Airline Bankruptcies: A Great Tradition (DAL)(LCC)(CAL)(UAUA)

95129cOne of the recurring themes found in the history of the airline industry is the ability of carriers to go into Chapter 11 often emerging with little debt and fewer employees. Aloha Air, ATA, and Alitalia are among well-known carriers that declared bankruptcy this year. There has been much speculation that the Delta (DAL) buyout of Northwest  was to help insure that both could weather higher fuel prices and falling traffic during the recession.

One of the greatest names in the history of the industry has disappeared completely. Its logos are collector’s items and many people under 30 don’t know that it ever existed.Pan American World Airways was probably the most famous carrier in the world from when it was founded in 1927 until well into the 1970s. It folded in 1991. Juan Trippe, one of the most well-known airline CEOs in history, began his aviation management carrier with investments from the Rockefeller and Cornelius Vanderbilt Whitney families. Charles Lindbergh helped Trippe negotiate Pan Am’s rights to fly to countries throughout South America.

In the late 1930s Pan Am launched it famous clipper planes which were large passenger craft that could land on water or a standard runway. This allowed the airline to introduce service to Europe and then across the Pacific. It had very little competition on many of these routes until new airlines including Northwest Orient, which would become NWA, begun to operate between the US and Asia.

Pan Am became one of the first airlines to use the 747 starting in 1970, and was the largest airline in the world by most measures in the late 1960s and early 1970s. The carrier’s success was undermined by high fuel prices in the early 1970s and a bidding war to buy National Airlines in 1980 which put tremendous debt onto the Pan Am balance sheet. Its debt problems became so severe that the company sold its Pacific routes to United. In 1989, Pan Am tried to merge with Northwest to cut costs. The airline was outbid, and its debt put it out of business in 1991. Delta bought what assets were left.

TWA was Pan Am’s most formidable competitor for several decades. It was started in 1930. By 1938, TWA was running commercial flights around the US using DC-3 aircraft. Flying enthusiast Howard Hughes bought stock in the airline. A pilot’s strike in 1946 allowed Hughes the opportunity to put up the capital to take control of the troubled company. Hughes pushed the carrier into the Asian and European markets, putting TWA head-to-head with Pan Am. TWA began buying into the jet market beginning service in 1956. It was aggressive in adding to its fleet, and in 1969 it moved ahead of Pan Am in total trans-Atlantic traffic and by 1988 it controlled over 50% of that entire market. Its dominance did not last long. Most of the European flag carriers and emerging US airlines led by America and United wanted to cash in on the lucrative routes. Raider Carl Icahn took over the company in 1985. He had hoped to make money selling off the firm’s assets. The plan did not work and TWA filed for Chapter 11 in 1992. It operated under court protection and made a run at the domestic market which failed in 2001 when American bought its remaining assets.

Another of the great American airlines to disappear in the 1990s was Eastern. The company started in business in the 1920s as a mail carrier. The carrier grew to become on of the four largest in the US by the 1970s and competed with Delta and United with routes that covered every region of the country. But, with the 1978 Air Transportation Deregulation Act, Eastern began to face brutal price competition on some of its most popular routes. Eastern’s CEO, former astronaut Frank Borman was forced to step down in 1985 when raider Frank Lorenzo took over the company. Lorenzo shortly had control of Eastern, People Express, and Continental. To fund his airline empire he sold off assets, including newer planes, which helped keep Eastern popular with consumers. A mechanic’s strike forced Eastern into Chapter 11 in 1989. The recession that year and rising fuel prices put Eastern completely out of business in 1991. Almost 35,000 people lost their jobs at the airline.

The concept of the “no frills” airline did not exist until People Express invented it in 1981. It flew out of the equivalent of a huge garage at the Newark Airport which was almost entirely a cargo and commuter plane facility at the time. Early round-trip fares were $149, which was a bargain at the time for trips to places including Florida. People Express worked off a business plan that said it could draw volume with low prices and make money by offering no services. The company was doing so well that it committed the cardinal sin in the airline industry—it bought another airline and took on a huge debt load. People Express acquired Frontier Airlines in 1985. The new company tried to raise fare to improve revenue, but its customers were used to flying cheaply around the country. Burdened by bond obligations, People Express folded in 1987 and many of its assets were purchased by Continental.

