The great American airlines disaster
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A total of 140 carriers have sought Chapter 11 bankruptcy in the US since 1978. Today, four of the Big Seven are still under the protection of the courts
By : Tracey Boles - Chief Reporter September 18, 2005
HURRICANE Katrina may have blown itself out in the early days of September but it claimed two new casualties last week. The post-storm spike in the price of oil was the straw that broke the camel’s back for Delta Air Lines and rival Northwest, forcing both US airlines to file for bankruptcy protection on Wednesday night.
The airlines – long hobbled by high fuel costs, relentless competition and heavy debt which was causing them to burn millions of dollars each day – join the 140 US carriers which have sought Chapter 11 since 1978.
Even before Hurricane Katrina, airlines were paying 50% more for fuel than they did in 2004. When prices jumped 25% in the days after the storm, Delta and Northwest were pushed over the edge. They are not the only ones hurting. “Anything with a wing has problems with today’s fuel prices,” according to Michael Boyd, an US aviation consultant.
In less than two years the airline industry’s total fuel bill has more than doubled from $44bn (E36bn, £24bn) in 2003 to what is estimated to be $97bn for 2005 – and that estimate by the International Air Transport Association is based on an average oil price of $57 a barrel, in other words conservative.
Fuel now gobbles up a quarter of the global industry’s $400bn turnover and will push it to a collective loss of $7.4bn for 2005. The final toll could be even higher, however; each $1 increase in the price of a barrel of oil adds $1bn to the industry’s cost base. Only in May, IATA issued a loss forecast of $6bn for 2005 based on an average oil price over 12 months of $47 per barrel. The new estimate of $7.4bn is based on $57 a barrel; the cost of Brent crude stands at around $65.
IATA’s director general and chief executive Giovanni Bisignani said last week: “Oil is once again robbing the industry of a return to profitability. Each dollar added to the price of a barrel of oil adds $1bn in costs to the industry. Cost reduction and efficiency gains have never been more critical.”
But US airlines are feeling the pain more than most. Cumulatively, airline industry losses for 2001 to 2004 were $36bn, the vast majority of which – $32bn – was lost in North America. And there is no let up in sight for the once mighty US carriers. Last week, the country’s chief trade organisation, the Air Transport Association, warned its airlines could end up $10bn in the red this year.
The filings by Delta and Northwest means four of the seven big US airlines are operating under court protection, the other two being United Airlines and US Airways. Half the seats available on flights in the US are being operated by bankrupt airlines, if several smaller players which have gone bust are included, according to Standard & Poors.
With Asia Pacific carriers poised to make a profit in 2005, how did the US airlines get it so wrong?
DELTA’s filing had been expected for some time but, just a week ago, Northwest’s move into bankruptcy protection, though mooted, was not regarded as imminent. The latter had been trying to win $1.4bn in concessions from its workforce in a bid to avert Chapter 11. Despite both airlines warning that they may have to file for Chapter 11, their workers appear to have been blind to their fate, resisting much-needed cutbacks. Northwest, America’s fourth largest carrier, has been fighting for three years to win concessions from its pilots, flight attendants and baggage handlers. But only the pilots have agreed to the cuts; the airline is in its third week of a strike by members of its mechanics union who walked out on 20 August over the airline’s request for $176m in savings.
Delta, the third largest carrier, has also been doing everything it can to stave off bankruptcy. Earlier this month, it sold commuter arm Atlantic Coast Airlines to SkyWest for $450m. It has put planes up for sale and, only last week, asked pilots for another round of deep cuts on top of the $1bn in cost savings they agreed a year ago.
But the cash burn at Delta and Northwest could not go on. Northwest has lost $3.6bn since 2001 and Delta $10bn; each day, the Atlanta-based carrier was running through $6m.
By last week, the airlines found themselves sandwiched between the hurricane and tougher new bankruptcy laws which come in on 17 October. After that, companies will only have 18 months to draft a restructuring plan. United Airlines, for example, has been in bankruptcy for nearly three years and does not expect to emerge until next February.
Chapter 11 has been dubbed the carwash for offering companies a scrub up from which they emerge cleaner, shinier and better. It offers federal protection from creditors and is a way for airlines to sort out their finances while remaining in business. Operations can be overhauled and lower payments to creditors negotiated.
Bankruptcy American-style is not a course of action to be taken lightly, however. Consumers may not feel the difference because Chapter 11 will have little impact on routes or flights – in the short term at least – but workers certainly will. They can expect jobs to go and severe reductions in wages and benefits. Since the 11 September attacks, the number of planes taken out of service and the number of employees who have lost their jobs are the equivalent of a major airline according to analysts.
