormous legal and consulting fees cannot be justified by the paltry savings that might be achieved, she said.
UAL Corp., parent of United Airlines, used bankruptcy to cut its costs
by $7 billion a year. During its 38 months in Chapter 11, the
second-largest U.S. airline paid more than $300 million in professional
fees. Northwest Airlines trimmed costs by $2.4 billion a year in
bankruptcy and paid more than $130 million in fees. Delta Air Lines cut
$3 billion from its annual costs in Chapter 11 and paid $237 million in
its restructuring. If major carriers were to enter bankruptcy now, they would not be able to cut costs so deeply. But the professional fees would remain very high. Furthermore, bankruptcy laws have changed since 2005, potentially making it harder to manage a company in Chapter 11.
"The marginal benefits are outweighed by the professional fees and the
uncertainties that are created by a bankruptcy," airline consultant
Robert Mann said.