A spate of recently announced airline cost-saving measures shows an industry desperate to move toward a more sustainable structure. The newest decisions—ranging from deferring new planes and cutting more labor costs to downsizing equipment and even removing pillows—do not sit well with airline employees or business travelers but are likely to help most carriers either avoid bankruptcy protection or use it to successfully restructure. Nevertheless, many corporate travel managers are preparing for possible shutdowns among preferred airline suppliers.
"Low-cost competition is no longer a recipe, it's a philosophy, one essentially embraced by the entire industry," said UBS analyst Robert Ashcroft.
J.P. Morgan Securities analyst Jamie Baker said LCC and legacy airline economics are converging and by the end of next year, "it may be comparatively difficult to tell the sub-sectors apart." Such convergence already is apparent in simplified pricing models spreading across the domestic market and impacting the structure of corporate contracts
(see story).Labor costs in particular are falling rapidly as legacy carriers negotiate or impose cheaper union contracts and transform employee pension plans. These measures will help most large competitors gradually regain financial health but, for certain carriers, the coming winter will make or break recovery.
US Airways' fate may be known sometime next month. Under terms of a new deal signed with lessors in November, the airline must achieve specific cost reduction targets by Jan. 14—the same day access to cash collateral from a federal loan is set to expire
(BTN, Oct. 15)—and emerge from Chapter 11 bankruptcy protection by June 30. Otherwise, it loses a $140 million package of cash and debt deferrals.
US Airways during the next three years also would lease 31 regional jets and return 25 mainline jets in a deal "enabling us to effectively serve smaller routes or develop new markets," said US Airways president and CEO Bruce Lakefield. The agreement requires bankruptcy court approval by Dec. 17.
To accomplish the necessary cost reductions, US Airways seeks fresh changes to labor agreements. The Association of Flight Attendants
(BTNonline, Nov. 16) and Communication Workers of America each threatened to strike should the carrier unilaterally impose such changes. CWA late last week announced a tentative agreement with management.
"We believe US Airways is completely tapped out," said UBS' Ashcroft. "Nonetheless, we still think liquidation is less likely than not. The airline functions courtesy of the U.S. government," which has twice reworked terms of a loan backed by the Air Transportation Stabilization board
(BTN, Oct. 18).US Airways' partner United Airlines also has important dates ahead. The court overseeing its two-year bankruptcy on Jan. 10 will hear the company's argument for rejecting collective bargaining agreements with major labor unions. United cited "urgent financial needs" but said it remained committed to achieving consensual agreements. Like US Airways, United faces strong objections from labor groups.
The airline also received yet another extension, until Jan. 31, to exclusively file a reorganization plan. Judge Eugene Wedoff has extended the exclusivity period a number of times and may hear arguments for further extensions next month.
On the revenue side, United last month said it secured new corporate accounts valued at $130 million over five years. "Typically, it is a lengthy cycle, but we actually brought three very significant contracts to conclusion in the last few weeks," Graham Atkinson, senior vice president of worldwide sales and alliances, told employees. "We are earning credibility with some very discriminating travel buyers."
Though Atkinson did not name the new clients, he said agreements were finalized with help from Star Alliance partners. Two days later, Star Alliance announced it signed a five-year corporate travel agreement with Chevron USA, a unit of ChevronTexaco Corp. United CEO Glenn Tilton had been ChevronTexaco's vice chairman before taking the top spot at the airline two years ago.
Atkinson said United continues "a major sales transformation" he said was "essential if we are going to meet the company's revenue challenges."
Meanwhile, United will accept bids through Dec. 10 from several regional airlines to operate as many as 70 regional jets within the United Express feeder network. The winning bidder would assume operations now handled by United Express partner Air Wisconsin but at lower cost to United. Air Wisconsin's United Express feeder service offers 500 daily flights to 72 cities, with sizable operations at United's Chicago O'Hare and Washington Dulles hubs.
Smaller competitors in both of those markets face their own financial hardships and could be among the first airline casualties of 2005. Bankrupt ATA Airlines created a frenzy among low-cost competitors in Chicago when it announced plans to end Midway Airport operations
(BTN, Nov. 8). The bankruptcy court on Dec. 16 is scheduled to select a bid for ATA's Midway assets. The Indianapolis-based carrier recently finalized a $15 million debtor-in-possession deal with the Indiana Transportation Finance Authority that requires ATA to "maintain substantial hub operations at Indianapolis International Airport."
