washingtonpost.com  > Business > Columnists > Washington Investing
Page 2 of 2  < Back  

US Airways' Woes Reflect Industry In a Tailspin

The bankruptcy process also makes it all too easy for zombie airlines to keep flying. US Airways and United Airlines are able to keep operating under bankruptcy court protection even though by normal standards they are broke. Neither has enough money to meet all its obligations -- particularly the hundreds of millions of dollars promised to employees in pensions.

Treasury Secretary John W. Snow took an important step toward restoring economic rationality to the airline business last week by insisting that troubled airlines should not be allowed to duck their pension obligations. The federal government -- through the Pension Benefit Guaranty Corp. -- stands behind pensions in much the same way it protects bank deposits. If airlines default on their pensions, the buck gets passed to the PBGC, which itself is running low on cash and could require a taxpayer bailout.

_____US Airways Inc._____
(UAIRQ) Stock Quote and News
Historical Chart
Company Description
Analyst Ratings
_____Investing Columns_____
Washington Investing
The Color of Money
Cash Flow
The Week in Stocks
Personal Finance Special Report
_____Previous Columns_____
Insider Traders Who Push Too Far Can Pay Dearly (The Washington Post, Sep 27, 2004)
Real Value In a Mall Sale Is in the Property (The Washington Post, Sep 6, 2004)
Krispy Kreme's Failings Tough To Glaze Over (The Washington Post, Aug 30, 2004)
Google Not The First To Go Dutch (The Washington Post, Aug 23, 2004)
Pay for XM Executives Modest as Stock Recovered (The Washington Post, Aug 16, 2004)
More Washington Investing Columns
_____The Markets_____
Dow Over 12 Months
Nasdaq Over 12 Months
S&P 500 Over 12 Months

But Snow and the other Bush administration officials who oversee the PBGC are not likely to get tough with United and US Airways with an election two months away. They don't want to be blamed for grounding any flights. A taxpayer bailout of the pension promises of spendthrift airline executives, however, sounds more like socialism than "an ownership society."

Pay your bills or shut your doors is the way the world is supposed to work. But airlines get special treatment everywhere. In most countries, governments simply bail them out. In the United States, the airlines benefit from a bankruptcy system that protects companies that can't make it.

If bankruptcy wasn't a boon, US Airways would not be seeking the courts' protection for the second time in two years; United's escape from Chapter 11 would not have been delayed as often as a flight out of O'Hare; Delta Air Lines Inc. would not be talking so openly about going into bankruptcy within the next month.

One of the things that is going on, of course, is a waiting game. All the airlines are waiting for one of the others to go away, hoping that will reduce the level of competition enough that the rest of the industry can regain its health.

That hope, of course, helps keep luring investors into airline stocks, along with the dream that "restructuring" in bankruptcy will make it possible for failing airlines to fly profitably.

Bankruptcy reorganization didn't work for US Airways -- but it will work the second time, officials insisted last week. The first time the carrier went through Chapter 11, it passed up the chance to cancel costly labor contracts. This time, executives are making clear they will cancel the contracts of pilots and other workers unless they voluntarily take pay cuts.

US Airways says the first bankruptcy was successful in cutting costs -- the airline just didn't foresee how high fuel prices would go, how fast low-fare carriers would grow or how far ticket prices would fall.

This time, US Airways executives say bankruptcy reorganization will succeed. But it hasn't worked for United, which Friday asked for more time to work on it, and there's little reason to believe it will work for Delta.

There are doubts about whether the waiting game will have any winners. As Button points out, if one of those three goes out of business -- but its planes and routes are taken over by someone else -- the industry will be right back where it started.

Liquidation of some airlines and mergers of some carriers are part of the solutions proscribed by local industry experts like Button and Darryl Jenkins, a former George Washington University professor who is now visiting professor at Embry-Riddle Aeronautical University, which runs the nation's top pilot-training program.

United chief executive Glenn F. Tilton raised the possibility of mergers last week in a speech in Europe, suggesting that consolidating the six largest network carriers into "about half that number" would help restore the industry's health.

But as Jenkins, the Embry-Riddle professor, likes to point out, government officials are as afraid of airline mergers as they are of liquidations. Politicians fear not only the loss of flights into their hometowns, but the loss of jobs at their "hometown" airlines. The Illinois congressional delegation has pushed for government help for United and though US Airways is headquartered here, its hubs in Pittsburgh and Philadelphia have made Pennsylvanians the airline's champion in Washington.

Any aviation expert you ask will tell you the airlines need to reinvent themselves, to find some way to compete besides cutting costs and cutting fares. It's been a long time since the airlines came up with anything as innovative as their popular frequent-flier programs. Their last Big Idea was the "yield management" computer programs that try to maximize revenue by setting different prices for every seat on a plane. That innovation came back to bite them in the butt, making fares so complicated that new competitors could lure away customers with simple, low prices.

The airlines can't all turn themselves into JetBlue, but they certainly can learn some lessons from the upstarts and startups. Ask anybody who's flown on the low-fare carrier created when Dulles-based Atlantic Coast Airlines turned itself into Independence Air. Wide leather seats, friendly staff members and low fares almost make flying fun again on Independence Air -- though that is no reason to buy the airline's stock. It's too soon to tell whether Independence Air can survive against the industry odds.

Truth be told, there's no good reason to buy any of the airline stocks. Even the most successful low-fare carriers, Southwest Airlines and JetBlue, have given investors a rocky ride this year. JetBlue stock is selling for half what it was worth a year ago and Southwest shares are off about 20 percent. Investors certainly would be better off if they shunned the entire industry. And the airlines probably would be, too.

< Back  1 2

© 2004 The Washington Post Company