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Are The Airlines "too BIG To Fail?"  
User currently offlineBoiler905 From United States of America, joined Apr 2010, 47 posts, RR: 0
Posted (4 years 6 months 3 weeks 5 days 12 hours ago) and read 8854 times:

Hey a.net-ers, I'd like to invite your ideas and/or speculations on this.

After the new merger between UA and CO will create the newest largest airline in the world, are they creating an unsafe mindset that they are becoming too big to fail? Their attempt to save billions of dollars through mergers sounds good at first, but can the complexity of these combined airlines be sustained? (I'd say so far, so good for DL/NW)

Are the airline a future industry that the government will rescue? (excluding any unforeseen event such as 9/11)

Currently, DL's market cap is around $9.6B, but if you look at a company as big as Goldman Sachs who was "too big to fail" their market cap is almost 8x larger at $79B.

My questions:
~Are the airlines big enough to be considered "too big to fail?"
~If they aren't big enough, are more mergers between these monstrosities of airlines in store?
~What kind of situations can you think of where the government might actually bail out an airline (or airlines)?


Reminder... I'm not saying that I think this will happen, I'm just posting a random thought that crossed my mind.

Thanks for sharing your thoughts!

Boiler


Boiler Up
37 replies: All unread, showing first 25:
 
User currently offlineshankly From United Kingdom, joined Jan 2000, 1547 posts, RR: 1
Reply 1, posted (4 years 6 months 3 weeks 5 days 12 hours ago) and read 8857 times:

Only five letters needed to answer your questions my friend.....Pan Am


L1011 - P F M
User currently offlineBMI727 From United States of America, joined Feb 2009, 15812 posts, RR: 27
Reply 2, posted (4 years 6 months 3 weeks 5 days 12 hours ago) and read 8838 times:

Quoting Boiler905 (Thread starter):
After the new merger between UA and CO will create the newest largest airline in the world, are they creating an unsafe mindset that they are becoming too big to fail?

I hope not, but I don't think that they are. I think that they believe that consolidation and streamlining will help the industry and are pursuing that path.

Quoting Boiler905 (Thread starter):
Are the airline a future industry that the government will rescue?

Well, Braniff thought they were too big to fail, and they found out the hard way. Since then I think that everyone has known the score.



Why do Aerospace Engineering students have to turn things in on time?
User currently offlinenewark777 From United States of America, joined Dec 2004, 9348 posts, RR: 29
Reply 3, posted (4 years 6 months 3 weeks 5 days 12 hours ago) and read 8788 times:

The difference between the financial institutions that got rescued and airlines is that financial institutions play an integral part in many sectors of the economy, and if they fail they can drag many others down with it. Should an airline fail, others just move in to take its place.

If an airline gets bailed out, it will be for political reasons, not that it is "too big to fail."



Why grab a Heine when you can grab a Busch?
User currently offlinetharanga From United States of America, joined Apr 2009, 1865 posts, RR: 1
Reply 4, posted (4 years 6 months 3 weeks 5 days 11 hours ago) and read 8758 times:

There's a big difference between a big airline and a big bank. If an airline fails, it'll be liquidated and others will pick up the pieces. No major repercussions on the wider economy.

If a big bank fails, especially in the circumstances of the day where there was little to no transparency or public information on what deals they had entered into, it can take out all the other banks with it, and then the overall economy as well. So there's really no comparison.

Instead of too-big-too-fail, I'd watch for monopolies. I don't think that's an issue yet, outside of some individual routes.


User currently offlinerfields5421 From United States of America, joined Jul 2007, 7607 posts, RR: 32
Reply 5, posted (4 years 6 months 3 weeks 5 days 11 hours ago) and read 8732 times:

Quoting Boiler905 (Thread starter):
Their attempt to save billions of dollars through mergers sounds good at first,

I don't know why putting thousands of people out of work and cutting the pay of those remaining sound 'good at first'

A merger has never saved a company which did not have the sound business principles in place to survive without the merger. Yes a merger can create a bigger, better company - but unless both companies are healthy and strong - this usually does not happen.

That is opposed to the purchase of a weak company by a strong one, which has a higher success rate.

Quoting newark777 (Reply 3):
The difference between the financial institutions that got rescued and airlines is that financial institutions play an integral part in many sectors of the economy, and if they fail they can drag many others down with it.

