The season of involuntary restructuring is in full blossom this autumn as two more major US airlines – Delta and Northwest Airlines – are poised at the brink of bankruptcy.

As the continuing rise in the cost of fuel overcomes new cost efficiencies, earlier savings are rapidly becoming obsolescent. Now Delta, after devoting the past 12 months to a restructuring intended to avoid bankruptcy, is unlikely to stay out of Chapter 11 reorganisation.

For its part, Northwest is set to bring down its labour costs by defying a union to the point of a strike. The carrier has said that if it cannot lower its costs with a new union contract, it would use the bankruptcy courts to do so. It may have to use bankruptcy even it does force the union into concessions.

Delta chief executive Gerry Grinstein said in July that Delta had not gone far enough to overcome its $10 billion losses made since 2001. The plan Delta adopted last September to cut $5 billion in costs through 2006, he said, was not enough as forces beyond its control, namely oil and low-fare competition, continued. By mid-August, Delta was trying to renegotiate contracts with credit-card processing companies and seeking to arrange the debtor financing it would need if it sought court protection.

A Delta bankruptcy would put 15% of the nation’s capacity into the control of a bankruptcy court just as a similar amount in the form of United Airlines is preparing to come out of court and as US Airways exits reorganisation for a new corporate parent at America West Airlines. If joined in bankruptcy by Northwest, the percentage would rise to 25% and would place a major transpacific operator in the reorganisation game. Both carriers face enormous pension burdens, and are keenly aware of changes in the US bankruptcy laws effective in mid-October that would give them less time to reorganise and limit their powers in bankruptcy.

A Northwest victory over its mechanics union would be significant though pyrrhic. The Aircraft Mechanics Fraternal Association (AMFA) faces its highest-profile test since winning the right to represent 10,000 mechanics at Northwest in 1998. The airline, which already has agreement on cost cuts from its pilots, wants $176 million in concessions from AMFA. As the union grew more militant in its stance, Northwest grew more public in its preparations to fly through a strike. It hired and trained replacements, arranged for charter carriers to operate flights, and prepared as visibly as it could.

Fulcrum Group analyst Susan Donfrio says AMFA does not have the kind of warchest it would need for any protracted action, while AMFA has failed to win promises of solidarity and support from other unions. AMFA’s sole strong union ally at Northwest is another new and relatively weak group, the Professional Flight Attendants Association (PFAA). PFAA won an election to replace the Teamsters as the Northwest flight attendant representative in June 2003.

The signs all suggest that the airline could win a confrontation. Whether AMFA reads the signs with the same conclusion is open to question. A last-minute deal could save union face, although that raises a further question: have things gone so far that Northwest will be compelled to seek court protection anyway? It lost more money in the second quarter alone than it wants to save in a year from the mechanics.

Standard & Poor’s analyst Jim Corridore thinks the risk of a Northwest bankruptcy is high no matter what happens in the labour showdown. If he is right, the US industry will still have two major airlines in bankruptcy next year – though with different names than this year’s pair.


Source: Airline Business