Airlines Hide Out In Bankruptcy Court

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By Jerry Knight
Monday, September 19, 2005

US Airways of Arlington is on Runway 11, revving its engines to fly out of bankruptcy.

Dulles-based Independence Air is circling the same field, getting ready to land.

U.S. Bankruptcy Court is an all-too-frequent stop for the nation's airlines, a routine refueling and refinancing station on the way to whatever may be the final destination for the embattled industry.

The airlines would become what they want to be -- a strong, profitable industry -- a lot faster if they stopped flying through bankruptcy court and made some tough decisions on their own.

But they can't resist. They're like Dad, driving down the interstate with a carload of squirming kids demanding, "Are we there yet?" He sees a sign that says "Cheap Gas & Snack Bar" and pulls right in.

Bankruptcy court is so irresistible to airlines that this week, about half the travelers flying in America are riding on planes of companies operating under the protection of Chapter 11 of the federal bankruptcy law, the provision that gives companies that can't pay their bills time to work out deals with their creditors.

In a first even for the bankruptcy-prone airline industry, Delta Air Lines and Northwest Airlines filed for Chapter 11 on the same day, last Wednesday. Among the big carriers, they joined US Airways, which won a judge's approval Friday to merge its way out of bankruptcy, and United Air Lines, which at 38 months and counting is the Cal Ripken of Chapter 11 airlines.

Chapter 11 is so irresistible that Northwest Airlines flew into it last week even though it is not broke or even close to it. Northwest had more than $1 billion in cash and credit lines it could tap when it filed the paperwork.

In fact, Northwest says it doesn't need to borrow money to keep operating, which is what most companies operating under Chapter 11, including Delta, are forced to do.

Northwest's finances were so strong that on the morning of the day it filed for Chapter 11, five Wall Street firms issued research reports pooh-poohing reports that the filing was imminent, keeping their "buy" recommendations. Merrill Lynch, Morgan Stanley, Prudential Equity Group, J.P. Morgan and Fulcrum Securities all had egg on their faces by sundown. Just one analyst, Raymond E. Neidl of Calyon Securities, cut Northwest to "sell."

That may tell you as much about the reliability of Wall Street research as it does about the airline business, but still it's clear that something has gone wrong.

Chapter 11 has become a strategic tool for airlines, said St. Louis University finance professor Michael J. Alderson, who has studied the system for two decades.


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Graphic
Flying Frequently . . . to Bankruptcy
Since airline deregulation in 1978, more than 100 carriers have filed for bankruptcy protection. Several, including US Airways, have reorganized more than once.
Flying Frequently . . . to Bankruptcy
THE WASHINGTON POST
© 2005 The Washington Post Company

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