Excellent point.

For example if AIG had been allowed to fail - something like 20-25 million retirees in the US would have lost their income.


User currently offlinedl767captain From United States of America, joined Mar 2007, 2539 posts, RR: 0
Reply 6, posted (4 years 6 months 3 weeks 5 days 11 hours ago) and read 8732 times:

I think they could be considered too big to fail, but they also might not. There are two sides.

One side is that they are too big to fail, Delta for example employs too many people and if Delta were to go under all those people would be out of a job and would be a really big problem.

On the other side, Airlines who fail can be picked up (or picked apart) by other airlines. If Delta failed completely parts of them would be bought out by airlines like American and United, this would also mean most workers would be able to be hired back by other airlines.


User currently offlinenewark777 From United States of America, joined Dec 2004, 9348 posts, RR: 29
Reply 7, posted (4 years 6 months 3 weeks 5 days 11 hours ago) and read 8673 times:

Quoting rfields5421 (Reply 5):
I don't know why putting thousands of people out of work and cutting the pay of those remaining sound 'good at first'

It doesn't sound good to those people, but it sounds good to the newly joined company. The lingo for that is "synergies."

Quoting dl767captain (Reply 6):

One side is that they are too big to fail, Delta for example employs too many people and if Delta were to go under all those people would be out of a job and would be a really big problem.

Job losses aren't a good enough reason to prop up a near dead company, though. In the long run you are doing more harm than help. As you mentioned later in your post, some of the losses would be mitigated by other airlines expanding and hiring some of the laid off workers.



Why grab a Heine when you can grab a Busch?
User currently offlineAirframeAS From United States of America, joined Feb 2004, 14150 posts, RR: 24
Reply 8, posted (4 years 6 months 3 weeks 5 days 11 hours ago) and read 8617 times:

Quoting Boiler905 (Thread starter):
"too BIG To Fail?"

The biggest excuse in aviation, IMO. Nothing is too big to fail.



A Safe Flight Begins With Quality Maintenance On The Ground.
User currently offlineBoiler905 From United States of America, joined Apr 2010, 47 posts, RR: 0
Reply 9, posted (4 years 6 months 3 weeks 5 days 9 hours ago) and read 8421 times:

Good point of views everyone, thanks!

Quoting shankly (Reply 1):
Only five letters needed to answer your questions my friend.....Pan Am

Lol, this is a good sum up of what everyone has said. Good one, shankly

IMO, I don't think the airlines will ever reach the range of being "too big to fail". Like some of you said, other airlines will just pick up the mess through further consolidation.

Obviously I do not support the job losses through the mergers, but the airlines cannot survive on their own anymore with the labor contracts. (Unless you're WN) And it is the only option for the airline to salvage as many jobs as they can compared to if they went bankrupt. Sorry if I offended you.



Boiler Up
User currently offlinetrigged From United States of America, joined Mar 2005, 540 posts, RR: 0
Reply 10, posted (4 years 6 months 3 weeks 5 days 9 hours ago) and read 8421 times:

If something is too big to fail, then the problem lies not with the failing company but with the people that allowed it to become that big (usually through mergers, acquisitions, etc.) No company is too big to fail. The airlines are no exception. If one fails, the market will absorb the passenger loads, workforce, equipment, etc. When you repeatedly prop up a failing company, you usually just prolong its death.

User currently offlineScottB From United States of America, joined Jul 2000, 6808 posts, RR: 32
Reply 11, posted (4 years 6 months 3 weeks 5 days 8 hours ago) and read 8228 times:

Quoting shankly (Reply 1):
Only five letters needed to answer your questions my friend.....Pan Am

Not really. When Pan Am failed, they were a relatively small player in the industry; all of the current legacy carriers would dwarf PA. Even WN is larger than PA was. While they certainly had an iconic brand, their failure was due in no small part to their service being duplicated by competitors with lower costs in many of their markets.

The more pertinent question with respect to "too big to fail" is how the industry would adapt to the failure of a large player (i.e. DL, "new" UA, AA, WN) in the short to medium term, especially in an environment where 80-85% load factors have become the norm. If a carrier with 25% of the market were to fail (i.e. go to Chapter 7), would the government have to step in temporarily to facilitate the transfer of assets to healthy carriers?

