Fleeting Profits, Mergers,. and More Bankruptcy

A fleeting two years of profitability in the nation’s airlines during 2006 and 2007 ended in 2008 with an industry operating loss of $3.6 billion.13 In that year began a global reces­sion of large dimensions, precipitated by a burst housing bubble caused by defaults on subprime mortgages (which began in 2007), largely due to loose credit policies of government backed mortgages. Stated differently, many people were encouraged by government policy to buy houses that they could not afford. As defaults increased due to homeowners’ failure to make mortgage payments, banks and hedge funds that had bought these worthless mortgages packaged up as tradable securities bearing high credit ratings by Moody’s and Standard and Poor’s, began to face huge losses. Bankruptcies and government intervention in such institutions as Bear Stearns, AIG, Fannie Mae, Freddie Mac, IndyMac Bank, and Washington Mutual caused a drying up of credit that precipitated a widespread decline in employment. Unemployment rates nation­ally exceeded 10 percent. Unemployment rates for years 2003 to 2007 were between 6.3 and 4.4 percent.

At the same time, in 2008, the price of a bar­rel of crude oil oscillated wildly between $145 and $33 within a few months, causing the price of jet fuel to range between a low of $1.26 to a high of $4.26 a gallon. Fuel was now not only the highest cost factor in airline operations; it was also the most volatile. Revenues plunged 17 percent in 2009, which caused the largest two – year contraction in the history of aviation, and which resulted in a loss of $2.5 billion for the year. Over the nine-year period ending in 2009, the air transport industry lost $58 billion dollars.

Between 2002 and 2007, Chapter 11 bank­ruptcy reorganization had helped slim down four of the largest legacy airlines (US Airways, twice—in 2002 and again in 2004; Northwest and Delta, which filed on the same day in 2005; and United, which filed in 2002). These airlines had used Chapter 11 to renegotiate their union contracts for lower wages and more flexible union work rules, eliminate jobs, reduce capacity, and increase fares. These airlines were in a much better position to weather the economic turbulence of the late 2000s because of restructuring in Chapter 11.

During the first decade of this century, merger was also employed by all airlines in addi­tion to bankruptcy as a corporate tool to consoli­date resources and to try to advance profits. TWA was absorbed into American Airlines in 2001, before 9/11. America West Airlines was merged into US Airways in 2005, as a part of the Chapter 11 process of US Airways. Northwest merged with Delta in 2008, and the airline continued operation under the name of Delta. In 2010, Continental became a part of United. Southwest acquired AirTran in March 2011. All of these mergers were approved by the Department of Justice and were deemed not to violate any of the constraints of the antitrust laws.

During the first part of the 21st century, the legacy airlines were reinventing themselves from a historical perspective through the use of bankruptcy and merger. Although there were no bankruptcies of any airline during the days of economic regulation, there were a few mergers. These mergers were facilitated by the CAB, in order to maintain service and rates as prescribed, by requiring successful airlines to absorb the less successful ones. That is the reason that the 16 airlines grandfathered under the Civil Aeronautics Act of 1938 had contracted to 10 airlines by 1978.

All of the legacy airlines, except American, had slimmed down through bankruptcy, and all had combined through merger with another car­rier during the first decade of the 21st century. In 2011, not having been “cleansed” through bank­ruptcy, American had lost $11 billion since 2001. American Airlines faced labor costs that were significantly higher than any of its competitors and pensions that were the richest in the industry. Its labor and operating costs in 2011 were about 10 percent higher than Delta’s. In fact, in 2011 Amer­ican was the only major airline to lose money.

To further complicate the picture, American owns and operates American Eagle, a regional carrier that uses small, 50-seat aircraft that other airlines have been shedding (most other major carriers contract out their regional connections to independent regional airlines and have moved a bigger risk share to them). It is the only major airline that still performs most maintenance in­house. It also flies obsolete MD-80s, which are not fuel efficient, and are a big liability in these times of spiraling fuel prices.

In spite of years of negotiations with its unions, there was little progress in moving the issue forward, so in November 2011 the last holdout of the legacy airlines, American, capitu­lated and filed for Chapter 11 protection.14 At that time, there had been 178 bankruptcy pro­ceedings filed by domestic airlines since 1978, 46 of which had been in Chapter 11.15