Bankruptcy's virtue

March 26, 2003

IN THE SUPPLEMENTAL budget offered this week by President Bush, he didn't include relief for the nation's beleaguered airlines. That hasn't stopped the carriers and their employees from continuing an intense lobbying campaign in Washington for tax breaks and other aid totaling at least $9 billion.

But what's really needed by the airline industry is not the salve of a federal bailout but the discipline provided by bankruptcies. That's their best shot at emerging with financial strength from a lethal thicket of crushing debt, overly generous pay contracts and long-standing inefficiencies.

There's no question that the airline business has been deteriorating terribly since the Sept. 11 attacks, a downturn rapidly accelerating with the latest gulf conflict. Bookings, both international and domestic, are way off. Service cutbacks and thousands of employee layoffs are spreading. In all, carriers estimate they've lost $18 billion in the last two years.

Two major airlines, Pan Am and Eastern, died in the wake of the first gulf war. Now, despite a post-9/11 infusion of $5 billion in federal aid and as much as $10 billion in possible federal loan guarantees, virtually every major carrier faces possible bankruptcy in the next year or so. Two, United and US Airways, are already there, and United might end up liquidating. The country's largest carrier, American, is on the brink.

Things are so bad the industry itself has raised the specter of nationalization.

To be sure, serious national interests are at stake here. America's air system -- serving more than 600 million passengers a year -- is an economic and national security asset, one that absolutely must be sustained. Because of that, rather than tax and fee holidays, the airlines may have a case for more federal help with their security costs stemming from terrorism threats.

But having loaded up on massive debt, granted unaffordable wage increases and not prepared for the bursting of the late 1990s' bubble, most major airlines were heading into deep financial trouble long before Sept. 11 and the latest gulf war. Reduced demand, costly security measures and a doubling of jet fuel prices have come on top of long-standing profligate ways for an industry that some contend still hasn't fully given up the mentality of regulation -- 25 years after it was deregulated.

In many cases, bankruptcy would not only allow insolvent airlines to keep running, but also give them license to get out from under a lot of their debt and costly and inflexible labor contracts. Such court-supervised reorganization would be the best shot at recasting these companies -- and the nation's air transport system -- on much more solid footing. Another dose of federal aid would only prolong the inevitable.

Yes, some airlines might not emerge from bankruptcy. But their planes and routes likely would be sold to other carriers or start-ups. Remember, the airlines made money for much of the 1990s, and even now it's possible to run a profitable airline, as Southwest shows.

This crisis is precisely the type of situation for which bankruptcy was designed, and the airlines should be largely left to undergo that process so that they can find their own paths to sustainable profitability.

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