Big airlines have little to gain from Chapter 11
Written on September 5, 2008
The threat of another round of major U.S. airline bankruptcies seems to have diminished, but it’s not just because of tumbling fuel prices and sweeping downsizing.
For most of the top airlines, Chapter 11 simply isn’t feasible considering the high cost of bankruptcy and the relatively small savings to be wrung.
“It’s too expensive without the commensurate cost savings to gain,” said Pia Thompson, partner at Reed Smith, the law firm formerly known as Sachnoff & Weaver, which represented creditors during the bankruptcy of United Airlines parent UAL Corp (UAUA.O: Quote, Profile, Research, Stock Buzz).
“There’s almost nowhere left to cut,” Thompson said. “They’ve really done everything they can.”
Since 2002, four of the top seven U.S. airlines have restructured in bankruptcy. Two others — AMR Corp (AMR.N: Quote, Profile, Research, Stock Buzz) and Continental Airlines (CAL.N: Quote, Profile, Research, Stock Buzz) — cut costs outside of Chapter 11.
During these large-scale reorganizations, airlines reined in expenses related to labor, airplane leases and facilities fastcash. Those steps, plus a series of fare increases, put the industry back on sure footing after a wave of low-cost competition pummeled large carriers.
But the good times didn’t last. A jump in oil prices sent the price of jet fuel soaring and erased nearly all the gains airlines had made.
By the time crude oil notched a record $147.27 a barrel in July, analysts were predicting a fresh wave of airline bankruptcies. In the first half of 2008, industry analysts combed airline financial statements for signs that insolvency was near.
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