By Michael Connor
MIAMI (Reuters) - Transport group CNF Inc (NYSE:CNF - news) on Monday suspended operations at its Emery Worldwide Airlines unit and laid off 800 staff after regulators uncovered alleged maintenance shortcomings and threatened to ground the major U.S. freight carrier.
The company said it would fulfill its air deliveries through contractors.
The action came just before a midday deadline set by the Federal Aviation Administration (news - web sites), which had threatened to pull Emery's license to fly.
The last time the U.S. government forced a shutdown of a major air carrier was ValuJet in 1996, after a crash in the Florida Everglades killed 110 people.
Emery agreed to stop operating its fleet of 37 aircraft for 30 days while regulators and the company sort out what has to be done to resume flying.
FAA officials told a news conference that agency inspectors found numerous problems during several inspections since January 2000. They included inadequate repairs, unapproved replacement parts, poor record keeping, and the use of un-airworthy aircraft.
For example, the FAA said, Emery did not effectively repair an air pressurization problem on a DC-10, despite several complaints from pilots. In another case, apparent improper maintenance led to a landing gear malfunction on a DC-8.
``It's apparent to us that their willingness and ability to take corrective action over time is lacking and therefore we lacked confidence in them to hold the (operating) certificate at this time,'' Ava Mims, deputy director of FAA flight standards said.
INVESTIGATORS POSTPONE HEARING
U.S. safety officials also are investigating the crash of an Emery DC-8 in California last year that killed three crewmembers. A National Transportation Safety Board (news - web sites) hearing on that accident, scheduled for August 22-23, was postponed indefinitely on Monday.
One Emery pilot now out of work said crewmembers began to speak up when safety became a serious concern. ``You get in an airplane and you don't know what's going to happen. Yeah, you're scared,'' he said.
CNF companies operate in the United States and 226 other countries, delivering shipments by trucks, ships and planes.
``There will be no interruption of freight service and Emery air freight will meet all of the day-to-day operating requirements of our customers both in North America and around the world,'' Chief Executive Chutta Ratnathicam said.
CNF, which also provides logistics services and specializes in hauling heavy freight, hired aircraft operated by Ryan Aviation of Wichita, Kansas, and others to carry freight, the company said in a news release.
A spokeswoman for Palo Alto, California-based CNF said the company's managers had been surprised by the FAA threat and expected Emery Worldwide Airlines to resume carrying freight for Emery's broad transport operations.
It was unclear when the carrier would actually resume flying after the 30-day review period with the FAA.
The layoffs will include pilots, other crew and administrators and affect 67 percent of Emery Worldwide Airlines' staff of 1,200, CNF said.
Beyond weathering global sluggishness in transport services, Emery has suffered repeated business setbacks. In May, the company lost to FedEx (NYSE:FDX - news) a contract to haul mail for the U.S. Postal Service.
In June, CNF said it would cut its fleet of Emery planes by more than a dozen to 38 and would eliminate 900 jobs. Emery lost $25.2 million in its second quarter and has predicted further losses in the current quarter.
Industry analysts said the Emery airline shutdown would hurt CNF's earnings and was likely to benefit rivals such as Polar Air Cargo.
``It raises questions about earnings being overstated historically, since they seem to have underspent on maintenance,'' said analyst Donald Broughton of AG Edwards & Sons. ``It also means maintenance spending is likely to go up.''
Peter Coleman, transportation analyst at Banc of America Montgomery, said the forced suspension may prompt CNF's executives to speed up a possible restructuring or divestiture of Emery.
Specialist trade newsletter Cargo Facts reported in June that CNF was considering offers for the sale of Emery Worldwide Airlines as part of a plan to reduce losses on Emery's domestic network.
``They are looking for ways to make themselves less asset-centered,'' Coleman said.
CNF's shares closed down $1.19, or 3.78 percent, to $30.31 on the New York Stock Exchange (news - web sites). The stock is off nearly 7 percent this year, while the Dow Jones index of trucking issues is up 7.5 percent.