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Is Chap 11 To Blame?

Wed Dec 14, 2005 12:11 pm

Okay we're all well and truely versed in the mess that is the domestic airline environment at the moment in North America, particularly the USA.

It got me thinking about Chap 11, and how airlines like BA have been blasting it. I fully understand, and accept the reasons for Chap 11.... it gives the creditors (those who the company owes money such as suppliers) a chance at actually recovering their investment, and gives the staff some hope of maintaining their jobs. In other words, the thing is probably worth more as a going concern, but the original shareholders kiss most if not all of their investment goodbye. It all seems fair enough... basically to protect people who have extended their goods and services and give them some hope of getting most of their money back eventually.

Now it got me thinking about the local situation here in Australia. Australia, like Europe, does not enjoy such bankruptcy laws. Here, it's all over... simple as that. It got me thingking about what probably would have happened had Australia had similar laws in place, with the failure of Ansett.

(1) Ansett would still be flying. It most likely wouldn't be very strong, still have too many staff, although I'm sure they would have reduce both the number of staff, and amount of Aircraft types flying. I'm certain it would be reduced to largely just a 733 and A320 style operation, maybe with a few 767s for Hong Kong and Perth. Staff would have been forced to take pay cuts and they'd be very unhappy about it, (and still probably paid more than virginblue), but as they would have been so unhappy, I'm sure morale would have sunk to all time lows and service standards (or at least attitudes) gone there with it.

(2) virgin would not have grown as large and would not be able to due to lack of terminal space and access. However they would have been big enough to continue placing extreme pressure on Ansett due to their much lower cost base, likely to make a small profit, just above break even.

(3) Qantas would most likely not have aquired impulse (it itself would go into Chap 11 but it would have been unlikely to emerge out of it) and turned it into jetstar, however it would be unfairly hurt buy Ansett because the profits from its international opertion would prevent it from filing for bankruptcy, yet Ansett would be able to continue operations in conditions Qantas would be almost powerless to match.

(4) Australian unions at both Qantas and Ansett would not have allowed the current level of reorganisation, because they would not have experienced the serious job losses that resulted at Ansett. This would have prevent QF from structuring its domestic operations, as all would be still expecting the old conditions to last forever. Meanwhile Virginblue would continue to inflict damage on both.

(5) The average age and efficiency of the aircraft flying domestically in Australia would have been much older. In this environment, it is unlikely that QF would have purchased all the 738s they did, nor the A332s etc. Their domestic operations would likely be break even at best, or just slightly above.

Instead today, we have a new highly efficient fleet, with low prices, higher frequencies and more people are flying than ever before. There was much pain in the process, particularly at Ansett and with troubles caused from the loss of Ansett Air Frieght (for a while in parts of the state of Queensland it was impossible to get fresh roses! little things like that). Our domestic industry is profitable and healthy, although many people had to pay a high price in order to get it like that. Virginblue now carriers more passengers than Ansett did, and does so on 1/3 of the aircraft and about 1/3rd of the staff (gives you an idea of how overstaffed the Ansett operation actually was), of course, its service is nowhere near the level that Ansett provided!

So it got me thinking. Is chapter 11 holding back a similar thing happening in the USA? I'd love to hear your thoughts.
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RE: Is Chap 11 To Blame?

Wed Dec 14, 2005 12:44 pm

A true Free Market in America would be great for airlines, the weak would fade, the best would grow and prosper, and customer needs/wants will be addressed. But alas it won't happen anytime soon. As here we have favorites, just like everone has A and B well we have AA, UA, CO, NW, and others with large loyal followings and some do reside in positions of power. Judgment clouded. Never letting their airline of choice go without a fight. Wishful thinking though.......
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RE: Is Chap 11 To Blame?

Wed Dec 14, 2005 1:16 pm

I used to think Chapter 11 was a bad thing, but it isn't.
It gives companies a chance to shape up or lose out. It helps reorganize loans that were badly written, and erase some bad elements of the company with protection from previous agreements. Overall it keeps companies going, and keeps people employed.

Of course, it is hell for those who already had a streamlined business, as the playing field gets suddenly leveled.

The current round of Chapter 11 in the US is much different than previous rounds though. This time through all the Legacies are having to do it because they can no longer compete with the new LCC model, and they have to adapt or die. The airlines no longer have businesses subsidizing flights by buying many first class tickets. Business travelers are now more likely to travel in coach. People are less willing to pay big bucks for last minute seats , as walk up fares are being offered for less by LCC's. Maintenance and planes are big factors now, as well as point to point service without hubbing.

THe world of Airline economics has changed, and out of it I think the US airline business will be the leanest and meanest in the next few years.

Some will still fail, and some will cut so hard they will cease to be viable without mergers. The next 5-10 years is going to bring many changes to the US Airline industry.
Older than I just was ,and younger than I will soo be.

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