Three years and a day after the events of Sept. 11, 2001, pummeled the airline industry, US Airways began a second court-supervised restructuring with grim prospects for survival. At the same time, Delta Air Lines CEO Gerald Grinstein urgently worked with the carrier's pilots union to at least delay a Chapter 11 filing. United Airlines, meanwhile, is running out of time to submit to the court its reorganization plan after 21 months of bankruptcy proceedings. These developments will reverberate around the industry and could determine whether any longstanding players meet their demise or remain viable suppliers for Corporate America.
Buyers have become somewhat desensitized to the financial problems facing major airlines, especially if their preferred carriers can maintain route networks and continue uninterrupted operations. Yet, US Airways already began deconstructing its Pittsburgh hub, and a second trip through bankruptcy court could result in more service cuts, if not liquidation. Delta, meanwhile, by January will downsize Dallas Fort Worth operations from a mini-hub with more than 250 daily flights to a spoke city with just 21.
These moves may be the first in a wider industry restructuring that has brewed for years and now is hastened by crippling fuel prices. The industry is expected to lose another few billion dollars this year, and sequential bankruptcies fundamentally could alter the competitive landscape.
"The best thing is if oil prices moderate," said UBS analyst Robert Ashcroft. "Second best is if competitors run out of money before you do."
For Delta, the immediate goal is to slow early pilot retirements, which recently accelerated as senior-level pilots bail out ahead of a potentially painful financial restructuring. Otherwise, the carrier won't have enough pilots to operate a full schedule and likely would seek bankruptcy protection.
"The goal is to avoid filing," Grinstein said last week during a SkyTeam press event in New York
(see story). "We are in discussions now with the pilots union, and I am hopeful we will come to a resolution soon."
Delta then must finalize a new, long-term deal with the Air Line Pilots Association, saving it about $1 billion annually, and restructure its huge debt load. If it cannot, the carrier likely will file for Chapter 11 in the coming weeks.
In noting the severity and urgency of the situation, Grinstein this month told employees that "if all of the other pieces don't come together in the near term, we will have to restructure through the courts."
Those other pieces include as many as 7,000 layoffs within 18 months, fleet simplification that would eliminate four aircraft types by 2008, a push to move 50 percent of all bookings to its Web site and an overhauled schedule at its Atlanta hub. In all, Delta targeted $5 billion in annual cost savings by 2006. It expects to achieve $2.3 billion in savings by year-end.
For Dallas-area corporate clients, or those who use Delta to fly to or through DFW, the carrier's retreat from the market will impact preferred agreements.
"We tried to restructure DFW operations in several ways," Grinstein explained, "but the situation continued to be bad. A commanding market presence is critical, and we didn't have it in Dallas." Delta as of January will fly from DFW only to its remaining hubs in Atlanta, Cincinnati and Salt Lake City, each of which will see expanded flight schedules as aircraft are redeployed.
J.P. Morgan Securities analyst Jamie Baker said American Airlines would benefit from Delta's decision because the two carriers have battled head to head in more than 40 DFW markets. AA this month announced plans to add 70 daily mainline and regional jet flights to its DFW schedule, effective next summer, citing "the strength of a growing North Texas economy."
Baker noted there still would be "a sizable vacancy in Dallas" that could tempt AirTran or Southwest Airlines. "Ultimately, it may prove better for American to have had an ailing, high-cost competitor at Dallas, rather than a far more nimble, low-cost one," he said.
In all, Delta on Jan. 31 will enact schedule changes impacting 51 percent of its network. "It will be the largest single-day schedule transformation in Delta's history," Grinstein said, "and probably will be the biggest transformation that has taken place at any carrier in this industry at any time."
Changes will include increased flying from such focus cities as Boston, New York and Orlando. To the surprise of many, Delta next spring also will expand its low-fare Song operation.
Meanwhile, the carrier plans to maintain and refresh its two-class service configuration by adding leather seats and extra legroom to the coach cabin and eventually installing new first class seats. Chief marketing officer Paul Matsen last week told reporters that Delta "now is developing the next BusinessElite," which likely would include lie-flat sleeper seats.
The airline has yet to extend its new simplified pricing structure beyond its Cincinnati hub
(BTN, Sept. 6), though such expansion is an element of the transformation plan. Delta recently reported a 63 percent increase in Cincinnati bookings and said it had begun reclaiming marketshare lost to low-cost competition at surrounding airports.
US Airways Flying on Fumes
Corporate buyers also should expect vast changes to US Airways' network. If a second bankruptcy restructuring doesn't cure the carrier, it will liquidate and sell off gates, landing slots and airplanes. Some companies already are preparing contingency plans.
"We are trying to make sure we use nonrefundable, reusable US Airways tickets and working those down as fast as we can," said Eastman Kodak manager of corporate travel services Doug Baldy. "We want US Airways to survive and will continue to support them, but they have the most lift out of Rochester and in the event they do not survive, we did the analysis to see where we have alternatives. There is no serious jeopardy for the travel program because only 6 percent of our travel is on routes where US Airways is the only carrier, and it would not take long for other carriers to get on those routes."
Corporate clients in most cases, however, are obligated to continue preferred agreements with US Airways, as long as the carrier continues the bulk of its operations. "There is nothing much you can do right now to improve or protect negotiated agreements until we see how this all shakes out," said Travel Analy-tics CEO Scott Gillespie. "There is no way to predict the consequences for a corporate client until we see how capacity is reallocated."
Gillespie suggested it may be "an interesting time to negotiate shuttle agreements" because American and Delta may want to lock in new business before the situation changes dramatically. He also suggested US Airways clients keep open lines of communication with other carriers because "they soon may need to use them."
Last week's bankruptcy filing did not come as a surprise, and the airline is unlikely to liquidate in the near term. The company said there would be no changes to operations, and ARC said it continues to process US Airways bank settlement transactions.
The bankruptcy court gave US Airways approval to honor customer programs—including its frequent flyer program—and maintain agreements with suppliers and other airlines. Because the airline had not lined up debtor-in-possession financing, the court also let the airline tap into $750 million that had been restricted as part of collateral for its federal loan guarantee from the Air Transportation Stabilization Board. ATSB in a statement said it "understands the circumstances" and will work with the airline and the bankruptcy court "to ensure that the taxpayers' interests are protected."
There is no doubt that longer-term prospects are bleak. "We believe the company has 30 days to work out a reasonable plan with its employees, especially as no one was willing to finance" Delta's Chapter 11 reorganization, said Helane Becker, analyst with The Benchmark Co.
Becker earlier suggested Southwest Airlines "is in a position to pounce on the East Coast if any of the major airlines currently in dire straits files for Chapter 11." She specifically cited US Airways' Charlotte hub as a possibility. A Southwest advance into that market would further pressure US Airways, which already has been supplanted by Southwest as the top carrier in Baltimore and now is battling the low-fare airline in Philadelphia for its very survival.
Even if US Airways survives, it likely would operate a much smaller network and offer simplified pricing across its system, a development that probably would end most traditional corporate contracting efforts. That, in turn, would impact United Airlines' corporate clients who use US Airways services via the airlines' codeshare relationship.
Commenting on US Airways, United in a statement said, "We have enjoyed a codeshare relationship with US Airways since 2002 and look forward to continuing good work with US Airways on codeshare and frequent flyer programs as the company operates in Chapter 11."