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Tue November 29, 2011
Business

Is Bankruptcy 'Business As Usual' For Airlines?

As American Airlines struggled to keep up with its rivals in recent years, it could at least boast something that competitors could not: The Fort Worth, Texas-based carrier had never gone bankrupt. Not anymore.

On Tuesday, American's parent, AMR Corp., filed for bankruptcy protection, citing $10 billion in loses over the past decade. In a statement, it said it took the step in hopes of bringing down costs and emerging more competitive.

You might say it's almost business as usual for the airline industry. United, Northwest and Delta have all taxied down the Chapter 11 tarmac. US Airways did it twice in as many years.

But David Arthur Skeel, a professor at the University of Pennsylvania Law School and an expert in corporate bankruptcy, remembers that things were different 20 years ago, when Eastern Airlines and Pan Am went belly up.

"If you contacted a travel agent, they would ask you if you were willing to fly on a bankrupt airline," he said. "They don't ask that anymore."

Fading Stigma?

Skeel said it illustrates not only how commonplace airline bankruptcies have become, but also how the stigma of bankruptcy itself has all but disappeared. To be sure, Eastern Airlines and Pan Am ultimately liquidated; all the major airlines struggling today went through Chapter 11, allowing them to keep flying while they restructured debt and operations.

It didn't start out as a corporate strategy for the airlines, but in the past decade, Chapter 11 has become precisely that, said Robert Mann, who runs an aviation consultancy in Port Washington, N.Y.

"As the industry consolidated, and particularly with the stress that emerged after 2001, it became a definite competitive strategy," he said. "Which is to say, if you haven't done it, you haven't wrung out all the costs that you could."

Pete Garcia, who retired as a vice president for Continental Airlines in 2007 and now runs his own consultancy, agrees.

"Bankruptcy, for the airline industry in particular, is just a way to refinance the business," he said. "It is a financial move to keep you in business and give you some time to renegotiate with your lenders."

Fuel Vs. Labor

It's a complex business, but when it comes to costs, there are just two that really keep CEOs and CFOs awake at night: fuel and labor.

"You can hedge fuel costs, but that's a bet, like Las Vegas," Garcia said. "Or, you can sit down and negotiate with employees."

But that's not easy, Garcia said. As with the automotive industry, unions and the airline employees they represent have been reluctant to make concessions, among them deep pay cuts and the elimination of pension plans.

Pensions were seen as the airlines' albatross, Garcia said. Pension burdens weighed heavily at United and Continental, airlines founded in the 1920s and 1930s, respectively.

"The percentage of employees who were actually on pensions, compared to say Southwest, which is only 30 years old, that's a big difference," he said.

Bankruptcy puts teeth into talks with the unions, and the legal intricacies of Chapter 11 make it easier to renegotiate labor agreements.

"All the other airlines were able to renegotiate their union contracts and to get their labor costs down to a manageable level. American was the only one that seemed unable to do that," Garcia said.

Unhappy Employees

So, why did American Airlines wait so long?

From the airlines' perspective, there's a price to pay for wringing those concessions out of employees, said Mann, the airline consultant.

"This is a personal service industry, and having highly motivated employees on the front line with customers is paramount," he said.

"In the case of American, you've got a group of employees who eight years ago took a 30 percent pay cut, have gotten very little of it back, and now suddenly you're going to cut their compensation," he said.

There's also a not-so-subtle irony about bankruptcy: It costs money. And the bigger the company, the more it costs.

Filing for Chapter 11 is likely to cost AMR "hundreds of millions of dollars in attorney and other professional fees," Mann said. "So, you don't do it lightly."

But there's also the bankruptcy stigma. Yes, it's faded, but it's still there. Nobody wants to work for a bankrupt company, and more than a few CEOs don't want to be in charge of a bankrupt company, the University of Pennsylvania's Skeel said.

"Look at General Motors," Skeel said. "Well before it filed for bankruptcy, it was clear that it needed to file for bankruptcy. But Rick Wagoner, the then-CEO, refused to file, and stigma was one of the big arguments that he made."

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