Two months ago, former British Airways boss Sir Rod Eddington used his valedictory speech at the Aviation Club in London to rage against Chapter 11, the US legal mechanism that allows, in his view, badly-run airlines to limp on when they ought to be put out of their misery, dumping capacity on the market and providing unfair competition for rivals who do not have the luxury of not paying creditors.
At today's monthly Aviation Club lunch, United Airlines chief Glenn Tilton hit back, providing a robust defence of the bankrupcy protection regulation. This was his argument:
1. Chapter 11 is not an "airline phenomenon". Any US company can apply for it.
2. Most companies don't survive Chapter 11. Off 166 airlines that have filed for it since 1978, only three are still in business.
3. It's a much more rigorous process than the back-door infusions of state aid that go on in Europe.
4. Creditors don't lose out. Its purpose is to re-create an enterprise that is worth more as a going concern than it would be if the company was liquidated there and then.
Above all, Tilton was insistent that United Airlines did not have a "right" to continue operating and had to prove its worth to court and creditors. So who is right? Chapter 11 is probably not the "safe harbour" Eddington claimed, although it does give airlines a chance to sort out legacy cost structures such as salaries and pensions deals and lease agreements that they could never do under normal circumstances. It may be the lesser of two evils for creditors, but, in the meantime, it certainly distorts the market. While it is sorting itself out structurally, an airline in Chapter 11 must, above all, generate cash. Bankrupcy isn't exactly great branding, so carriers in Chapter 11 tend to slash prices to get bums on seats. This in turn forces rivals to cut their fares, which is great in the short term for consumers, but disastrous for the financial health of the sector as a whole.
Although Tilton was right to have a dig at European state aid in the past, this (with a few exceptions which skirt on the edge of legality) pretty much does not happen in Europe these days. If British Airways or Lufthansa fail to make money over a period of several years, they will go bust, simple as that. They have to do their "dirty work" outside the protection of the courts.
It will be interesting to see what sort of United Airlines re-emerges from Chapter 11 in February. Tilton promises that it will be a very different beast. But it will still have to compete with two rivals in bankrupcy protection and able to dump capacity on any of United's profitable routes. The fundamental problem is that, whatever changes Tilton makes to United, the sector as a whole is still fundamentally in need of consolidation. And that won't happen until either the competition authorities allow mergers or one or more of the majors - currently operating either in or with the safety net of Chapter 11 - is allowed to disappear.
Wrong on the cutting fares bit. Empirically, airlines in Chapter 11 cut capacity. Since this is essentially (and especially in the US) a commodity business, less supply means higher fares, not lower. Just basic economics.
The only problem with point (4) of Tilton is that poor managements that take far too long to get out of Chapter 11 do in fact grind through a lot of creditor money (not surprisingly, Tilton doesn't see it that way).
That's why the law was recently changed in the US to take control of restructuring away from the managements of bankrupt companies after 18 months. United has been in bankruptcy now for 37 months.
enplaned