Overhaul May Loom for Airlines

US Airways’ bankruptcy filing sparked new worries about the airline industry’s worsening financial condition, as investors sent carriers’ stock prices plunging Monday. Speculation also grew that giant United Airlines also may seek a bankruptcy restructuring.

Analysts said US Airways’ filing could trigger a string of long-overdue events that eventually might strengthen the loss-ridden industry, although at the cost of making air travel more expensive and less convenient for passengers. The changes also could prompt some airlines to merge in order to better compete, analysts added.

Across the country, passengers were largely unaffected Monday, the day after the filing. US Airways’ flights from Los Angeles International Airport to East Coast destinations were said to be running full or nearly full and without unusual delays. The Arlington, Va.-based airline--the nation’s seventh-largest--operates 10 daily departures from LAX.

US Airways said its service, currently 3,800 flights daily to 204 cities, would continue uninterrupted as it works with creditors and the U.S. Bankruptcy Court to mend its finances. The airline told a bankruptcy judge in Alexandria, Va., on Monday that it hopes to emerge from its reorganization within six to eight months.

Judge Robert Mayer on Monday cleared the way for the airline to maintain its operations, partly by allowing the carrier to tap $75 million of a $500-million financing package it negotiated with two lenders.

US Airways filed for bankruptcy protection--becoming the first major airline to do so since the Sept. 11 terrorist attacks--in part to make it easier for the company to win concessions from its creditors and employees, and to effectively shrink the carrier to make it profitable again, analysts said. If US Airways is successful, pressure could increase on other airlines to seek lower labor costs or reduce their size to better match their business to the lackluster level of passenger traffic, analysts said.

In the meantime, United and any other airline struggling to gain concessions from its employees can say “bankruptcy is a real, credible alternative, because look at the example of US Airways,” said Alec Ostrow, a bankruptcy lawyer in New York.

Once the airlines’ size and costs are more in line with travel demand, Ostrow added, the carriers also might be able to nudge fares higher and generate more income per passenger.

“There will certainly be an effect in the industry and on consumers,” Ostrow said. “It’s going to affect consumers in terms of decreased competition and a decreased ability to choose routes, times and carriers.”

But Ostrow and others agree that most other major airlines--American, Delta, Northwest, Continental and Southwest--are not in immediate danger of needing Bankruptcy Court protection.

The industry, which lost more than $7 billion last year, already was slumping before the terrorist attacks sharply curtailed travel. Despite huge cutbacks in flights after the attacks, the carriers are still flying more seats than there are passengers, forcing them to cut fares even though most airlines’ costs--especially their labor expenses--remain high.

The problem was especially acute at US Airways, which filed under Chapter 11 of the U.S. Bankruptcy Code. In Chapter 11, a company continues to operate but is protected from creditors’ claims while it designs a restructuring plan.

Once a company enters Chapter 11 and starts negotiating with its creditors over the future of the business, it’s hard to predict what changes might occur. It’s not uncommon for an airline to close or sell aircraft, routes, landing slots and other assets to survive. In the early 1990s, for instance, now-defunct Pan American World Airways sold its sprawling European service to Delta Air Lines while in bankruptcy proceedings.

Now there’s another big player in the equation: Uncle Sam.

A total of $10 billion in loan guarantees was made available as part of the post-Sept. 11 federal bailout of the airlines. US Airways and UAL Corp.’s United Airlines applied to the Air Transportation Stabilization Board, the agency overseeing the program, for loan guarantees of $900 million and $1.8 billion respectively.

To win the loan guarantees they need to raise cash from lenders--and to trim losses--US Airways and United Airlines are seeking massive employee concessions. The ATSB expects an applicant’s workers, suppliers and creditors to make concessions to help the airline repay the loans and thus protect U.S. taxpayers’ interests.

US Airways has made good progress on that front but decided it needed the Bankruptcy Court’s help to finish its restructuring.