In Washington, Dulles-based low-fare carrier Independence Air also is a bankruptcy candidate. Continental Airlines' outgoing CEO Gordon Bethune pulled no punches last month when he criticized the carrier for bringing a flawed business plan to the market. "I never saw an airline go through a life so quickly, and look at the destruction, not only of the equity for investors, but in the marketplace and all the competitive matches that have occurred," he said. "They are going to die, but it is tremendously hurtful for the rest of us."
After warning of a possible January bankruptcy in a Securities & Exchange Commission filing, Independence Air last month added Worldspan to its list of distribution channels, following a similar decision to participate in the Galileo/Apollo systems. The carrier at launch this summer opted to avoid GDSs and their segment fees.
"So many corporations are continuing to tell us they are excited about flying with us, but need to make their bookings through the GDS system," said Independence Air senior vice president of marketing Eric Nordling.
The airline finally got its new 132-seat Airbus A319 aircraft off the ground following Federal Aviation Administration approval. It already launched two of the planes on routes between Dulles and Florida and plans to have a dozen A319s in service by mid-2005.
Once considered a probable bankruptcy candidate, Delta Air Lines has made several moves in late 2004 to shore up its finances and back away from a Chapter 11 filing. "Delta now seems unlikely to go bankrupt in the near future," UBS's Ashcroft said. "Bear in mind, however, that Delta is still not out of the woods. It must work harder still this winter and spring to successfully restructure the company in the breathing space it has won."
The airline last week finalized more than $1 billion in financing from GE Commercial Finance and American Express Travel Related Services Co. The deals include various terms and conditions and "are secured by substantially all of Delta's remaining unencumbered assets, including a substantial portion of its accounts receivable," the airline said.
Delta also confirmed ongoing changes in its sales and distribution organization, saying it "is able to consolidate its sales roles while growing its Internet selling capabilities."
Continental last month said it needs to reduce labor costs by $500 million annually. It is discussing "a package of changes" with each work group and plans to implement the cost-cutting measures, including reductions in executive pay, on Feb. 28. "$500 million is the absolute minimum we need to be a survivor," Bethune said in a statement. A few days earlier, Bethune told BTN
(see story), "the market is going to speak to you, whether you like it or not," and Continental would try to maintain a labor cost structure in line with redefined industry averages.
"We put off asking for concessions because we are trying hard to find every dollar we can everywhere else in the business," added incoming CEO Larry Kellner.
Ashcroft expected Continental to obtain the necessary cost savings from employee groups. "It will likely be cast as doing one last thing for Gordon Bethune," he said in a research note last month.
J.P. Morgan's Baker said Continental's announcement came 10 months earlier than expected. "We thought Larry Kellner would have spent the first several months of his tenure building new bridges with labor. Apparently we were mistaken," he said. "Kellner has instead come out swinging. We believe this will apply further pressure on the managements of American and Northwest to do the same."
Northwest last month restructured a $975 million revolving bank credit facility, a prerequisite for implementation of the carrier's new deal with its pilots union. That agreement, which will save Northwest $300 million annually, went into effect last week.
Northwest still must hammer out new agreements with other labor unions, including the International Association of Machinists, which Baker termed "the most militant" of the carrier's labor groups. "We expect those negotiations, set to begin next year, to turn decidedly ugly," he said.
Meanwhile, American Airlines parent AMR Corp. last month reached an agreement with Boeing to defer 54 aircraft originally scheduled for delivery between 2006 and 2010. The deal postpones $2.7 billion in capital spending. AMR CFO James Beer said the deal will allow the company to "substantially enhance our ability to restructure our finances."
Some corporations may consider contracting with a carrier that already is in bankruptcy, rather than one on the verge, according to Laurence Smith, a corporate travel advisor and attorney with Wolff & Samson in West Orange, N.J.
"The underlying principle behind the bankruptcy code is to give the debtor a fresh start," he explained. "There are several protections that come into play for the debtor regarding pre-petition contracts that do not apply to post-petition contracts."
Smith suggested some buyers "who have serious misgivings about a carrier emerging from Chapter 11" may opt for shorter contract terms if discounts and/or flat fare levels are too appealing to pass up.
The National Business Travel Association's Aviation Committee recently penned a white paper urging travel managers to develop contingency plans and assess potential liabilities if a major carrier ceases operations. The paper suggests proactive, discussions with human resources, finance, corporate security, corporate communications and legal departments, as well as with preferred carriers, their alliance partners and travel management companies.
"Establish or reinforce a policy requiring that airline tickets be purchased no more than 60 days prior to flight and with a credit card," the committee said. It also recommended buyers draft a traveler advisory that can be customized for any potential scenario to keep travelers up to date.