Flying broke
THE AIRLINE INDUSTRY HAS A STRANGE romance with federal bankruptcy protection -- the country’s major airlines, besieged by record-high fuel prices, can’t seem to get enough of it. But when the nation’s third- and fourth-largest carriers declare bankruptcy on the same day, you know something is dreadfully wrong with how the industry does business.
With Delta and Northwest filing for bankruptcy just minutes apart Wednesday, three of the country’s seven major airlines are now in Chapter 11, seeking bankruptcy court protection from their creditors while they negotiate down their debts and tinker with their business models. Airlines can finger surging fuel prices all they want, but the country’s “legacy” carriers are suffering from decades of haphazard government intervention and their own expensive, rigid business models that can’t compete with healthier low-fare airlines. In the booming 1990s, airline executives fleshed out lucrative contracts to their labor unions, effectively building high operating costs into their business models. And failing to predict the fierce competition of low-cost carriers, legacy airlines flooded the market with too many seats.
Airlines such as Northwest and Delta have been forced to push their fares unsustainably low, begging passengers to fill their seats to compete with the likes of Southwest and JetBlue. But these legacy carriers weren’t built to operate as airborne Wal-Marts. Northwest and Delta didn’t file for bankruptcy just to stay in business; they did so to reinvent themselves.
Operating under bankruptcy protection in the airline industry gives carriers an advantage over competitors, which is why bankruptcy court is fast becoming the industry’s preferred hub. United, which has languished in Chapter 11 since December 2002, dumped its expensive pension program and shredded labor contracts with the blessing of a bankruptcy judge. Healthier airlines still had to sort out pension and labor difficulties on their own, giving sputtering United a leg up on its competitors. It won’t be surprising if Delta and Northwest do the same.
In fairness, Northwest and Delta couldn’t have foreseen today’s fuel prices. Northwest plans to spend $3.3 billion in jet fuel alone this year, compared with $2.2 billion last year. Delta blamed soaring fuel prices and high labor costs for posting a $382-million loss last quarter; it’s burned up $10 billion since 2001.
Still, fuel prices only put more weight on the house of cards legacy airlines built for themselves, and some of them should just collapse. But the federal government, despite its laissez-faire posturing, won’t let the free market run its course with airlines. Before the terrorist attacks four years ago, United and US Airways foresaw a changing airline climate and proposed a merger, which Washington unwisely opposed. More egregiously, the government won’t allow foreign ownership of an airline, blocking badly needed global consolidation of an industry that is inherently global in scope.
US Airways was allowed Friday to exit bankruptcy for the second time since 2002, but largely because of its planned merger with America West, giving some relief to an industry plagued by overcapacity. If Delta and Northwest can’t emerge from Chapter 11 ready to compete in the changing market, no one should stop them from dying.