But a growing number of analysts fear that United won’t get the loan guarantees because too few of its workers have agreed to pay cuts, which could force the carrier to seek bankruptcy protection as well.

“We have no confidence in the company’s ability to avoid bankruptcy,” analyst James Higgins of Credit Suisse First Boston said in a recent report.

United has some of the highest labor costs in the industry, “and in the current environment it’s out of sync with the market,” in which inroads are being made by lower-cost, lower-fare airlines such as Southwest Airlines and JetBlue Airways, said Michael Allen, of Back Aviation Solutions, an industry consulting firm.

United spokesman Chris Brathwaite said, “Anybody who’s speculating one way or the other is not as closely involved with the situation as we are. We’re clearly focused on our recovery, getting a handle on our costs and working with the ATSB to secure a loan guarantee.”

And just as some predicted, the three-member ATSB board could almost single-handedly reshape the airline business, depending on whether it grants the guarantees to the two carriers. The ATSB rules do allow for loan guarantees even if the airline is in bankruptcy proceedings.

Having airlines in bankruptcy at the same time they’re seeking government aid “is unprecedented territory” for the industry, said Thomas Boland, a managing director of Seneca Financial Group, who helped a smaller carrier, America West Airlines, get a loan guarantee from the ATSB early this year, the only one granted so far by the agency.

ATSB spokeswoman Betsy Holahan said the agency was still reviewing the requests from United and US Airways and that no date had been set for a decision.

Investors didn’t wait: They sold airline stocks with abandon Monday. Shares of UAL plummeted $1.40, or 27%, to $3.80 on the New York Stock Exchange.

Wall Street now values the entire company--which has 84,000 employees, 560 aircraft, $17 billion in annual revenue and is the nation’s second-largest airline behind AMR Corp.’s American--at just $291 million, about the price of two jetliners. And United’s employees own 55% of the airline’s stock.

AMR tumbled $1.23, or 13%, to $8.36 a share, and the American Stock Exchange’s index of all airline stocks lost 3.86 points, or 7.6%, to 47.17. The NYSE didn’t open trading in US Airways’ stock in light of the bankruptcy filing Sunday; the stock closed at $2.45 a share Friday.

Speculation that United might file for bankruptcy protection was fed by Chief Executive Jack Creighton, who told employees that the government probably would reject its loan-guarantee application without more worker cutbacks.

“We’ve gotten the clear feeling that we need more participation from all of our stakeholders in our cost-cutting efforts,” he said in a recorded message. “They have indicated to us that participation must be broader, deeper and longer.”

But among United’s unionized workers, only its pilots have agreed to givebacks. And while United has more than $2 billion of cash on hand, it’s still losing at least $1 million a day and faces upcoming debt payments that could wipe out much of that cushion.

Some argue that United should try to raise the cash on its own, but United says its access to the capital markets is severely restricted because of its deteriorating financial condition, and so it needs the federal loan guarantee.

But the ATSB will find that a hard sell unless United first proves it’s won major concessions, said Boland of Seneca Financial. “Given the problems in the industry, it’s difficult to put together a case that shows you can repay a loan if you’ve got a high cost structure.”

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Times staff writer Jennifer Oldham contributed to this report.

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Troubled Skies

Most airlines are facing losses and declines in traffic. A glance at the six largest U.S. carriers:

2nd-qtr. 1st-half % change % change income/loss income/loss in July in July Airline (millions) (millions) traffic* capacity**

AMR (American) -$495 -$1,070 -9.7% -8.6%

UAL (United) -341 -851 -12.3 -13.1

Delta -186 -583 -6.6 -6.6

Northwest -93 -264 -8.0 -8.5

Continental -139 -305 -8.6 -10.1

Southwest +102 +124 +0.4 +4.0

*From year-ago period; measured in revenue passenger miles or one paying passenger flown one mile.

** From year-ago period; measured in available seat miles

Source: Associated Press