After 2 1/2 years in bankruptcy, United Airlines is poised to emerge in the fall with an enviable cost structure that could tempt rival carriers to strive for similar cost cuts through court protection.
United, a unit of UAL Corp., has made the most of Chapter 11, reducing yearly costs by $7 billion. Much to the chagrin of its workers, the No. 2 U.S. carrier last month even managed to jettison its burdensome defined pension plans, generating annual savings of $645 million.
US Airways Group, also bankrupt, has won more than $1 billion in annual labor savings this year, an amount that might have been impossible outside of bankruptcy.
The savings of those two carriers has put increased pressure on non-bankrupt rivals, battered by soaring fuel prices and low-fare competition, to slash costs as well.
“I’m sure United’s progress in bankruptcy court will set off a domino effect,” said Joe Schwieterman, a transportation expert at DePaul University in Chicago. “There’s no doubt that the weakest airlines are pacing the stronger airlines in cutting costs.”
Delta, Northwest on the runway?
Delta Air Lines, at risk of a bankruptcy filing, is seeking $5 billion in annual savings. Continental Airlines Inc. hopes to cut labor costs by $500 million a year. So far, the carrier has struck deals worth $418 million annually.
Northwest Airlines Corp. hopes to wring $1.1 billion from its labor force as it restructures, but has run into strong resistance from labor unions.
Experts said that if airlines are unable to match UAL’s cost cuts outside of Chapter 11, then they may well take the bankruptcy route themselves.
“The fact that this large percentage of the industry has gotten there (to greater cost savings) and operates there I think is a reflection and provides a certainty that the rest of us need to get there,” said Doug Steenland, Northwest’s chief executive, said at a conference last Tuesday.
Steenland told analysts he hopes to get the needed savings through collective bargaining and avoid a Chapter 11 filing.
Nevertheless, Steenland and Delta CEO Gerald Grinstein told the Senate Finance Committee last week that pensions covering 150,000 workers and retirees are unmanageable and could force their airlines into bankruptcy.
United’s Chief Financial Officer Peter McDonald, however, said UAL’s cost cuts during bankruptcy merely leveled the playing field with other carriers.
“The reality is we were not cost-competitive,” McDonald said. “If we didn’t change our cost position, we weren’t going to be around. We pursued the right alternative.”
Bankruptcy risky business
But experts warned that bankruptcy is not a guaranteed remedy for what’s ailing airlines. With a relatively low rate of successful restructuring, some industry leaders consider it strictly a last resort.
“It is not a place we want to be,” Delta’s Grinstein said in March.
Furthermore, airlines contemplating bankruptcy as part of a business plan must consider the unintended consequences that could derail future success, said Lowell Peterson, a labor attorney with Meyer, Suozzi, English & Klein in New York.
He noted that bankrupt companies often pay higher borrowing costs. In many cases, a bankrupt airline sees a decline in advance bookings as potential passengers begin to question the carrier’s long-term viability, he said.
“The flying public and the investment public get skittish when they think about an airline going into Chapter 11,” Peterson said.
Even if United emerges unscathed, it is unlikely competitors will stampede into bankruptcy court, said Thomas Salerno, chairman of the financial reorganization practice group at Squire, Sanders & Dempsey in Phoenix.
The government may head off filings if too many carriers try to dump their financial burdens on the public, he said.
“I would predict we’re going to see some sort of congressional action to stem bankruptcies as a tool to stem pension plan liabilities,” Salerno said.
