September 15, 2004
Dark Skies: US Airways Skips Pension Payment as Escape Looks Less Likely
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The decision to miss the payment to pension plans covering mechanics and flight attendants gives the airline financial breathing room but the judge presiding over the case said he would hold a hearing on the matter Oct. 7.
The No. 7 U.S. airline, which filed for its second bankruptcy in as many years on Sunday, did get permission on Monday to continue operating using a loan it secured last year with the help of a guarantee from the federal Air Transportation Stabilization Board.
The company, which negotiated new relief from the loan board, still owes more than $700 million to the government.
US Airways aims to cut costs in a bid to become more like the discount airlines that threaten its survival, but analysts said the job would be difficult without additional financing.
"With no (debtor-in-possession financing) and with no serious prospect for an equity investor injecting cash into the carrier, you'll need to see a radically different cost structure in place by 2005," said William Warlick, senior credit analyst for Fitch Ratings.
When a company goes bankrupt, its debt ratings shift to default and its stock usually sinks as investors expect shares to be worthless by the end of the bankruptcy process.
US Airways said current management had no plans to liquidate the carrier. "This management team isn't here to preside over a liquidation," US Airways chief bankruptcy lawyer Brian Leitch told the court.
"There is no reason in the world that the plan cannot be successful. We won't ask for unrealistically low costs," Leitch added.
US Airways has said it must cut costs by $1.5 billion -- $800 million of which it hopes to get from labor unions that yielded nearly $2 billion to help the company out of its first bankruptcy.
"We're still talking, we talk every day, we're still working very hard," Chief Executive Bruce Lakefield told reporters outside court about thus-far-unsuccessful efforts to win givebacks from the airline's unions.
US Airways did not rule out the possibility that labor contracts and pension agreements could be rescinded if the talks fail, but the court would have to agree.
US Airways is arguing its case before the same judge, Stephen Mitchell, who approved its initial restructuring in March 2003.
The company told Mitchell it also cannot pay $19 million it owes to its pilots' retirement plan. The previous plan for pilots was terminated during the company's first bankruptcy and replaced with a cheaper plan.
Soaring fuel costs, $300 million higher than expected at US Airways -- and weak sales amid competition from low-cost rivals like Southwest Airlines are at the root of US Airways' problems.
US Airways was the first big U.S. carrier to enter bankruptcy during the industry's worst downturn, accelerated by the Sept. 11, 2001, hijack attacks. It filed its first bankruptcy in August 2002, followed months later by No. 2 United Airlines, which is still in Chapter 11.
Delta Air Lines, the No. 3 U.S. carrier, is fighting to avert a filing.
While Lakefield said discussions with the unions on possible concessions continue, labor groups said the company's plan to skip pension payments could complicate negotiations on concessions.
"US Airways management has thus far demonstrated an overwhelming inability to look beyond labor costs for any means to replenish falling revenues," said Randy Canale, president of the US Airways unit of the International Association of Machinists.
However, the company's financial problems are so daunting that industry experts agree with the company that labor must concede givebacks.
"These workers have chosen not to (take paycuts) voluntarily, so it will be imposed upon them," said Gary Hindes, managing director at Deltec Asset Management where he runs a distressed securities fund. "US Air probably is a goner."
The company listed assets of about $8.8 billion and liabilities of $8.7 billion. It has about $1.45 billion in cash.
Pension fund Retirement Systems of Alabama, which invested $240 million during the last bankruptcy, owns 36 percent of US Airways. The pilots' union, the Air Line Pilots Association, holds a 19 percent stake.
The U.S. government, through its loan guarantee, holds 10 percent. General Electric Co., a supplier of regional jet financing, owns 5 percent.
Despite the dark clouds hanging over the airline, we have to ask ourselves if there’s any way to save the other five of the six majors? To do that, we have to ask why so many airlines are struggling right now. I found a great article on NYTimes.com about it:
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High fuel prices and the post-9/11 slump have taken a toll, to be sure. But many in the industry - including some of the major-airline executives themselves - say the traditional airlines are finally being brought low by a more fundamental problem of their own creation, one that has been building up for years.
