Yep, it could be “good” for United, but like TurboS7 postd, the courts control your destiny.
Don't confuse the different types of bankruptcy (or "chapters" from the federal code – 7, 9, and 11 in particular) - there are different "levels" of bankruptcy and different results. Filing for bankruptcy doesn't necessarily mean going out of business - it can just mean reorganization and credit protection, debt relief, etc. Other airlines have gone into and then “emerged from” bankruptcy protection – and that may be the key word – protection. At it’s lowest levels, filing for bankruptcy affords a company protection while it gets it’s financial act together, subject to court approval – and as snowback posted, that may give them certain competitive advantages (as well as some disadvantages). For everyone who believes that the airlines are using 9-11 as an excuse, bankruptcy gives even greater latitudes.
For the record, Continental along with US Airways were the only majors (besides SWA, which is pretty much a given) with an operating profit at the time of 9-11 - all the other majors were already losing money and contracting. United may be “massive”, but that doesn’t have a thing to do with profitability – just look at jetBlue or AirTran to see where money’s being made consistently, then look to American, Delta, and United to see where it’s being lost. Based on CAL’s performance since he’s been there, it would be hard to argue that Bethune doesn’t know what he's talking about.
So while CAL may be losing millions per day, so are all the other majors (again, except SWA – just assume everything is “except SWA”) – we’re supposed to be losing more than a million every day at AMR. Part of that is intentional in that ticket prices are being kept very low through the end of the year in order to build up load factor; in some cases the fares are so low that we couldn’t profit even with a 100% load factor. It does appear to be working, in that in general people are flying again, though not quite to the levels of six months ago – but here we’ve had days with an 80% load factor. The industry needs to get through the holidays with as many people flying as possible – it’s the last big travel period until the summer, so it’s our last chance to get large numbers of people on the planes and to (hopefully) get them comfortable with flying again. After New Year’s, expect fares to start back up, and some of the operating losses will shrink of disappear. I would think CAL would be one of the leaders when it does happen – they’ve really reinvented themselves and are very much an “airline of choice” among the traveling public.
Publisher also brought up a key point with fixed and variable costs – running an airline is in general a variable income/fixed cost business – the cost of flying a B767 from NYC to SFO is essentially the same whether there’s one person aboard, or 250 – the income varies greatly, but the costs are pretty much constant. The industry has manipulated/restricted income somewhat with low ticket prices, hedging their bets on a relatively quick recovery, and trying to maintain market share.
At some levels the industry has been able to reduce costs, but it’s not as simple as it may seem. For example, one method is to use smaller planes to match smaller loads – replace a B767 with a B757 on the NYC to SFO flight. That reduces some costs, but the company is still making payments on that parked B767, so while we’ve saved on fuel and cabin crew expenses we’re still making payments on the aircraft that is not generating any income – not a good business idea. We could try to terminate the leases on these surplus aircraft, but there’s usually a stiff financial penalty with that, and besides, we’ll want those aircraft back when business picks up, so that’s not generally a good idea – especially if the industry downturn is short.
Of course there are some ways to do this that are obvious – deferring deliveries of new aircraft, and accelerating retirements of older planes; some of this was happening before 9-11, but the process has picked up. That at least avoids actually parking a productive (and expensive) aircraft and that’s what we’ve seen, especially with the B727 which has all but disappeared from the majors over the last two months, except for NWA, of course, which has in recent years tended to buck the trend of the other airlines and hang on to older aircraft they feel are productive.
On the crew level, furloughing also doesn’t save as much as it appears – since the bottom of the list gets furloughed, and they’re earning the least – compare a $50K FO to a $250K CA and it becomes apparent that a 20% reduction in pilots won’t save 20% in labor costs. Couple that with the costs to retrain all the pilots bumped during a displacement, and then to retrain them during a recall, and it may actually cost a company more if the furlough is short than to just retain the pilots. I think that’s what we’re seeing; as the airlines start to become (very) cautiously optimistic about a recovery, their trying to avoid any more furloughs and the expense and bad feelings that go with them – mostly the expense, I imagine.
So even though most airlines have contracted flying by about 20%, their expenses have not shrunk by as much; on the other side of the balance sheet, load factors are still down from their pre-9-11 levels on sharply discounted tickets.
Getting back to United, from what I’ve read their loads have not come back as much as the other majors – a mechanic’s strike is the last thing they need right now – just the threat is enough to drive down loads even more, since no one will want to book a flight if they think it will probably be cancelled.
As to US Airways, unlike UAL at least they were making an operating profit prior to 9-11 but still losing a ton of money due to their debt payments, and in the wake of 9-11 that’s gotten even worse. US Airways has a massive debt, and very few unencumbered aircraft or engines – that $1B won’t last very long if the creditors come knocking on the door. US Airways is making less than expenses, before even getting to their loan payments. Since most of their aircraft are already encumbered they have very little collateral to arrange loans – the low value of their stock ($6) makes it difficult to generate outside financing.
Some numbers from the company’s own press releases paint a bleak picture – for the third quarter (which ends at the end of September, USA had an operating loss of $369M and a net loss of $433M; including “special charges” and the airline stabilization grant, the total loss for the 3Q was $766M; compared to those numbers, $1B is not a lot of money; and that $1B (which is actually forecast to be $8-900M) started out as $1.25B at the beginning of the 3Q in June. Compare this to the 2Q, where USA made a $20M operating profit but still had a net loss of $24M,and you can see where the numbers have become huge for a company that was already struggling. Of course, all the rest of the industry is got hammered as well, but they just didn’t come into this crisis with the debt that USA carries.
While the numbers for this quarter won’t be out until January, the numbers that are available don’t point to a recovery; for October, USA reported 33.6% fewer passengers (RPMs) on 24.5% fewer seats (ASMs) compared to the same month in 2000; in November the numbers were somewhat better, with a loss of 24.6% on RSMs compared to a reduction of only 16.2% in ASMs. Overall, load factor is coming back but is still down 7%, which, combined with the discounted ticket prices means income is still way off, and all those fixed expenses, including loan payments, are still mostly there.
Of course there’s a lot more to these numbers than just what I posted; full reports are available on the company site and are good reading, as they tell a lot more about the significance of different things, where the company is, and where they hope to be going.
Unfortunately there’s a good chance that USA will end up in some form of bankruptcy, and possibly UAL as well. The question is what form these companies will take when they come out. The “serious” media, such as the Wall Street Journal, the NY Times, and Aviation Week, all seem to consistently expect at least two majors to file (but not necessarily to fail). More and more it looks like these are the two most likely, along with America West and maybe Sun Country. As time goes on it seems that the rest of the industry, though still in trouble, is moving towards recovery.
