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October 28, 2009

US Airlines Northwest, Delta May Consolidate

Airline analysts say it was soaring jet fuel costs that finally pushed financially strapped Delta and Northwest airlines into court-protected bankruptcy this week. 

Four of the seven largest U.S. airlines are now operating under bankruptcy protection. United and U.S. Airways have been in bankruptcy since shortly after the September 11, 2001 terrorist attacks, which together with recession triggered a sustained drop in airline traffic.  Since 2000, U.S. airlines have lost $38 billion.  Analysts say that the sharp rise in jet fuel prices this year, particularly after Hurricane Katrina, precipitated the court filings of Northwest and Delta.

Gordon Bethune, the retired former chairman of Continental Airlines, tells Bloomberg News he does not expect a recovery anytime soon.  "We have a dysfunctional industry with overcapacity that can't price their product to the expense level oil generates," he explained.  "That's got to change and it will change. But it is the traumatic way it is changing, like bankruptcy, in which nobody wins, not employees or the shareholders."

While in bankruptcy protection an airline is exempted from its labor and other contracts and operates under the supervision of the court. Some analysts say United and U.S. Airways gained a competitive advantage from bankruptcy because they were able to abrogate wage agreements and stop paying employee pensions.

U.S. based airlines have fared worse in today's brutally competitive markets than have their European and Asian rivals.  Despite new entrants into what were more regulated markets, competition and excess capacity are greater in the United States. Swissair, Switzerland's flag carrier, as well as its Belgian affiliate Sabena, did collapse in 2001 but that is usually blamed more on poor management than competition.

Michael Boyd, an industry analyst near Denver, Colorado, is relatively optimistic that Northwest will emerge from bankruptcy as a stronger carrier.

"Northwest is very well positioned because it is in the right kind of markets to access what we call Sino-centric growth which is in the American south and Midwest and in China," said Mr. Boyd on Bloomberg Television.  "But if they get their costs down their revenue stream is what saves them. Delta, I'm not really sure. They're over-invested in 50 seat jets, their route system is weak, and they're not big in Asia where they need to be. So they're going to have a much harder time getting through this."

The only U.S. airline that has been consistently profitable in recent years is Southwest, whose stock value exceeds that of all other U.S. carriers combined.  The biggest and oldest carriers like Northwest and Delta have high costs and pension liabilities that a young company like Southwest does not have.

Eventually, say the analysts, there will be liquidations and consolidation in the U.S. airline industry. But the malaise is not likely to end anytime soon as competitive forces are preventing companies from raising fares high enough to cover costs.