Struggling Airlines Eye New Law on Bankruptcy
Tuesday, August 2, 2005
If Northwest and Delta Air Lines file for Chapter 11 bankruptcy protection, as widely expected, they are likely to do so in mid-September, a month before a new, more restrictive bankruptcy law goes into effect, bankruptcy experts and airline insiders say.
The airlines are expected to delay any action until after the Labor Day weekend to avoid distressing employees during the busy summer travel period.
Northwest and Delta continue to post significant losses while trying to cut costs and adjust to record-high fuel costs.
Last week, Northwest reported a second-quarter loss of $225 million, compared with a loss of $182 million for the same quarter in 2004. The airline is trying to get its employees to agree to $1.1 billion in pay and benefit cuts. So far, it has secured cuts of about $265 million from its pilots and $35 million from its management and salaried workers. The carrier is losing about $4 million a day.
In a conference call with reporters last week, Douglas M. Steenland, Northwest's president and chief executive, refused to speculate if or when the airline would have to file for bankruptcy. But he said a new bankruptcy law taking effect on Oct. 17 would be "one of the factors" in the decision-making process.
Delta's chief executive Gerald Grinstein last week told employees in a memo that the airline's efforts to cut about $5 billion were not enough to avoid a possible bankruptcy filing. The memo came after Delta announced a $382 million loss for the second quarter. Delta's lawyers were preparing to file for bankruptcy last October when its pilots agreed to wage and benefit cuts of about $1 billion a year.
"Delta has been very candid about the risk that a number of factors, some of which are beyond our control, will affect our ability to avoid a Chapter 11 filing. But we're still working to pursue an out-of-court solution, even as we face increased financial pressures," said Delta spokeswoman Benet J. Wilson.
Analysts speculate that another U.S. carrier, Dulles-based Independence Air, also may be forced to file for bankruptcy protection.
Independence Air spokesman Rick DeLisi declined to comment yesterday. The airline expects to report second-quarter financial results next week.
The new bankruptcy law was passed in April against the backdrop of bankruptcy filings for United Airlines and US Airways.
Under the new law, companies in Chapter 11 are prohibited from paying retention bonuses to executives except when the executives have proved they have job offers elsewhere. The provision was put in place to stop companies from taking money from employees hit by wage and benefit cuts to enhance packages for managers, said Lynn M. LoPucki, a law professor at the University of California at Los Angeles.
"Very often the same managers who got the company in trouble were instead getting retention bonuses to stay," LoPucki said.
In May, US Airways Group Inc. asked a bankruptcy court judge for up to $55 million for a severance and retention plan for its senior executives and its 1,800 management-level employees. The airline said it wanted to make sure it could retain its executives as it completed its merger with America West Holdings. The bankruptcy court approved $15 million.
The new bankruptcy law also will force companies to reorganize and emerge from Chapter 11 protection more quickly. Companies will have up to 18 months of a so-called exclusivity period during which they must submit a reorganization plan and are protected from takeover attempts. United, which has been in bankruptcy for 2 1/2 years, has not yet submitted a reorganization plan and has asked for several extensions of its exclusivity periods. The airline plans to emerge in the fall.
The law also will require companies to make faster decisions about whether they want to reject leases of their vendors or partners. Currently, companies do not have a deadline for deciding which contracts they want to reject. After Oct. 17, companies filing for bankruptcy will have to make those decisions within 210 days. During United's bankruptcy, some airports and regional airlines have complained to the bankruptcy court that their futures were in limbo because the airline had not informed them whether they planned to continue using their services.