From the archives | This article was originally written and published on January 25, 2019.
September 14th, 2005 was truly a unique day for the United States’ aviation industry. That day Delta and moments later Northwest filed for bankruptcy in court. This put the air space above America in an exceptional position – 4 airlines were flying under Bankruptcy protections.
Delta, Northwest, US Airways and United Airlines carried half of the passengers in the United States. All 4 of them were also operating under the protection of Chapter 11, just not to get dissolved by creditors. But how did it get to this point, that 4 of the biggest 6 American airlines were in such dire financial straits?
Well, long story short, a lot of factors contributed to that fact. 2005 for the airline industry was the time, where anything that could have gone wrong literally went wrong.
If you‘re here for the long story, well then strap in! Because we‘re going to take it step by step and analyze each individual case for every airline. Then, we will try to sum up why did things go so south.
Legacy Carrier? Chapter 11? What?
In the previous chapter I have mentioned two very specific terms that some of you might not know of. If you do know them, just skip down a bit and we’ll meet in a bit.
First of all, let’s start out with what is a Legacy Carrier. A term that is unique to the United States, an airline is defined as a Legacy carrier when it has had established domestic routes before the aviation deregulation act of 1978. Another characteristic that defines a legacy carrier is that it offers additional services compared to a low-cost carrier. If a low-cost carrier makes money by squeezing every penny for food and priority boarding, then a legacy carrier runs on a completely different business model. If, for example, you purchase a ticket from Delta, you get a meal on a long flight and you can get a seat in first or business class.
Secondly, Chapter 11 is a part of the United States Bankruptcy Code. Chapter 11 permits organizations, such as airlines, to restructure their business while they face financial struggles. Let’s use an airline as an example. If a fictional airline called Big Earth Airlines had a lot of debt and it filed a Chapter 11 bankruptcy, then it would have the chance to take out new loans or talk with investors. It also would have the chance to cut costs – end leasing agreements, cut its workforce, or lower wages. Any profit made by the airline would firstly go to the new investors, then the carrier.
Another thing why Chapter 11 is unique – an airline is protected from anyone that they owe money to. Thus, it can operate as normal while restructuring the company.
So, with that out of the way let’s take ourselves back to September 14th, 2005.
Delta Air Lines
Delta already had big issues in its finances. For 5 years already it has not returned a single profitable quarter. The company was in a very bad situation.
A week before declaring bankruptcy, Delta sold off its subsidiary Atlantic Southeast Airlines. The airline did not cut pilots’ wages until 2004, when it finally held successful negotiations with its pilot union, while also constantly cutting jobs. The total amount of lost jobs summed up to be over 24.000.
And those were not the only cost-saving measures the company employed. It started outsourcing such operations as aircraft maintenance and reducing flights from its Cincinnati hub. Delta also got rid of its pension plans, just to save more money.
Analysts forecasted that Delta’s financial situation would get better only in 2007. In the end, Delta survived its crisis. The company eventually became the second largest carrier in the United States in 2018.
Northwest Airlines
The fourth-largest carrier at the time, Northwest declared Chapter 11 bankruptcy just minutes after Delta Air Lines. What was unique to Northwest’s situation was that its mechanics were already on strike for a whole month. Northwest pushed their mechanics to go on strike – with proposed 25% wage cuts to reduce costs. As disagreements surfaced, the airline hired 1.200 replacement workers to keep operations going. However, this is where irony strikes. Looking back, economists agreed that Northwest was in a much better place financially than Delta. Simply put, it had more cash reserve. Michael Boyd, an airline consultant said that Northwest “Doesn’t have any structure problems. Its route system is golden, it’s bulletproof.” In hindsight, they were right at the time – they were simply stating facts. However, as time showed, Delta emerged as the winner. Northwest made a deal with Delta in 2008 to merge together into one, with the Northwest brand going away forever. US Airways forces us to go back even more in time – it filed for bankruptcy under Chapter 11 in 2002. The airline was hit the hardest by the September 11 attacks. To illustrate, other airlines were fairly okay, because they had bases all over the United States. So did US Airways. However, one of its main bases was in Ronald Reagan International Airport in Washington, D.C. The airport remained closed the longest after the attacks and when it reopened, it had a lot of restrictions placed on it. Such as a ban on aircraft