Fortunately, I think recent history has shown the willingness of investors and partners in related industries (i.e. aircraft lessors/manufacturers, credit card issuers, regional capacity-for-purchase providers, etc.) to step in to help finance failed carriers.


User currently offlineOzarkD9S From United States of America, joined Oct 2001, 5198 posts, RR: 21
Reply 12, posted (4 years 6 months 3 weeks 5 days 7 hours ago) and read 8108 times:

During the AA/TW deal, the state of Missouri declared that if all the TWA employees in STL and MCI (mx base) were suddenly unemployed, the state would be bankrupt due to lack of funds for that level of increased unemployment payments. Which is why saw then Senators Danforth(R) and Carnahan(D) joined forces to ensure the approval by DOT/DOJ.

I think the question should be: Would a merged UA/CO shutdown bankrupt California or Illinois? Possibly. Those states are in precarious financial shape at the moment. Texas, Colorado, New Jersey, Ohio and Virginia? Probably not. An AA shutdown wouldn't bankrupt Texas or Florida, but again, Illinois is precarious. A DL shutdown might well bankrupt Michigan or Georgia, but probably not Utah, Kentucky, Ohio, Tennessee or New York.



Next up, STL-ATL-MSY-ATL-STL
User currently offlineFlyingColours From United Kingdom, joined Dec 2003, 2315 posts, RR: 10
Reply 13, posted (4 years 6 months 3 weeks 5 days 7 hours ago) and read 8047 times:

Hmm very good points however I also have one which at least applies (or applied) to the UK Charter industry.

Every UK tour operator and charter airline is required to shell out money to ATOL and the CAA so they can issue a bond, this bond is used should the company or companies collapse, it would pay for sub-chartered flights to bring people home, to cover the costs of keeping people in accommodation downroute until this can be done and various other financial obligations.

Back around 2003 when My Travel Group was looking extremely shaky (I mean seriously shaky, unofficial word saying not to use them and the works, and a catastrophically low share price) they confirmed that they were having a meeting with the CAA and ATOL (or whoever), the outcome of this meeting was that the company could not cease operations as they were not covered by their bond as they were in fact too big. The share price rocketed (and I mean rocketed, I knew this announcement was coming and wish I actually had money to have invested but wait that would be wrong...) The company bounced back and became considerably more stable than some of their rivals, until of course they were took over and "synergized"  .

As to fact checking the above, well it's off the top of my head from 7 years ago but it's pretty much accurate, I could ask a friend who was high up at their airline to refresh my memory.

Could a scheduled or low cost airline be deemed too big to fail?
My answer is no, as has been pointed out Pan Am, Braniff, Eastern, Swissair, Sabena, Ansett...

Could a charter airline become too big to fail?
In a way yes, only if it was part of a tour operator/travel conglomerate.
There are too may things involved in tour operations, an airline can be wrapped up easily (I mean look what happened to us, we folded on the Friday morning (officially) and on Monday an airline (who we worked closely with) was expanding into our old bases and taking our aircraft, ZB nicked our Greek routes and other bits and bobs were picked off). But a travel company involves much more, and for the record I know our travel companies went down with us, well except one which was sold to Virgin for a pittance...

As usual I think I wandered off and probably should have stopped talking a few paragraphs ago  

Phil
FlyingColours



Lifes a train racing towards you, now you can either run away or grab a chair & a beer and watch it come - Phil
User currently offlinetimberwolf24 From United States of America, joined Jun 2001, 575 posts, RR: 1
Reply 14, posted (4 years 6 months 3 weeks 5 days 7 hours ago) and read 8032 times:

If any company says it is too big to fail does that not also mean that they saying they are too big to succeed and then in turn they have already failed.


Living in LA, ORD/MDW will always be home!
User currently offlineFlyingColours From United Kingdom, joined Dec 2003, 2315 posts, RR: 10
Reply 15, posted (4 years 6 months 3 weeks 5 days 7 hours ago) and read 7969 times:

Quoting FlyingColours (Reply 13):
Swissair

Actually it's worth pointing out how badly I went off on one, Swissair had lots of "other" interests within its company structure, the engineering and catering companies, the hotel chains to name but a few.

So I think I've actually disproven my own statment, hmm I'm going to bed.

