Airlines Hide Out In Bankruptcy Court

"When your competition starts working under Chapter 11, you have an incentive to join them," he said. "You won't be competitive if you don't."

That's what's happening now. Going into Chapter 11 gave United and US Airways obvious advantages over their healthier competitors, advantages that were too tempting for Delta and Northwest to pass up.

For starters, companies in Chapter 11 can cancel contracts at will. They can tear up their catering contracts to save money on food. They can tell employees that their union contract is canceled: Take a pay cut or take a hike. They can renege on promises to pay pensions and throw their workers to the mercies of the government's Pension Benefit Guaranty Corp.

PBGC estimates that Delta is $10 billion short of meeting its eventual pension obligations. Northwest is nearly $6 billion short.

The day before it filed, Northwest stiffed Mesaba Airlines for $19 million. Mesaba is a longtime partner that flies feeder flights from smaller cities into Northwest's hub at Minneapolis and on other short-haul routes. In bankruptcy court, Mesaba will get only a fraction of what it is owed.

Ducking your debts is what Chapter 11 is all about. Credit-rating agencies estimate that holders of bonds issued by Northwest and Delta will get less than 10 cents for every dollar they're owed, which is about par in airline bankruptcy cases.

The ability to break promises, become a deadbeat debtor and still stay in business turns Chapter 11 into what economists call a "moral hazard." It gives companies an incentive to do the wrong thing.

And it encourages healthier airlines to take the same route.

"When competitors enter Chapter 11 and default on their financial obligations, including their employees' hard-earned pensions, it puts us at a cost disadvantage," Continental Airlines lamented in a statement issued after Wednesday's dual filings.

Continental, which went through a successful Chapter 11 reorganization in 1990, and American are the two old-line airlines left operating outside Chapter 11. Neither is expected to file, but obviously they are tempted. As Mae West once said, "I generally avoid temptation unless I can't resist it."

Robert L. Crandall, the former chairman of American Airlines, made the same point in a Wall Street Journal op-ed piece and in an interview Friday. "You need to change the bankruptcy laws," he said. "You say, 'Look, if you fail, you liquidate.' If you look around the rest of the world, that's what they basically say. You get a very limited period of reorganization. When companies fail, they get liquidated."

The liquidation of Eastern Airlines in 1991 shows how the system ought to work, Crandall said. "The good assets," such as the shuttle service between Washington and New York, "were acquired by others, the assets without any real economic value just went away. You thinned out the industry."