United may have managed to wrangle two deep rounds of cuts from its workers under Chapter 11 but it has been forced to cut 25,000 jobs. Earlier this year it set off the biggest default in the history of the federal pensions agency when it scrapped its traditional retirement plans. US Airways has more than halved its workforce to 22,000.
Just the hint that Delta and Northwest were considering filing for bankruptcy was enough to hit their share price. When news leaked out that Northwest was considering the move after it defaulted on a debt payment, its shares lost half their value. Delta stock has been trading at under a $1 a share, its lowest value for 50 years.
Delta and Northwest will be hoping to survive and emerge stronger than before. But Delta chief executive Gerald Grinstein knows it may not be that simple. He said last December that just two of the 140 airlines to have gone through Chapter 11 have emerged as viable competitors. He said: “It is in part because of the high failure rate that Delta has worked so hard to avoid bankruptcy.”
Delta’s $21.6bn in assets makes it the ninth largest bankruptcy in US history.
CHAPTER 11 may offer the airlines a respite but it cannot shield them from the challenge posed by America’s low-cost carriers. Airlines like Jetblue and Southwest, now carry one third of passengers on flights within the US; in 1990, their market share was just 6% of passengers.
Rock-bottom operating costs due to fewer staff and quicker turnaround times at airports mean the budget operations can undercut the majors on ticket price. Their continued growth will keep capacity high and fares low. Southwest has even taken the precaution of hedging against the high cost of oil until 2008.
Northwest and Delta, like most of their American competitors, have no such financial protection against surging oil prices. Their high debt – $28bn in the case of Delta – and low credit capacity means they are not able to hedge against high oil prices even if they want to; if the price of jet fuel shoots up, they must immediately pay more in cash. At one time, the majors would have passed on the extra cost to passengers. But severe pricing pressure from low-cost carriers means they are no longer able to do this.
The low-cost carriers are a particular worry for Delta. Some 70% of its network overlaps with low cost carriers, the highest proportion among the majors.
The behaviour of oil refineries in the midst of the fuel crisis has not helped the plight of the US airlines. In addition to increased oil prices, refinery margins for jet fuel have jumped from $6 per barrel in 2003 to $17. Before last week’s filing, Northwest was estimated to be paying $100 a barrel once refinery costs were factored in. IATA’s Bisignani said last week: “We fully understand the principles of supply and demand. But it is difficult to see this as anything other than a $14bn cash grab by the oil industry that is pouring salt into the wounds of a global crisis.
“Moreover, the impact of Hurricane Katrina on fuel supplies and refinery capacity will only ensure that relief will not come soon. To cope, urgent structural change across the industry's value chain is essential.”
Restructuring experts believe the business model of the majors is broken, with them having lost control of both costs and capacity at the end of the 1990s – well before 11 September. All of the legacy carriers have carried with them a set of contractual commitments that cannot be sustained. Of the big names, only American and Continental are still operating outside bankruptcy protection. Fuel prices have been rising across the globe but European airlines are expected to break even this year, and Asia Pacific carriers may manage to eke out a $1bn profit.
IATA’s Bisignani said: “Buried in the industry’s red ink, there is a incredible story to be told. Despite adding $10bn to our cost estimates, the incremental impact on the bottom line has been limited to $1.4bn. The airline battle to reduce costs, increase yields and improve efficiencies is effective well beyond expectations.”
American and Continental look stuck in a holding pattern wondering whether to go in next. Ten days ago Continental repeated warnings that high fuel prices could lead to a “significant loss” in 2005. But Continental has the benefit of having gone through two bankruptcy reorganisations in the 1990s, which allowed it to slash expenses. American is robust thanks to the $1.8bn in annual labour savings it won in 2003. In an industry buffeted by external events, of which Katrina is only the latest in a long line, neither can afford to be complacent, however.
The only bright spot for American carriers is international routes, where yields are rising steadily. But as they add capacity across the Atlantic, the bosses of European airlines such as British Airways are getting angry. They regard America’s Chapter 11 bankruptcy as a form of subsidised, unfair competition. BA chairman Martin Broughton has criticised the US government of using Chapter 11 to prop up the “walking dead”.
The weeding out of inefficient operators and the rise of low-fare carriers are exactly what former US president Jimmy Carter envisioned when he ordered the deregulation of the industry in 1978. Deregulation, which freed the airlines from government controls on routes and fares, may finally be coming to its logical conclusion.
But the woes of America’s airlines could easily spill over on to the international market.
