Both Delta and Northwest airlines may be only weeks away from bankruptcy filings unless they can solidify their financial footing. Whether one or both narrowly avoids Chapter 11, as American Airlines did in spring 2003, or joins United and US Airways under bankruptcy court supervision, the immediate ramifications for most corporate accounts won't be dramatic. Longer-term, relationships with these airlines could change, depending on how restructuring plans progress.
Meanwhile, a strike countdown at Northwest is scheduled to end Aug. 20, with 5,400 workers prepared to walk off the job absent a new contract. Though Northwest and industry analysts said the airline would find ways to continue operations during any work stoppage, some corporate travel professionals are assessing alternatives.
For both Delta and Northwest, new bankruptcy laws—approved this spring by Congress and set to take effect in October—could hasten Chapter 11 filings. Among other restrictions, the new laws include a stipulation that limits to 18 months the exclusivity period during which a debtor can submit a reorganization plan. Airline bankruptcies can be complicated, lengthy processes—United parent UAL Corp.'s reorganization now is likely to last at least three years—so airlines on the brink may opt to file soon to avoid being subjected to new legislation.
"The new laws will make a difference in larger bankruptcy cases and therefore certainly would play a role for airlines," said Laurence Smith, corporate travel advisor and attorney with Wolff & Samson in West Orange, N.J., "but they only may affect timing, not necessity."
At this juncture, it is difficult to assess the potential consequences of additional airline bankruptcies for managed corporate travel programs. Thus far, the highest-profile U.S. airline bankruptcy case now in the courts—UAL's—has not fundamentally changed how corporate clients work with the company. To be sure, much has changed in terms of the airline's contracting methods, scheduling and pricing, but those changes can be attributed as much to industrywide market dynamics as the company's Chapter 11 case. Similar corporate pricing and contracting transformations at American, Continental, Delta and Northwest, for example, occurred this year without bankruptcy.
In other examples, more significant modifications are planned, potentially affecting business travelers and their managers. Bankrupt US Airways and ATA Airlines, for example, have pinned their recoveries on mergers with America West and Southwest, respectively, which would alter networks.
In any case, corporate travel managers by now are relatively immune to the negativity generated by awful airline financials. Though solvency certainly is a factor in buyer decisions, it is not generally the overriding factor, barring serious service cutbacks or a real possibility of the airline in question simply vanishing from the skies. For larger airlines like Delta, Northwest and United, the likelihood of such a scenario is extremely remote.
"Having watched United operate business as usual during its Chapter 11 case, I would expect the same from Delta," said a travel manager at one of the carrier's multinational accounts."
"Everyone is just shrugging their shoulders," added Dan Boehm, president of Atlanta-area travel agency Boehm Travel. "Clients think that it is a foregone conclusion, but they are not dwelling on it."
Nevertheless, these situations bear watching. Delta last month reported another round of deep quarterly losses. Its stock last week was trading at its lowest level in decades and, citing ongoing negotiations with a third party for a Visa and MasterCard processing contract, the company delayed its latest 10-Q financial filing to the Securities & Exchange Commission. Delta said the existing contract covering Visa and MasterCard processing expires Aug. 29. Without a replacement contract—which would "require a significant cash reserve"—the airline could not accept Visa or MasterCard as a form of payment.
"Our current best assumption is that Delta will throw in the towel and file within the next two months if management cannot raise or save at least $750 million through added liquidity, labor savings, debt relief, etc.," said J.P. Morgan Securities analyst Jamie Baker in a research note last week. Baker, however, suggested that Delta CEO Gerald Grinstein still had a few cards to play, including a possible sale of regional subsidiary Atlantic Southeast Airlines and additional labor cost cuts. "An all-or-nothing liquidity and balance sheet restructuring scenario is most likely and Delta must now swing for the fences."
Should Delta declare bankruptcy, it likely would cut capacity to the benefit of large network competitors and Atlanta rival AirTran. "As a first stab, we'd expect Delta to reduce capacity to about 80 percent of its pre-9/11 level," Baker said, predicting a 17 percent decline in domestic seats, which would halve overall domestic industry capacity growth projections for 2006 to 2.1 percent. "Domestic capacity growth of this magnitude would likely afford another year of modest industry pricing power, building on the success in 2005, year-to-date."