Phil
Goodnight-FlyingColours



Lifes a train racing towards you, now you can either run away or grab a chair & a beer and watch it come - Phil
User currently offlineAADC10 From United States of America, joined Nov 2004, 2102 posts, RR: 0
Reply 16, posted (4 years 6 months 3 weeks 5 days 6 hours ago) and read 7874 times:

Banks were too big to fail because they had interconnecting derivatives contracts where failure of a counterparty would cause an otherwise health bank to fail. With the USA airlines, there are still four legacy network carriers and a bunch of LCCs. DOT and DOJ would probably not allow the number of legacy network carriers fall below three. When an airline fails, it strengthens the others by handing them the failed airlines passengers. In a failure, their hard assets could be purchased and the surviving airlines could pick up their routes quickly, something like AA did with TW.

Even if the USA had only one international network carrier (as many countries do) something could be reassembled out of the ashes like Swissair. What the USA needs is a better rail network because is is more fuel efficient that aircraft or buses and can provide an alternate if planes are grounded.


User currently offlinetharanga From United States of America, joined Apr 2009, 1865 posts, RR: 1
Reply 17, posted (4 years 6 months 3 weeks 5 days 6 hours ago) and read 7804 times:

Quoting ScottB (Reply 11):
If a carrier with 25% of the market were to fail (i.e. go to Chapter 7), would the government have to step in temporarily to facilitate the transfer of assets to healthy carriers?

Fortunately, I think recent history has shown the willingness of investors and partners in related industries (i.e. aircraft lessors/manufacturers, credit card issuers, regional capacity-for-purchase providers, etc.) to step in to help finance failed carriers.

If a big carrier were truly headed towards Chapter 7, then I think everybody would have seen the warning signs well ahead of time. And most likely, it wouldn't be so big, by the time it got there. It would have gone through Chapter 11 a couple times, and if it wasn't going to make it, it would have sold off assets in desperation as it limped to its death (planes, slots, gates, intl route authorities).

It'd be a slow motion decay. Pretty much like what PA did, really. It didn't go from powerhouse to nothing overnight.


User currently offlinecommavia From United States of America, joined Apr 2005, 11840 posts, RR: 62
Reply 18, posted (4 years 6 months 3 weeks 5 days 6 hours ago) and read 7774 times:

Quoting Boiler905 (Thread starter):
Are The Airlines "too BIG To Fail?"

No.

Period.

As others have said, there is a massive gulf between a big bank and a big airline. The U.S. economy is very deeply connected to the airline and travel/tourism/hospitality industry - no question about it - but nothing compared to the interconnectedness of the U.S. industry with the banking and financial services sector. Not by a long shot.

The airline industry is insanely competitive and dynamic. Consumers enjoy more choice than at almost any other time in history, and if/when one airline fails or exits a market, other airlines almost always come in and take their place, in the process preserving service in markets where it is economically viable and can be sustainably supported by profitable demand.

Quoting OzarkD9S (Reply 12):
I think the question should be: Would a merged UA/CO shutdown bankrupt California or Illinois? Possibly.

And the answer is a resounding "no."

Not even close.

The economy of California is a $1.9 trillion economy; that of Illinois is over $630 billion.

There is no way that the collapse of United - or any other airline - would "bring down" something that big. Would it hurt? Sure - a lot. The combined airline will have lots of employees and a huge economic footprint in both states, but nowhere close to enough to actually bring down the states' finances. (Besides, both those states are doing a great job of that without United's help.  )


User currently offlinePPVRA From Brazil, joined Nov 2004, 8971 posts, RR: 39
Reply 19, posted (4 years 6 months 3 weeks 5 days 5 hours ago) and read 7674 times:

Quoting ScottB (Reply 11):
Not really. When Pan Am failed, they were a relatively small player in the industry; all of the current legacy carriers would dwarf PA. Even WN is larger than PA was.

The market was much smaller back then.

Quoting tharanga (Reply 17):
If a big carrier were truly headed towards Chapter 7, then I think everybody would have seen the warning signs well ahead of time. And most likely, it wouldn't be so big, by the time it got there. It would have gone through Chapter 11 a couple times, and if it wasn't going to make it, it would have sold off assets in desperation as it limped to its death (planes, slots, gates, intl route authorities).

Yup. Carriers can disappear, but their assets don't. People often forget that.



