United Airlines will be in rare company if it successfully emerges from bankruptcy protection and manages to avoid plunging back in.

The industry's track record, after all, is strikingly bleak.

More than 160 U.S. airlines filed for Chapter 11 during the past two decades. But, like visitors to the Hotel California, many never left, meeting their demise in front of a bankruptcy court judge. Others emerged but went out of business shortly after, pared their assets and sold them at rock-bottom prices, or wound up back in bankruptcy a few years down the road.

United, the largest airline in Denver, would do well to keep that in mind as it attempts to emerge from bankruptcy by early next year, observers say.

The carrier has made huge headway during the 33 months it's trudged through Chapter 11, significantly cutting its costs, creating a new low-cost airline and tentatively lining up $3 billion in exit financing, among other moves.

But its toughest challenges might lie ahead.

The nation's second-largest carrier must now avoid the pitfalls - decimated employee morale, overly optimistic financial projections, an unfocused business strategy, failure to cut enough costs - that paved a path to the graveyard for other airlines.

"The number of successful airline bankruptcies is fairly nominal, and the odds are really stacked against you," said Steve Stapleton, an attorney at Cowles & Thompson in Dallas. "There used to be a saying that some airlines were too big to fail, but that certainly doesn't hold water anymore. There have been large carriers failing in bankruptcy for a while."

Cyclical nature

The list of airlines that filed for Chapter 11 includes some of the nation's giants, such as TWA and Pan Am, as well as smaller carriers such as Air Florida, Western Pacific and an earlier version of Frontier Airlines.

At least one U.S. airline has filed each year since 1979, and as many as 17 have in any one year alone, according to data gathered by airport management consulting firm John F. Brown Co.

The bankruptcies more or less come in cycles that started after the government deregulated airlines in the late 1970s and continued as the industry suffered from a history of weak leadership, huge debt, poor planning, increased competition and in many cases reckless growth.

"The airline industry has a horrendous history in Chapter 11," said Anthony Sabino, a law professor in the Tobin College of Business at St. John's University in New York. "Those who do not learn from history are doomed to repeat mistakes, and in the airline industry no one learns from history and always repeats mistakes."

In the late 1980s and early 1990s, major carriers such as Eastern Airlines plunged into bankruptcy against the backdrop of the Persian Gulf War.

Now, a decade later, terrorist attacks, another war in Iraq, soaring oil prices and overcapacity forced several carriers into Chapter 11, while two other large ones, Delta and Northwest, are on the brink.

The industry has lost nearly $40 billion in the past five years, and U.S. domestic airline revenue as a percent of gross domestic product has dipped more than 30 percent since 2001, according to investment banking firm Seabury Group.

Low-cost carriers such as JetBlue and Denver-based Frontier also have changed the landscape, snatching market share away from their larger competitors and driving down prices.

'Chapter 22s' common

Among the eight major airlines that filed for bankruptcy since 1980:

* Three - US Airways, TWA and Continental - emerged only to eventually plunge back in. TWA actually entered bankruptcy three times, a rarity.

* Four - Pan Am, TWA, Braniff, Eastern - were sold or liquidated and no longer exist.

* Two - Continental and America West - have emerged and are still operating.

* Two - US Airways and United - are currently in Chapter 11.

And then there are the dozens of smaller airlines that filed for bankruptcy and never emerged. Names such as Grand Airways, Access Air, Qwest Air and Royal West Airlines all are buried in the dust bin of aviation history.

Airlines that have been forced to file second bankruptcies, or "Chapter 22s" as they're jokingly called, have an even lower chance of succeeding, as they must deal with extremely skeptical creditors, consumers, vendors, lenders and employees.

Among the major airlines that have filed for bankruptcy more than once, only Continental was able to navigate through successfully.

The numbers certainly aren't encouraging, but more companies in industries across the board are faltering once they exit bankruptcy. Nearly 50 percent of U.S. businesses that emerge from Chapter 11 file again in five years or less, said Lynn LoPucki, a law professor at the University of California at Los Angeles.

That's up from about 16 percent in the 1980s.

"The failure rate is three times as high today as was two decades ago," LoPucki said. "Many of those that get out now find themselves back in at some point."

