Airlines hold lesson for car firms

The major players in a key industry file for bankruptcy protection with the hope of reshaping operations quickly and coming back to compete more strongly.

But it’s not the automakers; it’s the airlines, which just a few years ago underwent a wrenching restructuring in Bankruptcy Court that fundamentally altered the travel industry.

Circumstances are different. But with Chrysler’s filing for bankruptcy protection Thursday, and General Motors Corp. flirting with that same option, the experience of the airlines could offer useful lessons.

Air travel, for example, was largely unaffected by the spate of carrier bankruptcies that followed the Sept. 11, 2001, terrorist attacks -- which may be reassuring for car buyers, especially those worried about warranties not being honored.

Richard Gritta, a professor of finance at University of Portland in Oregon who has studied automakers and airlines, said the similarities between the two industries have been remarkable.

The auto business has been “marked by bad operational management that didn’t realize that the Japanese and then later the Koreans were making better cars. They didn’t pay attention and that’s when debt started to pile up,” Gritta said. “Toward the end they have become like the airlines.”

Since 2002, three of the four largest airlines have been in Bankruptcy Court: United Airlines, Delta Air Lines and Northwest Airlines.

The exception was American Airlines. Among U.S. automakers, that same role may fall to Ford, which says it won’t accept government bailout money and appears at no risk of failing.

Like the automakers, the airlines were suffering from high labor costs and increased competition.

By filing for Chapter 11, the airlines got the chance to do things that they would not have been able to do outside Bankruptcy Court, including forcing employees to accept lower pay and benefits, getting aircraft leases reduced and eliminating debt.

They also got out from under the burden of employee pensions that cost them billions of dollars a year.

As a result, carriers that reorganized under Chapter 11 have been able to weather some of the toughest business environments in decades, including last year’s fuel hikes and this year’s travel downturn.

American Airlines, then the nation’s largest, staved off bankruptcy by gaining major wage concessions from its workers.

But some analysts believe the cost cutting wasn’t enough and that left the carrier a weaker competitor.

“They managed to reduce cost to a large extent but not to the same level as the other carriers,” said Jan Brueckner, an economics professor at UC Irvine who studies the airline industry. “That’s what happens when one competitor goes into bankruptcy and the other doesn’t. GM and Ford should be worried about that.”

Delta and Northwest, previously the third- and fourth-largest in terms of passenger traffic, restructured operations in bankruptcy and Delta quickly acquired Northwest, supplanting American Airlines as the world’s largest carrier.

“American is at a disadvantage compared to most of the other carriers that went through bankruptcy,” said Ray Neidl, a longtime airline analyst in New York. “Others were able to get their cost structures down far more than American.”

Workers at American agreed to $1.8 billion in payroll cuts, pushing compensation to levels of a decade earlier. But many of its rivals were able to make significantly larger cuts.

In 2001, a year before the airlines got pummeled by the air travel slump in the aftermath of Sept. 11, American had the third-highest labor cost measured in the amount spent per “available seat mile,” or each plane seat flown one mile.

American was at 4.71 cents per available seat mile, behind US Airways, at 5.98 cents, and United, at 5.43 cents.

But by September 2008, the most recent period for which data are available, American’s labor cost, though lower at 3.69 cents per available seat mile, was the highest in a list of the 13 biggest airlines compiled by the federal Bureau of Transportation Statistics.

Labor costs for United, which emerged from Chapter 11 in 2006 with $7 billion in cuts, had fallen to 3.17 cents; US Airways’ had slipped to 3.11 cents.

The first major airline bankruptcy reorganization was that of Continental Airlines in the 1980s. At the time, analysts were concerned that the stigma of bankruptcy would cloud its recovery.

“There was fear in the first Continental Airlines bankruptcy that people might avoid airlines in bankruptcy because of safety concerns. But that didn’t occur,” said George Hamlin, a Fairfax, Va.-based airline consultant.

“If Chrysler emerges from bankruptcy successfully, it would have the same impact as Continental did in making airline bankruptcies a nonissue,” he said.

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peter.pae@latimes.com