Bankrupt Airlines

By the end of next week, four of the seven biggest airlines in the United States, U.S. Air, United, Northwest and Delta, will be undergoing Chapter 11 reorganizations under the Bankruptcy Code. Smaller America West is about to merge with bankrupt U.S. Air, while American, Continental and Southwest appear to have avoided bankruptcy for the time being.

Both airlines that provide most of the U.S. service to Asia, United and Northwest, will be bankrupt. Employees at each of the bankrupt airlines have been forced to make major concessions. U.S. Air expects to leave bankruptcy this fall, while United is close on its heels, with operations that are about a third smaller that when the bankruptcy began three years ago. The new operations at United will include a greater share of international flights and a discount division, called Ted.

A variety of factors including 9-11, rising fuel prices, unsustainable labor costs (particularly those related to pensions and health care), and the rise of the discount airline phenomena have all been blamed for the industrywide collapse. The brunt of the impact of these events is born by airline shareholders, airline bondholders and employees who face pay cuts, lost jobs and broken pension promises.

The airline industry has been notorious for the large number of bankruptcies in the industry, particularly after deregulation, but next week will be a historic low point for the industry.

The big question is whether the excess capacity in the industry will be removed through piecemeal cuts at each of the airlines, or through the demise of one or more of the current major players? Emerging airlines should be stronger, with far less debt burdening their cash flow, far smaller payrolls, and cuts is competing airlines reducing the supply of travel resources, but an outright airline collapse still seems like a plausible option.

The constant cycle of bankruptcies in the industry also calls into question the entire form of organization of the typical airline. Are we seeing the classic problem of heads I win, tails someone else loses management? Similar cycles were endemic in commercial banking and the insurance industry until adoption of a mutal form of ownership and regulatory action in the form of the FDIC (and later its sister agency for S&Ls) restrained unnecessary risk taking. Does the country need a new airline organized on a mutual basis as a consumer co-op, with business customers paying a predictable high price for tickets and then receiving a share of any resulting profits proportionate to their patronage at the end of each year?

On the other hand, maybe the problem is one of business models and not organizational forms. The big airlines traditionally operated on the basis of exceedingly high fares for short notice business travellers through monoply hubs (often with mostly empty flights), discount fares for vacationers, a cumbersome (for passengers) hub and spoke system that greatly reduced the number of available direct flights, heavy debt loads, and well compensated union employees. Discount airlines shook up this model by focusing on full direct flights full of discount travellers on profitable routes with less well compensated non-union employees. Will a post-bankruptcy business model for ex-legacy airlines of low debt, poorly compensated union employes, heavy on international flights emerge?

Of course, some of the business models are, in part, technological issues. While the Concorde have proven that there is not much of a market for supersonic passenger travel, we have yet to see if the big jet will continue to rein supreme, or whether it will be supplanted by the smaller regional jet, which is able to offer more frequent and more direct flights, or by the even smaller air taxi, which gives VIP travellers an intermediate option between first class and a private jet, shuttling them between general aviation airports.

For now, we will wait and see what emerges from bankruptcy courtrooms across the country. But, this is unlikely to be the last major upheaval in the industry.