This article from NYTimes.com has been sent to you by psa188@xxxxxxxxx Some Question Bankruptcy Role in Airlines' Cure March 29, 2003 By EDWARD WONG with MICHELINE MAYNARD Even as US Airways prepares to roll off the operating table on Monday, American Airlines is steeling itself to go under the scalpel of bankruptcy court restructuring. But industry analysts and economists are questioning whether the kinds of cuts that carriers make in Chapter 11 are deep enough to cure the industry's fundamental ills. After all, they note, the airlines went through a wave of bankruptcies in the early 1990's, only to end up in their worst shape ever today. So while US Airways will undoubtedly look leaner on Monday - when it is scheduled to end its bankruptcy - than when it filed for protection last August, it does not expect to turn a profit this year or next, and even its chief executive acknowledges it could still fail. United Airlines is using the leverage of bankruptcy laws to press its unions to let it start a low-cost carrier. But such experiments have failed in the past, because they could never fully copy the successful model of Southwest Airlines. It is unclear, in the meantime, what American Airlines, the world's largest carrier, will do if it enters bankruptcy court, as bankers have said it might next week. There are no indications that American - or any major rival - is seriously rethinking how it does business. Skeptics say that the problem with sticking to the old-school focus on cutting labor costs is that it has not worked in the long run. When the airlines eventually eke out a profit, unions demand significant wage and benefit increases, because executives bludgeoned them so hard during the downturns. To break out of the cycle, the carriers need to take stronger medicine, experts say. Their prescription includes permanent and far-reaching changes in complicated fare structures that have driven away business travelers, in route networks and schedules that guarantee an oversupply of seats and in an archaic mind-set that counts on the government to bail the carriers out, like a prodigal son who keeps asking his parents for rent money. "Bankruptcy can do a lot of things for you on the cost side and the capital structure side," said Samuel Buttrick, an analyst at UBS Warburg. "Bankruptcy can't build you a good airline network." Mr. Buttrick pointed out that when US Airways emerges from bankruptcy, it will simply have gone from being an airline with the highest costs in the industry to an airline with high costs. And that is after wringing out annual savings of $1.9 billion - 63 percent coming from labor - and cutting capacity by 28 percent since the attacks of Sept. 11, 2001. US Airways said on Thursday that it would cut capacity by another 5 percent next month. Few doubt that David N. Siegel, the airline's chief executive, has used bankruptcy protection about as efficiently as possible. But the US Airways business model, which relies on charging high walk-up fares for profit, is unchanged. And Mr. Siegel recently acknowledged the obvious - that market conditions are far from ideal. "Our short-term survival and long-term success after we emerge from Chapter 11 are conditioned on our taking decisive, proactive steps to limit the airline's financial exposure from the war," he said. Since the industry's deregulation in 1978, the traditional airlines have been consigned to a cycle of boom and bust, with some carriers fizzling out during down times - Pan Am, Braniff and many more - and others starting up to take their place. That could happen again now. The consequences might not be so bad for consumers, except for those travelers with tickets or frequent-flier accounts on the airlines that fail. Generally, though, air fares have fallen in lock step with the financial woes of the industry. In part, those falling prices reflect the chronic excess capacity on routes served by the six largest airlines. In the last week and a half, all those carriers have announced cutbacks in flight schedules because of a steep drop in passengers after the United States-led invasion of Iraq. The capacity reductions range from 5 to 12 percent. But well before the war began, analysts say, there was a 15 to 20 percent oversupply of seats in the market. Executives knew that, yet stubbornly kept their planes in the air. Terry Trippler, an air fare expert at Cheapseats.com, said that some major routes still looked overstocked, even after the recent cuts. There are 94 scheduled nonstop flights on April 15 between New York and Chicago, and 29 scheduled nonstops (along with 11 direct flights) between New York and Los Angeles. "You don't want to cut too much unless the other guy cuts," said Raymond L. Neidl, an analyst at Blaylock & Partners. "That's always been a problem with the airlines. They always want to guard market share." Gordon M. Bethune, chief executive of Continental Airlines, said it was not so easy for carriers to park their planes. The airlines still have to pay lease rates on parked aircraft, as