Simply put, they have taught their customers to resent them, and to resist paying the fares they need to make a profit.
"People's expectations for airline service are pretty low," said Peter Cappelli, professor of management at the Wharton School of Business. The situation is so dismal that "things could deteriorate another 20 percent and I'm not sure you could calibrate the difference," he said.
Year after year, under chronic financial pressure, the traditional airlines have made flying less comfortable and less convenient for most passengers. In addition to the cramped seats on crowded planes, with cutbacks or extra charges on nearly ever facet of service from the food to baggage allowances, travelers navigate complicated fare systems that still exact sky-high "full" prices from some passengers while dangling ever-changing discounts before others. These systems, intended to reap as much revenue as possible while still filling the plane, have left consumers feeling that there is no such thing as a fair price for air travel and have encouraged them to game the system.
On top of that, the airlines have added one restriction after another to their tickets in recent years, making it expensive or impossible for passengers to change their travel plans after booking. The chief consolation offered for all these irritations - frequent-flier miles - have been drained of value as the airlines make redemption harder by limiting the available dates and seats.
And in recent months, several of the major airlines have begun charging a $5 fee to buy tickets over the phone and $10 to buy them at an airport counter, where "How can I help you?" used to be free.
Even the airlines' "hub and spoke" route systems became a nuisance for many passengers. Though they brought new air service to many smaller cities, they forced harried throngs of passengers to make connections in crowded hub airports to get where they wanted to go, rather than be able to fly nonstop. Meanwhile, the major airlines set a trap for themselves in the 1990's, when the long economic boom produced some fat years that many executives thought would go on indefinitely.
In an industry already famed for high pay and lavish benefits, companies locked in high, hard-to-cut costs with union contracts that were the envy of the labor movement. The airlines could afford those costs only as long as the public was willing to pay high fares for their reputation and service.
The rapid growth of discount airlines like Southwest and JetBlue, with their bare-bones service and lack of pretensions, shows what many passengers think of that proposition now.
These airlines, which have never held themselves out as anything more than a way to get from here to there, can charge much less than the old majors and still make money because they have avoided the big airlines' big mistakes.
The low-fare airlines' operations are simpler and leaner; their labor costs are much lower; they do not have the financial burden of pension obligations to thousands of retired workers, a major expense for the older carriers; and crucially, they have not annoyed their customers nearly as much.
On the low-fare carriers, passengers are not pampered, but they do not expect to be. People who might be disappointed with the quality of a United meal - or resent being forced to pay extra for one on a Ted flight - do not seem to mind when Southwest gives them just a drink and a bag of peanuts, because that is all Southwest has ever promised them.
While a segment of the market is still willing to pay premium prices for a substantially higher standard of service, it exists now mostly on long-haul and international routes. Flights of just a few hours have become a commodity bought strictly on price, and the market won't bear the fares that the big airlines need to cover their costs. So, in their current form, these companies are not viable any more. The question for the traditional carriers now is whether they can transform themselves into something like the low-fare carriers, or find niches where they can still thrive.
US Airways and Delta have each said in recent weeks that they would drop hubs and eliminate thousands of jobs in an effort to rein in costs. Each hopes to make its operations more like their low-fare rivals. But those hopes depend on the willingness of their workers to accept new cuts in pay and benefits, and investors to pump in more money.
Once the public would have had an emotional investment in the fates of storied names like Delta and United: witness the anguished reaction to Pan Am's closure in 1991. But not now.
There was some sympathy for the airlines in the dark days after Sept. 11, but despite the bailout that Congress approved after the attacks, the industry is still in turmoil, and the continuing drumbeat of bad news has had a numbing effect on customers.
- Arik
Posted by Arik Johnson at September 15, 2004 01:18 PM | TrackBack
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