Delta and Northwest File Chapter 11 on the Same Day

In the last issue of 2004, this journal predicted a number of things for 2005, including “a major airline currently not under bankruptcy protection will file under Chapter 11.” Wednesday after the stock market closed, both Delta Air Lines and Northwest Airlines (could the industry at least agree on whether “airlines” is one word or two?) filed paperwork to do that. Chapter 11 allows them to continue flying without harassment from their creditors. But with fuel prices and pension commitments being what they are, liquidation may make more sense.

In the past four years, the US airline (house style just decided says it’s a single word) industry has lost $32 billion, suffering from the travel collapse following the Al Qaeda murders of September 11, 2001, the SARS panic in Asia, war in the Middle East and now, oil in the $60+ a barrel range. Worse, barriers to entry are really not that high, meaning that startup airlines are constantly coming into fringe markets and taking business away because of their lower costs.

And it is the costs that have hurt the legacy carriers (the old guard, what would be considered flag carriers in Europe). Some analysts say that fuel costs have pushed Northwest over the brink, but there is no reason for that to have happened. Southwest has managed to hedge in part their fuel risk through the next couple of years, and it will help the airline stay profitable, as it has been for years. Pensions and poor wage deals have also done their part. Twenty years ago, change could have prevented all of this – but deregulation caught management and labor flatfooted.

Approximately half of the US air fleet is now operated by bankrupt airlines. Logically, consolidation should occur, with some airlines vanishing and other shrinking. But as visiting professor at Embry-Riddle Aeronautical University told the Washington Post, “It's more difficult than ever to liquidate an airline. You have so many lenders of last resort who want to keep aircraft prices high.” Plane manufacturers will offer cheap finance, engine makers will do the same, and employees become owners as they trade salaries and wages for stock – none has an interest in a leaner, meaner, industry.

So, what will happen? The pension liability will get unloaded onto taxpayers. Congress may throw more welfare money at the industry. And the companies in bankruptcy now can stay there for a long time. The good news is that after October 17, new bankruptcy laws will require any company filing Chapter 11 to have a plan for getting out in 18 months, or facing liquidation. It’s a shame Delta and Northwest beat the deadline.


© Copyright 2005 by The Kensington Review, J. Myhre, Editor. No part of this publication may be reproduced without written consent.
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