Jeremy Warner's Outlook: Deny US airlines their Chapter 11 life support
14 September 2004
US airlines never die - they just get reincarnated. America may be the land of the free - of red in tooth and claw capitalism - yet when it comes to airlines, something all sentimental and dewy eyed seems to come over even the most hard bitten of American money men. Somehow or other, American airlines always seem to rise phoenix like from the ashes of their own insolvency. There are far too many airlines in America, and at least a half of them are essentially bust, but politicians and legislators seem quite incapable of allowing the necessary cull. On Capitol hill and beyond, the airline lobby remains a remarkably powerful force.
First came the 11 September terrorist atrocities, then Sars, then the Iraq war, and now the high oil price. One alone of these crises would in any other industry have been enough to put any number of players out of business. The fact that all four in combination has failed to claim even a single liquidation is down to the billions in aid heaped by the Federal authorities on the airlines and the miracle of Chapter 11 - the US insolvency procedure that allows companies to seek temporary protection from their creditors.
Over the weekend, US Airways achieved the dubious distinction of becoming the first American company to file for Chapter 11 twice in two years. There is nothing wrong with the principle of Chapter 11, a relatively enlightened insolvency procedure that allows companies to force through painful but possibly lifesaving surgery. In theory, it prevents the total wipeout of creditors that might occur in a complete liquidation.
Yet with airlines, the effect is only to perpetuate and make worse an already unsustainable excess of capacity over demand. Freed from the need to meet interest costs and debt repayments, the airline will typically slash prices in an effort to generate extra revenues, undermining the position even of previously solvent competitors. It is no surprise that more than a third of the US airline industry is now in Chapter 11, for it gives a "beggar thy neighbour" competitive advantage to all who apply it. Presumably, one or more of the dinosaurs of the US airline industry will eventually be allowed to keel over and die. But there is still an awful lot of pork barrel politics involved in this industry, and there doesn't seem much appetite even for the one sacrificial scalp.
FriendlySkies From United States of America, joined Aug 2004, 4106 posts, RR: 5
Reply 3, posted (10 years 1 week 16 hours ago) and read 2305 times:
Chapter 11 is just a way for business to sort out their problems without the savage beasts known as creditors and lessors clawing at their backs. The gov't doesn't pay for it, the company and creditors do. All financing is received from stand alone banks and trusts, not the gov't. I don't see a problem with this, there are regulations that prevent abuse of the bankruptcy courts...
Yyz717 From Canada, joined Sep 2001, 16259 posts, RR: 56
Reply 4, posted (10 years 1 week 16 hours ago) and read 2293 times:
Let the market place solve the issue. As creditors get burned by Chap 11, they will insist on more stringent credit or payment terms with ALL airlines which will limit their exposure. In theory anyway.
Panam, TWA, Ansett, Eastern.......AC next? Might be good for Canada.