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Airline woes contagious
If AMR files for bankruptcy, it could force other airlines to follow in an effort to cut costs.
March 26, 2003: 3:42 PM EST
By Chris Isidore, CNN/Money Senior Writer

NEW YORK (CNN/Money) - Airlines aren't watching just the war news to determine their next step in dealing with the industry's most severe economic crisis. They're watching each other.

If another major carrier, such as American Airlines parent AMR Corp. (AMR: Research, Estimates), files for bankruptcy court protection, it would allow the carrier to shed debt payments, plane leases and labor contracts it no longer can afford. That could prompt other struggling competitors to file so they are not put at a competitive disadvantage.

"Very often in a highly competitive industry, where a number of companies have sought Chapter 11 (bankruptcy) relief, others will find it difficult to compete if they have the same pre-filing debt levels," said attorney Joseph Smolinsky, a partner specializing in bankruptcy at Chadbourne & Parke.

But if UAL Corp. (UAL: Research, Estimates), parent of the world's No. 2 carrier United Airlines, is forced to liquidate, it could remove enough capacity from the nation's system, at least on a short-term basis, to give some lift to fares that have fallen almost continually since early 2001. That actually could keep other carriers that might otherwise be facing bankruptcy risks on their feet.

"United shutting down doesn't necessarily fix the problem for other airlines, but it helps a lot," said Philip Baggaley, the managing director for airlines and aerospace companies at credit rating agency Standard & Poor's. "It does divert a fair amount of revenue to other airlines -- United carries about 17 percent of the nation's traffic."

All the major carriers have said they hope to avoid bankruptcy filing, and many airline unions have pledged to help keep their employers out of bankruptcy. A spokesman for the pilots union at American said Tuesday the union and airline were close to having a wage cut package for the union to vote on, which could be a large step toward avoiding bankruptcy. And United announced Wednesday that its losses during the first three months operating in bankruptcy were within the guidelines required by its lenders to allow its bankruptcy filing to continue, removing the immediate threat of liquidation.

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Still, the drop in traffic from the war has been severe, hurting an industry that already was in bad shape. The first Gulf War caused a rash of airline bankruptcies as Continental, Trans World Airlines and America West all filed for bankruptcy protection either during the war or in the months afterward, while Eastern Airlines, Pan Am and Midway Airlines all ceased operations.

If the American unions and other suppliers balk at the $4 billion in annual savings being sought by management, a bankruptcy filing still could occur. And that could put pressure on the others, according to industry officials.

"A lot of carriers would like to get out of aircraft leases, labor contracts that are hard to support given current traffic levels," said an industry consultant, who is advising major airline unions and therefore spoke on a not-for-attribution basis. "With American as big as it is, if they become efficient through bankruptcy, it puts a lot of pressure on others."

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Airline credit analyst Philip Baggaley discusses the industry's prospects for recovery.

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While much of the focus of bankruptcy court powers is on labor contracts, the airlines could have more luck negotiating labor concessions before a bankruptcy filing than they might negotiating new aircraft leases, said Michael E. Levine, a former senior airline executive who is now a law professor at Yale University.

Many current aircraft loan agreements have multiple lenders who have different legal standing to collect if there is a bankruptcy. Those at the front of the line are less willing to negotiate a break on the loan agreement than a single lender was in the past, he said.

"I think if American files bankruptcy, it's more likely they'll file over the [aircraft leases] than the labor contracts," Levine said.

Click here for a look at airline stocks

Levine and some other analysts believe that even if United ceases operations, it wouldn't necessarily help its major competitors. He said it actually could hurt, because the aircraft would eventually be bought by start-up low-cost carriers, who would join existing discounters such as Southwest (LUV: Research, Estimates) and Jet Blue (JBLU: Research, Estimates) in posing competitive problems for the major carriers.

"United liquidating provides a short-term boost, but it makes problem worse for [major] carriers," Levine said. "It creates a vacuum likely to be filled by discount carriers in 12 to 18 months. If United fails, all of its jets will be available cheap to everyone with an idea. And if United goes to ground, fares pop and all the unions at the other airlines sit on their hands waiting to see if they need to make a sacrifice."  Top of page




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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.