Scott Hamilton / Seattle

Ramifications from the failure of two majors would be widespread, but there could be winners as well as losers

It was once unthinkable: what happens if United Airlines and US Airways disappear? Can they successfully reorganise in bankruptcy and what happens if they do not?

United's position is so precarious that even its own officers suggest a shutdown could come as early as next month. Lenders of the debtor-in-possession (DIP) loan withheld $700 million while demanding billions of dollars in annual cost cuts, including $2.4 billion a year from the workforce. United also has to meet cashflow requirements set forth in the DIP documentation. Without all this, the lenders could refuse to advance any more money.

At the rate United is burning through cash - an average of up to $18 million a day in December and January - the situation will become cash-critical by the middle of February. United could start next month with less than $500 million. The DIP lenders could call their loans and foreclose on the security, which comprises the airline's aircraft.

United officials told the bankruptcy court on 30 December that the company expects a loss of $3.5 billion in 2002, equal to $96 million a day. The amount of one-time charges is unclear.

Most of United's labour unions agreed to an interim wage giveback, including the important pilots and the usually reluctant flight attendants. But the militant machinists union have said "no". United filed a motion in bankruptcy court to cancel the labour contracts if necessary, but timing is critical and it will be a race against the 15 February deadline to satisfy the DIP lenders.

Angry bankers could repossess United's aircraft when the 60-day period under Section 1110 of the bankruptcy code ends in February. An airline in bankruptcy must affirm the aircraft deals, restructure them or return aircraft to the secured parties during this period.

United proposed reducing rentals on Boeing 737-300s/500s to $80,000 a month and the lease terms to five years. On Boeing 757s, the carrier wants rentals of $80,000 a month for five-year deals and $130,000 a month for 10-year deals; and $300,000 a month for Boeing 747-400s. A court hearing is set for 15 January to begin the process of rejecting aircraft leases.

US Airways is in a better position, although it is by no means out of the woods. Observers believe that if either of the airlines is in danger of ceasing operations, it is United, not US Airways.

But US Airways' reorganisation plan's financial projections assume the price of oil at $27 a barrel. As of last week, the price had reached $33 a barrel as war with Iraq appears imminent and the nuclear dispute with North Korea fuels jitters in the world markets.

In the event of either airline - or both - shutting down, there are some obvious winners and losers, as well as some that are not so obvious.

The hub cities dominated by the two airlines would be immediate losers, but Chicago would quickly fill in with American Airlines as it takes up United's slack. Replacement services at United's other hubs would be more problematic, particularly for Washington Dulles Airport, which is a major international hub for United.


Only one other airline in recent years had a hub at Dulles, and that was ValuJet Airlines. This hub was dismantled following the May 1996 crash of one of its McDonnell Douglas DC-9s near Miami. ValuJet's successor airline, AirTran Airways, built a significant presence at Baltimore-Washington International Airport (BWI) after US Airways scaled down operations at the airport.

As a result, the company's chairman Joe Leonard says that any opportunities in the east that present themselves with either a United or US Airways cessation of service could easily be accommodated through BWI or AirTran's principal hub of Atlanta, Georgia.

"I don't know where the opportunities will present themselves," Leonard says. "We have the ability to move quickly and we've done a number of what-if scenarios." He acknowledges, however, that the airline does not "have the balance sheet or the strength to just muscle our way in" to a market.

The carrier has a large number of Boeing 717s scheduled for delivery in 2003, but it will continue to retire the last of its DC-9s. If necessary, AirTran could acquire another fleet type from the used aircraft market to extend its reach. "There are a lot of Boeing 737-400s and 757s available," Leonard says.

Frontier Airlines, United's main competitor at Denver, where they share hubs, stands to gain dramatically from a United collapse, but like AirTran does not have the balance sheet nor the aircraft and personnel available to grow rapidly. Continental Airlines and Northwest Airlines, which grounded many aircraft and furloughed personnel following 11 September, have the ability to recall the people and retrieve aircraft parked in the desert. Either Continental or Northwest could move into Denver, filling a major gap in the west at either airline.

The affiliated regional airlines would initially be hard hit by a collapse of US Airways or United. Mesa Airlines derives upwards of 45% of its business from US Airways and recently agreed to provide up to 70 regional jets to the carrier. SkyWest Airlines, Atlantic Coast Airlines (ACA) and Air Wisconsin are major suppliers to United. SkyWest and ACA derive about 50% of their revenues from United and until recently, Air Wisconsin obtained 100% of its revenue from United.

But one analyst observes that any shutdown of United or US Airways would also present major opportunities for the regional airlines. One of these carriers' chairmen agrees. As other airlines move into the voids left by United and US Airways, none of them would have the ability to adapt as quickly as the regionals, says this chairman. It might take a minimum of 90 days for American, Delta and others to shift aircraft and personnel, or to recall aircraft from the desert and employees from furlough. The regionals - with scores of suddenly surplus equipment and people available - could be tapped immediately to move into such hubs as US Airways' Pittsburgh and Philadelphia or United's Denver.

Furthermore, says an analyst, the regionals could begin their own service on the former routes of the mainline partners. "They could triple their income," over the current arrangements, he says.

Source: Flight International