that have more than 156 seats. And while the security measures were lifted in 2002, it was a little bit too late for the legacy carrier. In spite of this, we have to remember how CEOs ran US Airways. For the past few years, the airline posted just one profitable quarter. In 2000, United Airlines almost purchased the troubled airline, but federal regulators denied that motion. Yet it had one big issue – its prices and routes. While it’s a legacy carrier by its prices, its routes definitely were not. The carrier was being swallowed up by low-cost airlines such as Southwest. Management of US Airways attempted to save the company. The top management personnel took a 20% pay cut, with pilots and flight attendants following suit. The airline also tried to end leases on over 300 aircraft but was having difficulties doing so. Luckily for the airline, it managed to secure an investment from the Texas Pacific Group. US Airways also received a $1 billion government bailout to secure its future. However, after emerging from bankruptcy in 2003, a year later US Airways went bankrupt again. This resulted in the merger between US Airways and America West Airlines. Luckily for US Airways, their brand had better recognition worldwide. Because of this, US Airways stayed alive. Nevertheless, the US Airways brand went down under in 2015 after a merger with American Airlines (A1G) (AAL) . Its last flight was on the 16 of October 2015. The same year as US Airways, United Airlines also filed for bankruptcy under Chapter 11. At the time, this was huge news for the aviation industry. United was the largest airline to declare bankruptcy while also being one of the 10 largest bankruptcies in US history. While the airlines mentioned above had accumulated a lot of debt, United was very deep in trouble. As they declared bankruptcy on the 9th of December, 2002, their daily costs were between $20 and $22 million in that month alone. In January United expected to reduce their costs to $10-15 million. Normally, the company would run itself on $7-8 million per day. United said they expected to lose $2.5 billion in 2002! United compromised itself when they tried to buy US Airways in 2000. To persuade pilots to agree with the deal, United raised pilots’ wages significantly. But the company could not avoid strikes before the deal was struck. As a result of the pilot and mechanics strikes, United had to cancel a lot of flights. In the end, after over 4 years of bankruptcy, United Airlines was finally operating normally. The Legacy Carrier is currently the 4th largest American airline, so it’s safe to say that United ended up okay. So, after going through every legacy carrier’s situation, one question stands. How did it all come to this? And the answer can be split up into three parts: As I mentioned previously, US Airways had the most trouble out of all the legacy carriers as a result. However, the whole industry suffered massively. And the numbers back it up: The United States aviation industry lost more than 77 million passengers traveling through its routes. Those are massive losses and this has contributed to the airline bankruptcies across the United States. The airlines had to cover these losses with their own cash savings. And as a result, the two other factors were the last nail to the coffin. In January of 1999, one gallon of jet fuel (3.7 liters) cost $33 cents. At the end of the year, it doubled. In 2000 the price saw several huge spikes in the months of autumn. Ultimately it increased to $86 cents. So the massive increase of price contributed to the bankruptcy filings of United and US Airways. However, Delta and Northwest got the bad end of the stick here. When they declared bankruptcy in December of 2005, one gallon of jet fuel cost $1.73. The cost of fuel tripled in a span of 6 years. Considering the fact that the airlines were increasing their destination numbers and consequently increasing their fuel demand, this was detrimental. United and US Airways were already reducing their costs, so they were prepared for the later increasing costs of fuel. The airlines increased their wages just prior to their bankruptcies. However, this was not the biggest issue. Pensions were. At one point, United Airlines terminated their pension costs and saved $6.4 billion. US Airways did the same, saving $600 million in the process. At the time of bankruptcy, Northwest had a $3.8 billion debt in pensions alone. The pension plans while generous, but they were one of the reasons for the downfall of the airlines. In order to reduce such huge labor bills, airlines reduced the wages of everyone, including the top management. The Legacy Carriers also had to cut a ton of jobs, with Delta alone firing 24.000 employees. All in all, the early 2000s were disastrous for every Legacy Carrier in the US. While some managed to escape bankruptcy, as did American Airlines (A1G) (AAL) , but everyone felt the downturn in the industry. It showcases that while working in aviation is a dream for a lot of us, it can also be a brutal thing to be a part of.
US Airways
Bankrupt again
United Airlines
But why all the bankruptcies?
Firstly, the September 11 attacks.
Secondly, Jet Fuel.
Thirdly, Labor costs.