United Airlines parent UAL Corp. last week prevailed in a courtroom showdown with labor unions when the presiding bankruptcy judge ruled the company could unload heavily underfunded employee pension plans on the federal government. The result of the hearing not only will help determine UAL's fate but also could be a watershed moment in the course of the domestic aviation industry's ongoing restructuring and for pension plans around the nation.
Meanwhile, US Airways may be pinning its survival on a merger with America West Airlines. According to rampant industry speculation, a deal could be announced as early as this week. At the same time, both Delta Air Lines and Independence Air last week reported deteriorating financial performance and soon may be forced into Chapter 11 bankruptcy protection.
Analysts and observers said UAL competitors with defined-benefit pension plans now would need judicial and/or legislative help—such as a pension-reform bill introduced last week by congressional Democrats—to bring their pension costs in line. At the same time, the federal Pension Benefit Guaranty Corp. could become overwhelmed by pension obligations from the airline industry. PBGC already has a $23 billion deficit, not including billions more in UAL pension obligations that it now will assume
(BTN, March 21)."If UAL is successful, every legacy carrier has a pension problem that is not fixable outside of bankruptcy," said Seabury Group analyst and managing director Scott Gibson last month during the TravelCom Expo in New York.
"The savings that United will realize from this court ruling most probably cannot be replicated by carriers operating outside of the protections of bankruptcy," added Laurence Smith, a corporate travel advisor and attorney with Wolff & Samson in West Orange, N.J. "While bankruptcy is not the death knell for a carrier, it does change the rules of the game." He therefore suggested corporate travel managers develop contingency plans and build protections into preferred carrier agreements.
United at press time was engaged in another bankruptcy hearing regarding labor relations. The carrier is seeking approval to alter collective bargaining deals with two holdout unions that had not agreed to additional givebacks
(BTN, Feb. 7). Membership of both the Aircraft Mechanics Fraternal Association and the International Association of Machinists and Aerospace Workers already voted to strike should United unilaterally enact contract changes.
Meanwhile, America West and bankrupt US Airways may be on the verge of announcing a merger after confirming discussions last month. Both carriers share common financial supporters, including General Electric's aircraft leasing arm and the federal Air Transportation Stabilization Board.
"Both airlines are desperate and the enablers are in the room," said one source. "This is a real deal."
A combination of these two major carriers would create a coast-to-coast network encompassing US Airways' comprehensive eastern operations and America West's western strengths. It also could lead to America West's inclusion in the Star Alliance.
Wall Street analysts initially opposed the deal, suggesting industry consolidation only would achieve positive results if lower-yielding capacity is removed from the market. Otherwise, the revenue environment is unlikely to improve. More information on the potential AWA-US Airways deal could be available this week in conjunction with AWA's annual stockholders meeting.
US Airways also said an August schedule change will result in 10 fewer mainline aircraft in operation as it trims unprofitable flying.
Time may be running out for Independence Air, which now expects to post a first-quarter loss of at least $105 million. Though the Washington Dulles-based airline said load factors steadily had increased during the quarter and that it would turn a profit by early next year, Helane Becker, analyst with The Benchmark Co., said, "We are extremely skeptical of management's view that they can approach break-even by the summer and be profitable during 2006."
Competitors have said that Independence Air's extremely low pricing on East Coast and transcontinental routes is ruinous for all airlines involved. Even Independence Air said it must raise prices to improve financial prospects. The airline through July will return 76 aircraft to owners and lessors while it continues taking delivery of new Airbus A319 jets. It now operates to 46 destinations. Service to Norfolk, Va., will be discontinued May 31.
Delta Air Lines last week in a Securities & Exchange Commission filing said it expects "a substantial" net loss for the remainder of 2005 after posting a $1.1 billion loss in the first quarter. The carrier also said cash flows "will not be sufficient to meet all of our liquidity needs" and that additional cost-cutting initiatives, on top of those spelled out in its transformation plan
(BTNonline, Sept. 8, 2004), and/or a bankruptcy filing may be necessary.
Delta also said contracts with MasterCard and Visa will expire in August and that "significant cash holdback" is required to replace or renew those deals.