A total of 140 carriers have sought Chapter 11 bankruptcy in the US since 1978. Today, four of the Big Seven are still under the protection of the courts
By : Tracey Boles - Chief Reporter September 18, 2005
HURRICANE Katrina may have blown itself out in the early days of September but it claimed two new casualties last week. The post-storm spike in the price of oil was the straw that broke the camel’s back for Delta Air Lines and rival Northwest, forcing both US airlines to file for bankruptcy protection on Wednesday night.
The airlines – long hobbled by high fuel costs, relentless competition and heavy debt which was causing them to burn millions of dollars each day – join the 140 US carriers which have sought Chapter 11 since 1978.
Even before Hurricane Katrina, airlines were paying 50% more for fuel than they did in 2004. When prices jumped 25% in the days after the storm, Delta and Northwest were pushed over the edge. They are not the only ones hurting. “Anything with a wing has problems with today’s fuel prices,” according to Michael Boyd, an US aviation consultant.
In less than two years the airline industry’s total fuel bill has more than doubled from $44bn (E36bn, £24bn) in 2003 to what is estimated to be $97bn for 2005 – and that estimate by the International Air Transport Association is based on an average oil price of $57 a barrel, in other words conservative.
Fuel now gobbles up a quarter of the global industry’s $400bn turnover and will push it to a collective loss of $7.4bn for 2005. The final toll could be even higher, however; each $1 increase in the price of a barrel of oil adds $1bn to the industry’s cost base. Only in May, IATA issued a loss forecast of $6bn for 2005 based on an average oil price over 12 months of $47 per barrel. The new estimate of $7.4bn is based on $57 a barrel; the cost of Brent crude stands at around $65.
IATA’s director general and chief executive Giovanni Bisignani said last week: “Oil is once again robbing the industry of a return to profitability. Each dollar added to the price of a barrel of oil adds $1bn in costs to the industry. Cost reduction and efficiency gains have never been more critical.”
But US airlines are feeling the pain more than most. Cumulatively, airline industry losses for 2001 to 2004 were $36bn, the vast majority of which – $32bn – was lost in North America. And there is no let up in sight for the once mighty US carriers. Last week, the country’s chief trade organisation, the Air Transport Association, warned its airlines could end up $10bn in the red this year.
The filings by Delta and Northwest means four of the seven big US airlines are operating under court protection, the other two being United Airlines and US Airways. Half the seats available on flights in the US are being operated by bankrupt airlines, if several smaller players which have gone bust are included, according to Standard & Poors.
With Asia Pacific carriers poised to make a profit in 2005, how did the US airlines get it so wrong?
DELTA’s filing had been expected for some time but, just a week ago, Northwest’s move into bankruptcy protection, though mooted, was not regarded as imminent. The latter had been trying to win $1.4bn in concessions from its workforce in a bid to avert Chapter 11. Despite both airlines warning that they may have to file for Chapter 11, their workers appear to have been blind to their fate, resisting much-needed cutbacks. Northwest, America’s fourth largest carrier, has been fighting for three years to win concessions from its pilots, flight attendants and baggage handlers. But only the pilots have agreed to the cuts; the airline is in its third week of a strike by members of its mechanics union who walked out on 20 August over the airline’s request for $176m in savings.
Delta, the third largest carrier, has also been doing everything it can to stave off bankruptcy. Earlier this month, it sold commuter arm Atlantic Coast Airlines to SkyWest for $450m. It has put planes up for sale and, only last week, asked pilots for another round of deep cuts on top of the $1bn in cost savings they agreed a year ago.
But the cash burn at Delta and Northwest could not go on. Northwest has lost $3.6bn since 2001 and Delta $10bn; each day, the Atlanta-based carrier was running through $6m.
By last week, the airlines found themselves sandwiched between the hurricane and tougher new bankruptcy laws which come in on 17 October. After that, companies will only have 18 months to draft a restructuring plan. United Airlines, for example, has been in bankruptcy for nearly three years and does not expect to emerge until next February.
Chapter 11 has been dubbed the carwash for offering companies a scrub up from which they emerge cleaner, shinier and better. It offers federal protection from creditors and is a way for airlines to sort out their finances while remaining in business. Operations can be overhauled and lower payments to creditors negotiated.
Bankruptcy American-style is not a course of action to be taken lightly, however. Consumers may not feel the difference because Chapter 11 will have little impact on routes or flights – in the short term at least – but workers certainly will. They can expect jobs to go and severe reductions in wages and benefits. Since the 11 September attacks, the number of planes taken out of service and the number of employees who have lost their jobs are the equivalent of a major airline according to analysts.