Common mistakes

Bankruptcy court offers carriers the opportunity to renegotiate leases, scrap and modify labor contracts and, in the case of United, even abandon pension plans.

But observers say bankrupt airlines all too often fail to drive down costs far enough to survive the inevitable downswings of a cyclical industry.

Other carriers have the opposite problem: They focus solely on cost cuts, neglecting other key areas of their businesses.

"If all you're doing is changing the financial structure of the company, you can count on one of two things: being back in Chapter 11 or being gone," said George Hamlin, a director at Virginia-based research firm Merge Global.

Several airlines, most notably Eastern, had contentious relations with employees, which led to strikes, poor customer service and, ultimately, the demise of the airline. Other carriers, such as US Airways during its first bankruptcy, were too optimistic about their future prospects, structuring a business model on revenue and passenger growth that never materialized.

A few airlines came out during an economic upswing and, flush with cash and lulled by high demand, reverted to the overspending habits and unfocused strategy that sent them into bankruptcy in the first place.

"This is a cyclical industry, so the carrier that has not restructured properly might look fine in a time like the late 1990s, when the economy came roaring back," said Alan Sbarra, an aviation consultant in California. "But the upcycle masks a lot of problems."

Others refused, or didn't see the need, to change.

Pan Am, at one time arguably the most well-known airline in the world, didn't adjust its focus when its market shriveled and competition eroded its business.

"They simply lost their place in the global economy, but they didn't realize it," said Alan Gover, a Houston attorney who has represented lenders in the bankruptcies of Continental, Pan Am and TWA. "They still wanted to be an international flagship airline, but there was no longer a place in the global economy for it."

Leadership key

Two large airlines - America West and Continental - did it right, observers say.

America West battled through bankruptcy in the early 1990s by overhauling its financial structure and downsizing its business. The Phoenix-based airline renegotiated leases, employee contracts and debt terms. It also scaled back its operations by selling some international routes and planes, lowering jet orders and switching out its management team. The carrier battled low employee morale during the bankruptcy, but relations weren't damaged to the point of a strike.

Today it is the nation's seventh-largest carrier and is awaiting federal approval to acquire giant US Airways, which will step out from bankruptcy once the merger is complete.

Perhaps the best example, though, can be found in Houston-based Continental.

The carrier fell into Chapter 11 in 1983 as the effects of deregulation several years earlier trickled throughout the industry.

Under the direction of Frank Lorenzo, Continental sold off many of its assets, abandoned its Los Angeles hub and morphed into a discount carrier. It also lowered wages and salaries through the bankruptcy court - one of the first times an airline had used the process to do that. The company even turned a profit by the end of 1984.

It was enough to bring the carrier out of bankruptcy, but not for long.

Continental embarked on an acquisition spree, snapping up several carriers but loading itself with debt. In 1991, Continental filed for bankruptcy protection again amid the Persian Gulf War.

During the next few years, as the carrier battled through bankruptcy and fought to survive after emerging, Continental:

* Purchased nearly 100 new Boeing planes as it looked to update its jets, convert to one type of fleet and add international routes.

* Received backing from investors who pumped $450 million into the airline, giving it money to get through bankruptcy and grow.

* Initiated a program to improve various aspects of its business, including baggage handling, customer service, arrival times and, perhaps most important, employee morale.

* Closed its costly Denver hub while focusing more on its underutilized hub in Newark, N.J.

Experts credit Continental's survival to management's success in building employee morale, improving customer service and cutting costs. The airline's emergence from bankruptcy also coincided with the start of an economic boom.

"It took Continental two Chapter 11 filings and one major restructuring afterwards to get into the position it's in today, which is a pretty good one," attorney Gover said. "It also took outstanding management, which is extraordinarily critical in these situations. The executives made sure Continental's assets worked profitably, and they had a vision of what the airline was and what it could do."

Continental now is one of the strongest large carriers in the industry, managing to post a $100 million profit in the second quarter even as other airlines swam in red ink.

The airline has weathered the industry downturn better than most, experts say, because it was structured to respond to changing market conditions.

"It goes to show that proper planning, being able to weather the inevitable ups and downs of the business, is vital," said Michael Cox, managing director of Seabury Group. "Those that do survive bankruptcy addressed their costs and strategic issues in a comprehensive manner. That's how Continental approached its restructuring."

