US Air Files Second Bankruptcy in Two Years

US Airways, the seventh biggest airline in the US, filed its second bankruptcy claim in two years on Sunday. Like the previous one, this is a Chapter 11 action designed to get the airline back on its feet. Many analysts are saying it should become a Chapter 7 proceeding, liquidating the airline. With the situation so bleak, many travelers are avoiding a US Air booking, adding to the company's troubles. It is hard to see any future for the company short of a miracle, and a big miracle at that.

The carrier's unions have declined to give the company $800 million in concessions. The Economist called this a case of the unions shooting themselves in the foot, but a more charitable reading makes some sense. Having given up a painful amount back in 2003 (estimated at around $2 billion), they are simply loath to do the same again. There comes a point at which the job just isn't worth saving. If they give up close to $3 billion, and the company then comes back and asks for even more, is there any point?

The discount airlines are eating US Airways' lunch. Southwest Airlines, JetBlue, AirTran and Independence Air run a much tighter ship, and it is amazing that these carriers are able to cope with business conditions that cripple US Airways, Delta (which is wobbly) and United (currently in bankruptcy). Of course, they don't have the generous pay agreements that the older airlines have, and it makes them able to operate profitably with less revenue.

However, the key question here is just what did US Airways management think it was achieving with the first restructuring? Private individuals in the US get to file bankruptcy only once every 10 years. These alleged captains of industry have had to go back to the courts for protection twice in two years. David Bronner, the airline's chairman as well as the chief executive of its biggest shareholder (Retirement Systems of Alabama ), said, "While the airline has done a lot of things right since it emerged from Chapter 11 last year, the business plan that we thought would succeed proved to be insufficient as low-cost carriers have turned the industry on its head over the past year."

It is hard to imagine a clearer admission of failure. RSA owns 36% of the company, the pilot's union 19% and the US government (guarantor of a $900 million loan last restructuring) has 10%, giving the three entities the votes to decide to remove management and hire someone else. That looks quite unlikely given Mr. Bronner's two jobs. With assets depleted, unions unwilling to budge, and management admitting failure, it appears to be a matter of time before the carrier is permanently grounded. Capitalism has losers as well as winners, and this is the price of a market economy. Time to finish the job.


© Copyright 2004 by The Kensington Review, J. Myhre, Editor. No part of this publication may be reproduced without written consent.


Home