United may have managed to wrangle two deep rounds of cuts from its workers under Chapter 11 but it has been forced to cut 25,000 jobs. Earlier this year it set off the biggest default in the history of the federal pensions agency when it scrapped its traditional retirement plans. US Airways has more than halved its workforce to 22,000.
Just the hint that Delta and Northwest were considering filing for bankruptcy was enough to hit their share price. When news leaked out that Northwest was considering the move after it defaulted on a debt payment, its shares lost half their value. Delta stock has been trading at under a $1 a share, its lowest value for 50 years.
Delta and Northwest will be hoping to survive and emerge stronger than before. But Delta chief executive Gerald Grinstein knows it may not be that simple. He said last December that just two of the 140 airlines to have gone through Chapter 11 have emerged as viable competitors. He said: “It is in part because of the high failure rate that Delta has worked so hard to avoid bankruptcy.”
Delta’s $21.6bn in assets makes it the ninth largest bankruptcy in US history.
CHAPTER 11 may offer the airlines a respite but it cannot shield them from the challenge posed by America’s low-cost carriers. Airlines like Jetblue and Southwest, now carry one third of passengers on flights within the US; in 1990, their market share was just 6% of passengers.
Rock-bottom operating costs due to fewer staff and quicker turnaround times at airports mean the budget operations can undercut the majors on ticket price. Their continued growth will keep capacity high and fares low. Southwest has even taken the precaution of hedging against the high cost of oil until 2008.
Northwest and Delta, like most of their American competitors, have no such financial protection against surging oil prices. Their high debt – $28bn in the case of Delta – and low credit capacity means they are not able to hedge against high oil prices even if they want to; if the price of jet fuel shoots up, they must immediately pay more in cash. At one time, the majors would have passed on the extra cost to passengers. But severe pricing pressure from low-cost carriers means they are no longer able to do this.
The low-cost carriers are a particular worry for Delta. Some 70% of its network overlaps with low cost carriers, the highest proportion among the majors.
The behaviour of oil refineries in the midst of the fuel crisis has not helped the plight of the US airlines. In addition to increased oil prices, refinery margins for jet fuel have jumped from $6 per barrel in 2003 to $17. Before last week’s filing, Northwest was estimated to be paying $100 a barrel once refinery costs were factored in. IATA’s Bisignani said last week: “We fully understand the principles of supply and demand. But it is difficult to see this as anything other than a $14bn cash grab by the oil industry that is pouring salt into the wounds of a global crisis.
“Moreover, the impact of Hurricane Katrina on fuel supplies and refinery capacity will only ensure that relief will not come soon. To cope, urgent structural change across the industry's value chain is essential.”
Restructuring experts believe the business model of the majors is broken, with them having lost control of both costs and capacity at the end of the 1990s – well before 11 September. All of the legacy carriers have carried with them a set of contractual commitments that cannot be sustained. Of the big names, only American and Continental are still operating outside bankruptcy protection. Fuel prices have been rising across the globe but European airlines are expected to break even this year, and Asia Pacific carriers may manage to eke out a $1bn profit.
IATA’s Bisignani said: “Buried in the industry’s red ink, there is a incredible story to be told. Despite adding $10bn to our cost estimates, the incremental impact on the bottom line has been limited to $1.4bn. The airline battle to reduce costs, increase yields and improve efficiencies is effective well beyond expectations.”
American and Continental look stuck in a holding pattern wondering whether to go in next. Ten days ago Continental repeated warnings that high fuel prices could lead to a “significant loss” in 2005. But Continental has the benefit of having gone through two bankruptcy reorganisations in the 1990s, which allowed it to slash expenses. American is robust thanks to the $1.8bn in annual labour savings it won in 2003. In an industry buffeted by external events, of which Katrina is only the latest in a long line, neither can afford to be complacent, however.
The only bright spot for American carriers is international routes, where yields are rising steadily. But as they add capacity across the Atlantic, the bosses of European airlines such as British Airways are getting angry. They regard America’s Chapter 11 bankruptcy as a form of subsidised, unfair competition. BA chairman Martin Broughton has criticised the US government of using Chapter 11 to prop up the “walking dead”.
The weeding out of inefficient operators and the rise of low-fare carriers are exactly what former US president Jimmy Carter envisioned when he ordered the deregulation of the industry in 1978. Deregulation, which freed the airlines from government controls on routes and fares, may finally be coming to its logical conclusion.
But the woes of America’s airlines could easily spill over on to the international market.
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