In the meantime, Delta continues to restructure outside of court. One of its latest measures—set to take effect next month when the airline transitions to the fall flight schedule—would more quickly turn around aircraft on the ground in Atlanta and boost airplane utilization. The carrier in January executed a massive scheduling overhaul
(BTNonline, Sept. 8, 2004) that it claimed has improved operations in Atlanta. Overall, Delta by year-end expects to achieve efficiencies to free up the equivalent of 39 aircraft for growth in key markets. More scheduling adjustments are expected next year.
At Northwest, the situation is even less certain as clocks are ticking both toward the new bankruptcy laws in October and the possibility of a strike as early as this weekend. Management and the Aircraft Mechanics Fraternal Association were released from federal mediation and now are in a required 30-day cooling off period. AMFA's membership overwhelmingly has authorized a strike should union leadership call for one.
The airline said it has developed contingency plans in the event of a work stoppage. In addition to using contract technicians and other third-party vendors to fill in for AMFA members, Northwest also is preparing to deploy substitute flight attendants to replace unionized flight attendants who may participate in a sympathy strike. The airline also is discussing with pilot leaders the possibility of using other aviation companies to provide additional lift, should it be needed. For now, Northwest plans to operate 100 percent of all scheduled flights and therefore has not altered any ticketing policies.
"We are reasonably confident that Northwest will be able to fly through a strike, if one were to occur," said Helane Becker, analyst with The Benchmark Co.
Even so, travel professionals advocate prudence. "Very few people believe there won't be some level of pandemonium and flight cancellations should a strike occur," said Rebecca Martin, president of corporate agency A&I Travel, located in Northwest's Memphis hub. "We have been advising customers to delay any non-essential travel for two weeks after Aug. 20. If travel cannot be delayed, we are advising that they may want to consider alternative carriers."
Northwest also remains in federal mediation with other unions. It has targeted a total of $1.1 billion in annual labor cost cuts in order to become competitive with other carriers that already have secured labor cost savings and, like other carriers, desperately needs pension reform. "Absent either, a first-quarter 2006 filing essentially is unavoidable," said J.P. Morgan's Baker.
United parent UAL Corp., meanwhile, this month delayed the filing of documents that would detail its planned exit from bankruptcy protection. The company originally had planned to file a reorganization plan "on or about Aug. 1
(BTN, July 18)." The delay puts into question UAL's stated intentions to complete the bankruptcy process sometime this fall. The company filed for Chapter 11 in December 2002.
Though United has secured cooperation from most of its unions, like Northwest it faces ongoing labor strife. The Association of Flight Attendants continues to rally against UAL's decision to dump employee pension plans on the federal government by threatening strikes and other disruptive activities. "We want our pensions back and we want this management team out," said AFA president Greg Davidowitch.
UAL fired back, saying AFA's threats are illegal and "will not be tolerated."
Calyon Securities analyst Ray Neidl, noting UAL would have an appropriate cost structure to go along with a global network and strong brand recognition when it completes Chapter 11 proceedings, said "possible employee retaliation is the greatest threat to the company's reorganization and future viability."
On a positive note, United last week said it restructured financial arrangements for long-term use of 105 aircraft. Negotiations continue on arrangements covering 14 remaining aircraft.
United partner and fellow bankrupt carrier US Airways recently progressed further in its plans to merge with America West and complete its reorganization this fall. The Air Transportation Stabilization Board, which had provided loan guarantees to both companies totaling more than $1 billion, last month approved the merger and new loan terms. "The business plan put forward by the companies provides for a more competitive cost structure and increased liquidity which should better both airlines' competitiveness in a challenging industry environment," ATSB said.
The next step is vote by US Airways' creditors on the reorganization plan approved last week by the judge overseeing the carrier's bankruptcy case. Votes are due Sept. 12, exactly one year after US Airways reentered Chapter 11 protection
(BTN, Sept. 20, 2004). A confirmation hearing on the plan is scheduled for Sept. 15. An America West shareholders vote and special meeting is scheduled for Sept. 13.
Meanwhile, Independence Air last week in an SEC filing warned of low cash. A bankruptcy candidate since last winter, Independence said its $66 million in reserve as of June 30 and projected cash flows "are not expected to be sufficient" to cover operations and financial commitments. The airline last week, however, struck a deal with Airbus to defer new aircraft deliveries, temporarily improving its cash position.