well as the salaries of workers they do not lay off. So carriers prefer to keep the planes flying to squeeze out whatever little revenue they can, he said, even if that means oversupplying various markets. Some experts say the most efficient way to bring down capacity is to allow the industry to consolidate. If there were only two or three giant airlines competing to fly just about everywhere, each might be able to make consistent profits, they say. Now, the only profitable carriers are low-fare operators like Southwest Airlines that have avoided building comprehensive nation-spanning route systems. Washington, though, has been hesitant about allowing consolidation. Federal officials blocked a proposed United-US Airways merger and put stiff conditions on a code-share partnership among Continental, Delta Air Lines and Northwest Airlines. The most immediate prospect for consolidation lies in the shutdown of United Airlines - a possibility that United has raised as it negotiates concessions from its workers. United's seats add up to about 17 percent of domestic capacity. But even United's liquidation would only partly solve the oversupply problem. If United disappeared, its rivals would put planes on some of its routes, and other entrepreneurs could buy United's planes to start new airlines. Mr. Buttrick, the UBS Warburg analyst, predicted that if United failed, 60 to 70 percent of its capacity would return within two years. In the meantime, 72,000 United workers would have lost their jobs, and 40 million travelers could lose their frequent-flier miles. Many experts say that besides grounding some planes, the airlines need to simplify their fare structures. Most still charge astronomical fares for walk-up tickets - a holdover from the dot-com boom, when businesspeople would pay almost anything for a last-minute flight. Ticket-booking Web sites and the simplified fare structures of low-cost airlines - with about five fare types rather than dozens - have made travelers resentful of the opaque pricing of the major carriers. So far, America West Airlines is the only network carrier to overhaul its fares. The other large carriers have experimented, lowering walk-up fares in markets that account for about a third of total domestic revenue, according to Jamie Baker, an analyst at J. P. Morgan Chase. United has said its limited tests have added $20 million to $25 million to its monthly revenue, but the airline has yet to overhaul fares systemwide. "We don't have the formula down and comfortable," said Douglas A. Hacker, executive vice president for corporate strategy at United. During down cycles like today's, airline executives traditionally go to Washington, tin cups in hand. They argue that airlines provide an essential service, like a public utility, and so cannot be allowed to fail. If this made sense during the era of regulation, critics say it rings false in a free market environment - especially when those same executives ask the government to lift limitations on mergers and foreign investment. Citing potential losses totaling $10.7 billion this year because of the war, the airline industry is asking lawmakers to suspend several taxes, pick up the costs of heightened security, permanently underwrite war-risk insurance and tap oil reserves to help bring down the price of jet fuel. "Airlines, like all the other firms in the U.S., are notorious for being crybabies, always looking for government handouts," said E. Han Kim, a professor of finance at the University of Michigan School of Business Administration. "They look for their big mother, for mother's milk. And that's Uncle Sam." But the milk supply may be running low. In December, the government refused to give United a $1.8 billion loan guarantee, forcing the airline into bankruptcy protection. On Wednesday, Senate Republican leaders said they would support financial relief, though the proposed package would probably be under $3 billion, far less than what the airlines want. Some leading lawmakers are expressing their disgust at the industry's performance. On Thursday, Senator John McCain, chairman of the Senate Commerce Committee, criticized Leo F. Mullin, Delta's chief executive, after learning that his pay last year jumped 120 percent to about $13.5 million, while Delta was losing $1.27 billion. John Kennedy, a company spokesman, said Delta executives were paid less than executives at similar-size companies. But that does little to take the bite out of Senator McCain's choice words for Mr. Mullin. "You ought to be ashamed of yourself," he said. http://www.nytimes.com/2003/03/29/business/29AIR.html?ex=1049955995&ei=1&en=4904fb5cf684bea2 HOW TO ADVERTISE --------------------------------- For information on advertising in e-mail newsletters or other creative advertising opportunities with The New York Times on the Web, please contact onlinesales@xxxxxxxxxxx or visit our online media kit at http://www.nytimes.com/adinfo For general information about NYTimes.com, write to help@xxxxxxxxxxxx Copyright 2003 The New York Times Company