United prepared for exit

Will United join the ranks of Continental and American West?

The answer to that question won't be revealed for years.

United, which is still posting steep losses, intends to file its reorganization plan in early September. The plan will detail how it intends to repay creditors and outline its business strategy going forward, kicking off the process to emerge from bankruptcy.

The airline, a unit of Chicago-based UAL Corp., certainly has done its share of cost cutting since it filed for Chapter 11 in December 2002, slashing $7 billion in expenses. Much of that came through two rounds of wage and benefit cuts and the termination of its pensions.

United also made a host of operational changes, scaling back on domestic routes while increasing its more-profitable international flights. It created a low-cost airline called Ted so it could better compete with Frontier, Southwest, JetBlue and other discount carriers, and it restructured everything from its airport bonds to its aircraft leases.

The carrier also enhanced productivity, introduced customer amenities such as some fully reclining seats in first class and shifted more flying to regional jets.

United made sure to plan the restructuring around its greatest asset: the airline's much-envied worldwide route structure and partnerships, which allow consumers to fly almost anywhere in the world.

And United officials say they employed a focused, unique strategy since the beginning.

"We took the view early in the case that we were going to take full advantage of every opportunity that bankruptcy gives us to fix our situation, and we have done just that," said Jake Brace, United's chief financial officer. "We also took advantage of all of the opportunities to save costs that aren't necessary, enabled by the bankruptcy process."

The airline looked for new revenue streams as well. In Denver, for instance, United focused on cementing new contracts to sell classroom space and simulator time at its flight training center here.

With $3 billion in financing lined up, United says it will have sufficient liquidity when it exits bankruptcy. And the carrier insists it has "stress-tested" its business plan to ensure it will hold up even if the market goes south.

Yet some observers are skeptical about several aspects of United's progress.

The carrier has set and missed deadlines to emerge before, and its tenure in Chapter 11 has been been fraught with contentiousness that could lead to long-term challenges.

United's moves to cut wages and pensions have left a bitter taste in the mouths of its workers. Union leaders say morale is in the tank, and flight attendants are still threatening to strike.

The carrier has continuously pushed back the release of its reorganization plan to meet revised financial projections, sending a signal to some observers that United has been entirely too optimistic.

Some analysts question whether United has made enough fundamental changes to its business to survive in the long term.

And, as United approaches nearly three years in bankruptcy, others are saying the airline will need to overhaul its management team to truly be successful.

"I would be very surprised if they did not emerge in the next six months," said Evergreen aviation consultant Mike Boyd. "But they've had a lot of misfires, and if they were better focused at the top they'd be out by now. They can get out, but if they don't do it with new management they'll be back in if they're not careful."

Steps for reorganizing an airline

* Drastically cut costs.

* Renegotiate labor contracts, lowering wages and benefits across the board.

* Try to maintain good relations with employees.

* Reduce number of flights, exit some markets.

* Boost productivity.

* Try to renegotiate aircraft leases.

* Look for new ways to boost revenue.

Ways out of bankruptcy

History shows that airlines should focus on several key areas to successfully emerge from Chapter 11:

* Product: Carriers must improve service and the customer "experience." That could include things such as adding check-in kiosks and machines that read tickets at the gate and reconfiguring seating.

* Pricing and distribution: Simplifying fare structures and bundling travel packages on the Internet are key to attracting travelers and boosting revenues.

* Network: Scaling back in money-losing hubs, using aircraft for more flights each day and boosting the frequency and efficiency of regional jets help a company operate more efficiently and boost the bottom line.

* Costs: Airlines should dramatically lower costs, possibly by outsourcing work, implementing information technology improvements and renegotiating labor contracts.

* Leverage/liquidity: They also should reduce debt to less than 65 percent of revenues and boost liquidity to at least 20 percent of annual expenses.

Source: Seabury Group

Battling bankruptcy

Many airlines that filed for Chapter 11 no longer exist, including . . .

* Braniff : Facing mounting corporate debt and overexpansion and reeling from a recession and airline deregulation, Braniff filed for bank- ruptcy in 1982 and ceased operations. Company was bought out of bank- ruptcy and emerged as a low-cost carrier in 1984. Filed bankruptcy again in 1989 and grounded flights. Essentially went out of business in early 1990s.