Valujet was another discount carrier, founded in 1993, which had some success. Using Atlanta as its hub, it quickly spread service across the southeast and raised capital with a 1994 IPO. But, the company may have run the airline too inexpensively. The government started to charge the government with safety violations as early as 1995. In 1996, the FAA asked that the airline seek approval to add new aircraft. It was concerned that rapid expansion was undermining Valujet’s ability to properly service its aircraft. The trouble came to a head on May 11, 1996 when Valujet flight 592 crashed killing 110 people. After the incident, the airline was grounded for three months and started to lose money. In 1997, Valujet was taken over by AirTran and its run as a discount carrier was over. 

America West began operations in 1983 as a service primarily for people who wanted to fly to Las Vegas and Phoenix for leisure. On its first day of operation, it had three leased 737s. Over the next four years, the company began to use its two primary destinations as hubs to offer service to a number of cities and even began service to eastern states. It paid for the expansion by nearly filing for bankruptcy in 1986. Apparently, management did not learn its lesson because American West began expansion again in 1989, even offering service to Japan. A combination of too many obligations and the increase in fuel costs during the Gulf War put America West into Chapter 11 in 1991. It stayed under court protection for almost four years. By 2003, the airline had shut its major hub in the eastern US. As part of the wave of consolidations in the airline industry in 2003 and 2004, America West “bought” US Air. Since the US Air brand survived, it is open to question as to who acquired whom.

Republic Airlines was the king of the Midwest market from the late 1970s to the late 1980s. It kept two large hubs in Detroit and Minneapolis. Operating small aircraft including 727s it served more locations that any carrier in the US. In the hopes of picking up more domestic traffic to support its international routes, Northwest bought Republic in 1986. Of course, Northwest is currently in the process of disappearing into Delta.

Piedmont was a major carrier in the American southeast from its founding in 1948. Its first hub was in Winston-Salem. Like many airlines operating during that period it used twin engine DC-3 propeller planes which were reliable and easy to service. Piedmont was one of the few carriers that kept reasonable profit margins and responsible debt loads. It expanded into markets in the Northeast but stayed away from major cities, preferring Syracuse and Baltimore. The carrier did have one international route from Charlotte to London’s Gatwick. Piedmont was rewarded for its profitability and was bought by US Air in 1989.

No discussion of the airline industry would be complete without a look at all of the major airlines which went bankrupt but managed to stay in business. Most of these financial disasters were caused by over-expansion, high borrowing costs to purchase new aircraft, rapidly rising fuel prices, and, for many airlines, the drop in traffic after 911.

Delta (DAL) was heading into bankruptcy for almost two years in 2005 with a remarkably high $28 billion of debt on its balance sheet. The airline had lost $10 billion over the four years before it sought court protection. It used the move to cut out large numbers of union workers and cut down benefit costs. By the time it exited Chapter 11, it had cut over 6,000 people. By some estimates, attorneys made over $120 million helping the carrier though the process.

Northwest went into bankruptcy at the same time Delta did. The carrier was facing employee unrest and a work stoppage by its mechanics. The airline was able to stiff its unsecured creditors, paying them as little as 66% of their claims. The company raised $2 billion in new capital from institutions. Northwest also picked up leverage in cutting pay for large pools of employees including flight attendants.  It then went back to normal operations in 2007.

US Air (LCC) made it into Chapter 11 a little ahead of some of its competition. It had faced prolonged negotiations with its unions and had not entirely recovered from the traffic drop after 9-11. US Air filed for protection in 2004. It had also gone into Chapter 11 in 2002. Rather than spend the second period of court protection trying to raise capital while it worked thought bitter labor negotiations, it merged with American West in 2005.

Continental (CAL) went into Chapter 11 in 1990 (it went bankrupt in 1983 as well) as a result of high oil prices due to the Gulf War and several years of rapid expansion and acquisition of new aircraft. The company had $2.2 billion in debt and only a little over $100 million in cash. If the company had not bought Eastern Air, it might have had the balance sheet to cover a protracted period of loses, but with the costs of integrating a new carrier there was no chance for Continental to generate enough cash to handle its debt service

Another victim of 9-11 was United (UAUA) which went into Chapter 11 in 2002. United had received loans from the Air Transportation Stabilization Board after the disaster, but labor costs and slow traffic put it in a position where it was unlikely to be able to pay that money back. As usual, the labor unions paid a big price in the bankruptcy. The airline did not become independent until early 2006. Aside from negotiating debt loads down, it has blistered suppliers and employees, lowered salaries and benefits.


Douglas A. McIntyre