Northwest, Delta Enter Chapter 11
The nation’s airline crisis deepened Wednesday when Delta Air Lines Inc. and Northwest Airlines Corp. both filed for bankruptcy protection in the face of massive losses, bringing to four the number of big U.S. carriers now operating under the supervision of a bankruptcy judge.
Delta and Northwest, respectively the third- and fourth-largest airlines by passenger traffic, said they would continue flying while they try to regain their financial footing -- a tall order given the surge in jet fuel prices that followed Hurricane Katrina.
The carriers joined No. 2 UAL Corp.’s United Airlines and No. 7 US Airways Group Inc. in seeking Chapter 11 bankruptcy protection from their creditors. Those airlines also have continued their normal flight operations.
Rarely have four of the largest players in a major business -- the quartet carries about five of every 10 passengers boarding a domestic airline -- found themselves in bankruptcy simultaneously. It’s a dubious feat that some analysts said marked the onset of an industry shakeout that many have predicted since the airlines were deregulated in 1978.
“It’s imperative that the traditional airlines regroup and become stronger,” said Hugo Burge, president of Cheapflights.com, a travel website. “The airlines can’t go on as they are, and something needs to give.”
Delta and Northwest are expected to gradually shrink in size and use bankruptcy to achieve huge cost savings -- especially through employee pay cuts -- to survive. Layoffs also are expected, although neither airline would speculate as to how many.
The bankruptcies also could spawn more airline mergers, reducing the number of competitors. US Airways already plans to leave bankruptcy by merging with America West Holdings Corp., the owner of America West Airlines, later this year.
For now, though, the Delta and Northwest bankruptcies aren’t expected to have an effect on travelers.
Under Chapter 11, a company continues operating while it works out a restructuring plan to repay creditors. Delta and Northwest said they would maintain their current flights and frequent-flier plans. United and US Airways have done the same.
“Delta is open for business as usual and will continue normal operations,” Delta Chief Executive Gerald Grinstein said in a statement, adding that passengers’ travel plans and frequent-flier miles “are secure.”
The airline bankruptcies have mounted even as air travel overall has rebounded to its pre-Sept. 11 levels. One reason: Fares remain relatively low, which has been good for passengers but a major problem for the big airlines as they try to generate enough sales to cover their costs.
“The best thing the airlines have going for them right now is very strong demand for their service,” said Richard Barsness, a management professor at Lehigh University.
But low fares aren’t the industry’s only problem. Discount carriers such as Southwest Airlines Co. have been steadily taking customers away from old-line carriers such as Delta and Northwest, which are saddled with high cost structures and enormous debt loads. For carriers that didn’t hedge their fuel costs, the 90% increase in jet fuel prices since January 2004 was especially painful.
Overall, the industry has lost more than $30 billion since 2000 and is on track to lose an additional $5 billion to $10 billion this year.
Delta and Northwest, both founded in the 1920s, and other large traditional airlines have tried to reduce expenses and push up ticket prices to stop the red ink. But Southwest and its ilk have continued to expand their reach, keeping downward pressure on fares and forcing the older carriers to streamline.
“The U.S. airline industry has changed permanently, and Northwest must change with it,” Northwest Chief Executive Douglas Steenland said on a conference call Wednesday.
The final straw for Delta and Northwest was Hurricane Katrina. The price of fuel -- an airline’s second-biggest expense after labor -- surged above $2.30 a gallon shortly after Katrina disrupted the Gulf Coast’s refining operations. Before the storm, fuel cost less than $1.90 a gallon, and it was just over $1 a gallon in early 2004.
Both airlines had been trying to cut costs to avoid Chapter 11. Northwest is enduring a strike by its mechanics over a dispute to slash wages and benefits, with the airline using replacement workers to keep flying.
“Unfortunately, skyrocketing fuel costs, among other factors, caused time to run out,” Steenland said.
The airlines’ trade group, the Air Transport Assn., sought relief from the U.S. government Wednesday by asking that the 4.3-cents-a-gallon federal tax on jet fuel be suspended for a year. That would trim about $600 million from the industry’s fuel bill, which this year is expected to soar $9.2 billion, or 43%, to $30.6 billion, the group said.
The industry’s hardship also has enveloped smaller, struggling carriers. Aloha Airgroup Inc., the parent of Aloha Airlines, and ATA Holdings Corp., which runs ATA Airlines, also are operating in Chapter 11.
Atlanta-based Delta, once a prosperous carrier admired for customer service laced with Southern hospitality, has lost $10 billion since 2000 and is saddled with more than $20 billion in debts and pension obligations. Northwest has lost $2.5 billion over that period.
Their filings were not a surprise, because the airlines had repeatedly warned that they faced Chapter 11, especially as fuel costs kept rising.
Steenland said it was “purely coincidental” that Delta and Northwest filed for Chapter 11 on the same day. Northwest did so because it faced multimillion-dollar debt payments this week that it couldn’t afford, he said.
Northwest, based in Eagan, Minn., flies an average of 150,700 people a day and operates hubs in Minneapolis-St. Paul, Detroit, Memphis and Tokyo.
Delta carries an average of 301,370 passengers a day, with about 3,250 daily departures to more than 200 domestic and international cities. The flights include those operated by Song, a discount airline that Delta started two years ago. Delta’s major hubs are in Atlanta, Cincinnati and Salt Lake City.
Both have a sizable but not dominant presence in California, with service to Los Angeles, San Francisco, San Diego, Orange County and Ontario. Delta also flies to Burbank.
More than 2,000 of Delta’s employees also live in California; Northwest has more than 860 workers in the state.
Both airlines’ employees are expected to face wrenching changes. The carriers can attempt to use the Bankruptcy Court to jettison their labor contracts and impose lower wages and benefits. United has used its stay in Chapter 11 to wring more than $3 billion in annual cost savings, and to shift nearly $7 billion of its pension liabilities to the federal government.
Wage cuts and job reductions “are a necessary component” of Delta’s reorganization plan, Grinstein said.
Although consumers might not be affected immediately by Delta’s Chapter 11 filing, they probably will see gradual changes in the breadth and frequency of Delta’s service to certain cities as Delta joins the others in slimming down to regain profitability.
“Airlines shrink in bankruptcy, and Delta should be no exception,” analyst Jamie Baker of JPMorgan Securities Inc. said in a note to clients Tuesday. He estimated Delta would shrink by about 15% as it navigated through Chapter 11, as United and US Airways have done.
Delta and Northwest announced their filings after financial markets closed. Earlier, Delta’s stock fell 7 cents to 71 cents a share, and Northwest rose 30 cents to $1.87 a share. During bankruptcy, a company’s common stock is usually rendered worthless as creditors lay claim to the firm’s assets.
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California links
The airlines’ daily departures in California
*--* Northwest Delta Los Angeles 22 38* San Francisco 13 20 San Diego 5 16 Orange County 4 10 Ontario 2 12 Burbank 0 1
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*Includes Song subsidiary
Source: The airports