* Eastern Airlines: Under pressure from low-cost carriers and battered by worker strikes, Eastern filed for bankruptcy protection in 1989. Sold international routes and its shuttle service. Went out of business in 1991.

* Pan Am: Struggling to recover from the highly publicized terrorist bombing on one of its flights over Lockerbie, Scotland, Pan Am filed for bankruptcy protection in 1991. Delta purchased Pan Am's profitable assets. Operations ended in December of that year.

Several that emerged from bankruptcy wound up back in Chapter 11 again, including . . .

* Hawaiian Airlines: After emerging from bankruptcy this year - the airline has filed and emerged twice since 1993 - Hawaiian reported a $1.4 million profit for June on operating revenue of $70 million.

* Trans World Airlines: Plagued by financial problems, TWA filed for bankruptcy three times starting in 1992. In 2001, after it filed for bankruptcy the third time, American Airlines acquired its assets.

Some airlines, though, managed to restructure successfully . . .

* Continental Airlines: Continental first filed for bankruptcy in 1983 and emerged three years later, only to file again in 1991. It lowered wages and benefits but maintained a decent relationship with employees and put a skilled management team in place before emerging in 1993. Today, Continental is one of the strongest of the large carriers. It reported a profit in the second quarter even though most airlines posted steep losses.

* America West: The airline filed for bankruptcy in 1991 and emerged in 1994. Undertook a major financial restructuring under bankruptcy, renegotiating leases, gates, employee contracts and debt terms. Sold some routes and aircraft and changed the management team. Now in final stages of approval to acquire bankrupt US Airways.

Others are trudging through Chapter 11 now . . .

* ATA Airlines: After filing in October 2004, ATA has outsourced some work, cut jobs and linked some flights with Southwest Airlines under a partnership in which they jointly sell tickets. Sold some gates at Chicago's Midway Airport to Southwest. It is trying to raise $100 million to exit bankruptcy; recently said it might need another $50 million to continue operating through the end of the year. Also faces possible strike by pilots.

* United Airlines: In bankruptcy since December 2002, United has cut $7 billion in costs, wrangled two rounds of wage and benefits cuts from workers, created a new low-cost airline called Ted, boosted international flights, lowered domestic capacity, terminated pension plans. After many delays, plans to file its reorganization plan by early September, which will kick off its exit from bankruptcy. Company still must line up exit financing.

* US Airways: The airline filed for bankruptcy for the second time in two years in 2004. Slashed worker pay by $1 billion a year and shed $3 billion in pension obligations but has been hammered by fallout from a staff shortage around the Christmas holiday of 2004 and still bleeding red ink. On track to close merger with America West. The new airline, which will be the nation's fifth largest, will be headquartered in Phoenix and plans to provide service to more than 200 cities across the U.S., Canada, Mexico, the Caribbean and Europe. It will be funded by $1.5 billion in new capital.

And several are on the verge . . .

* Delta Air Lines: Delta narrowed its loss in the second quarter but lags the rest of the industry in some key operation areas. The airline is teetering on the brink of bankruptcy and is developing a restructuring plan. Deferred delivery of eight Boeing aircraft from next year to 2008, and the company said its seating capacity this year won't increase as much as expected. Delta faces mounting fuel costs and competition from discount carriers. Plans to cut 7,000 jobs as part of its restructuring plan and reiterated that it may have to seek bankruptcy protection if it can't reduce costs enough. However, the airline announced this month that it will sell its regional carrier, Delta Connection, for $425 million.

* Northwest Airlines: The airline is losing $4 million a day as fuel expenses more than doubled. Achieved just $300 million of the $1.1 billion in targeted annual savings last year through new contracts with pilots and salaried workers. Northwest's mechanics are on strike. The carrier said it would reduce its growth plan for the year by scaling back seat and flight additions in the second half of the year. Seeking wage, benefit and pension concessions from its unionized workers, who executives say are the highest- paid of any airline. CEO says company could have to file for Chapter 11 if it fails to reduce labor costs and delay some pension contributions.

Source: Airchive.Com, Wikipedia.Org, Rocky Mountain News Research.

Back to Top