"If goods do not cross borders, soldiers will" - Frederic Bastiat
User currently offlineltbewr From United States of America, joined Jan 2004, 13170 posts, RR: 15
Reply 20, posted (4 years 6 months 3 weeks 5 days 5 hours ago) and read 7647 times:

You might have politically too big to fail issues. That has been a problem of Alitalia, other 'national' airlines.

In the USA, you might have some problems if a major were to fail (go into liquidation), but it long before one did, competitors, including LCC's, would take advantage of a competitor's weakness, buy valuable routes (like UA did with PA).


User currently offlinePPVRA From Brazil, joined Nov 2004, 8971 posts, RR: 39
Reply 21, posted (4 years 6 months 3 weeks 5 days 4 hours ago) and read 7591 times:

Varig is a good example. They went from 120 or something planes and over 50% market share down to 8 or so and nothing in market share, in very short time. There were some disruptions but they weren't anywhere near as bad as when TAM screw up their booking system a few years ago.

[Edited 2010-05-05 17:50:39]


"If goods do not cross borders, soldiers will" - Frederic Bastiat
User currently offlineBMI727 From United States of America, joined Feb 2009, 15812 posts, RR: 27
Reply 22, posted (4 years 6 months 3 weeks 5 days 4 hours ago) and read 7554 times:

Quoting OzarkD9S (Reply 12):

California and Illinois are already bankrupt.



Why do Aerospace Engineering students have to turn things in on time?
User currently offlineBoiler905 From United States of America, joined Apr 2010, 47 posts, RR: 0
Reply 23, posted (4 years 6 months 3 weeks 5 days 4 hours ago) and read 7488 times:

Quoting ScottB (Reply 11):
When Pan Am failed, they were a relatively small player in the industry; all of the current legacy carriers would dwarf PA. Even WN is larger than PA was


Yea... NOW they're bigger than Pan Am was.



Boiler Up
User currently offlineaxio From New Zealand, joined Jul 2006, 317 posts, RR: 0
Reply 24, posted (4 years 6 months 3 weeks 5 days 3 hours ago) and read 7140 times:

One of the key rationales for bailing out NZ in 2001 after the Ansett debacle was that letting NZ fail would have been extremely detrimental to the country. This was because it would suddenly, albeit temporarily, decimate the tourism industry, and it would result in poor services to the provinces as any replacement would surely cherry pick the profitable routes and ignore the greater interests of the nation.

So in many respects it was too big to fail, although as many have pointed out, it's failure would not have been as disastrous as a bank failure because individuals would not have sustained the kind of losses they would if their savings suddenly disappeared.



Time for a new viewing deck at AKL!
25 rfields5421 : It is just a shame that really hasn't happened in the airline industry yet. So far it has just been trading one set of problems for two more. No one
26 SkisAndy : Yes - of course the airlnes are too big to fail - they were already in 2001, after 9/11. All other travel companies, travel agencies, hotels, car rent
27 Antoniemey : Most of the airlines figured out how to survive on their own as well. (yes, for some of them it did include time in Chapter 11). United was actually
28 Revelation : Another point is we just had almost all the air transport stop in Europe for a few days, with no clear indication when it'd be allowed to restart, du
29 MLD9S : Too big to fail.....hmmm.... I guess the question that should be posed is how big is too big in modern days? Sure, Southwest, the new Delta and the ev
30 Post contains links 787KQ : Yes. The alternative is to regulate even more the airlines including its labor, management and safety, etc. There can be major implications to commer
31 isitsafenow : The little guys fail overnight. The big guys die a slow death. First they regress in some cities and frequency of flights. Then sell off routes, hange
32 manfredj : Is it as simple a statement to say that we wouldn't have the "slow death" large airlines feel if we just left the airlines alone and didn't have gover
33 brilondon : I would add two more letters to your post. EA. There is no such thing as too big to fail. Look at Enron. They were fairly big and they did. I realize
34 Post contains images einsteinboricua : yeah...and maybe oil wouldn't have spiked to nearly $150 Bottom line: the fact that today we're paying fees like there's no tomorrow isn't because of
35 mayor : Not hardly. Pan Am didn't have a viable domestic system to feed its international network.
36 heathrow : No one is untouchable. As it has been said, Pan Am, Trans World.... There's also Braniff, Swissair, Excel (UK), Skyservice, Wardair... the list goes o
37 chepos : Anything in this industry in possible. Political problems, environmental issues and other out of our control problems can cause the best in this indus
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