Delta, Northwest file for bankruptcy protection

Airline industry struggling with fare wars, fuel costs

September 15, 2005|By Meredith Cohn | Meredith Cohn,SUN STAFF

In a stunning day for the beleaguered U.S. aviation industry, Delta Air Lines Inc. and Northwest Airlines Corp. sought protection yesterday from creditors in a New York bankruptcy court, the latest of the major carriers struggling in an era of fare wars and rocketing fuel costs.

Delta and Northwest would join UAL Corp., the parent of United Airlines, and Arlington, Va.-based US Airways Group Inc. in reorganization under Chapter 11 of the federal bankruptcy code, putting four of the nation's seven largest carriers into the court system.

The news affects tens of thousands of employees, who face the collective loss of millions in pension benefits, vendors and shareholders, whose stock may become worthless. But passengers and frequent-flier account holders will not be affected, the airlines said.

Although the moves weren't unexpected for the two struggling carriers, industry consultants and observers still said it was a remarkable turn of events. The aviation industry has changed drastically in the past quarter-century since deregulation, but perhaps no more so than in the past four years.

The Sept. 11, 2001, terrorist attacks severely dampened travel before the rise of discount carriers and their low fares returned air travelers in record numbers. But the largest carriers have been hampered by fuel prices, which had doubled in recent years even before the impact this month from Hurricane Katrina, and high wages and pensions not offered by their low-cost rivals.

Industry officials told Congress yesterday they project total losses of up to $10 billion this year, almost double earlier projections. It's not unlike upheaval seen in industries such as steel and auto, where the historic companies have been undercut and outmaneuvered by more recent operators.

`These guys are a mess," Darryl Jenkins, a visiting professor at Florida's Embry Riddle Aeronautical University and a Washington-based airline consultant, said of the legacy carriers. "Everyone is waiting for someone else to liquidate and relieve the competition. At some point, they are going to have to make the really tough decisions. We just aren't seeing it yet."

Among the other major carriers, American Airlines, the largest of the legacy carriers, has bounced back in recent years from near bankruptcy, and Continental Airlines, the fifth-largest, also reorganized in bankruptcy. Southwest Airlines, is the sixth largest carrier, and the only low-cost carrier among them.

Even with 16 incremental increases in fares during the past year collectively, the major carriers still cannot charge enough to pay their bills when passengers have many other choices and are able to shop on the Internet for the best fares, analysts said.

The legacy carriers have cut billions in costs in recent years to try to match pay and benefits of low-cost competitors such as Southwest and JetBlue airlines. They have scaled back hubs and sought new financing packages from creditors. But even with 698 million passengers flying last year - a record - there remain too many seats to too many places. Some airlines may need to consolidate or go, some industry observers said.

Atlanta-based Delta said it has obtained $1.7 billion in debtor-in-possession financing from GE Commercial Finance and Morgan Stanley so it can continue operating in bankruptcy.

Other airlines have found ways to operate under the new conditions: United Airlines, the nation's second-largest carrier, expects to emerge from bankruptcy early next year. US Airways, the seventh-largest, announced yesterday it plans to emerge from bankruptcy late this month or early next month by merging with America West to form what would be one of the largest low-cost carriers. A bankruptcy judge is set to hold hearings today to consider US Airways' plan of reorganization.

Delta's shares closed down seven cents to 70 cents yesterday. Northwest's rose 30 cents to close at $1.87 a share, but fell in after-hours trading. Both companies made their filings after the stock market closed.

Delta already has made wage and benefits cuts and scaled back its routes, including elimination of its Dallas-Fort Worth hub. Company officials said yesterday they were 85 percent through a multi-year plan to reach cuts totaling $5 billion a year, but the latest rise in fuel costs will mean more job reductions and pay cuts that will be announced next week. The airline will also continue to scale back hubs and shift more of its planes to international routes that are more profitable.

"The action we have taken is a necessary and responsible step to preserve Delta's value for our creditors, customers, employees, business partners and other stakeholders as we address our financial challenges and work to secure our future," Delta Chief Executive Gerald Grinstein said in a statement. "Delta is open for business as usual and will continue normal operations throughout the reorganization process."

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