Airlines Hide Out In Bankruptcy Court

Crandall called on Congress not only to reform airline bankruptcies but also to tackle the endless problems of the industry. "We don't have any aviation policy at all," he said.

The bankruptcy process does produce benefits, said James Corridore, the airline specialist at Standard & Poor's. It keeps employees employed. It keeps the flying public flying. It keeps cities from being stuck with empty airports and no transportation. But, he noted ,"it gives carriers their second, third and fourth chances" to get their acts together. Keeping weak airlines in business ultimately delays the weeding-out process that is the essence of free markets.

The primary problem of the airline business is that there are too many airlines flying too many planes on too many routes. Even the industry's trade association, the Air Transport Association, agrees that consolidation and capacity reduction are needed.

Chapter 11 puts off the pruning of the industry, a process that began in the 1970s when the airlines were deregulated.

Since then there have been close to two dozen Chapter 11 filings by airlines, but only a few major carriers have vanished. (Remember Pan Am and TWA?)

US Airways came close to joining that list, Corridore said, noting that the airline looked to be on its way to liquidation until America West came along. "What US Airways and America West are doing is pretty novel -- one airline that's fairly healthy merging with one in bankruptcy."

The merger will be completed by the end of the month. The penultimate step came Friday after Judge Stephen S. Mitchell of the U.S. Bankruptcy Court in Alexandria approved US Airways' plan for making peace with its creditors, which will get 3 to 17 cents for each dollar they are owed.

Calling the reorganization plan "viable and realistic," Mitchell said he has "every hope and confidence that the airline will prosper."

In two trips through bankruptcy court, the airline changed significantly. It started out flying 417 jets to 204 cities with 4,478 flights a day. Now there are 263 planes flying 3,148 daily departures to 183 cities. The workforce has been cut from 46,500 to just over 22,000.

Chapter 11 worked for US Airways, but it took two tries, wasted millions of dollars on legal fees and cost investorsbillions.

Stockholders were wiped out, as they almost always are. Creditors wound up owning about 10 percent of the restructured airline. Investors who poured in new money hold a 52 percent stake. America West will own 37 percent.

US Airways President Bruce R. Lakefield said joining America West will create the kind of airline that travelers have been asking for, "a global carrier offering full service amenities and simplified fares."

"Through our restructuring, we have reduced our debt, improved our liquidity and strengthened our balance sheet," Lakefield said. "With the financial position of other carriers deteriorating, we are pleased that we will have a strong cash position, a robust business plan, a low cost structure and a strong network."

The merger will cost the Washington area one of its best-known businesses because the corporate headquarters will move to Phoenix, with American West chairman and chief executive W. Douglas Parker running the show.

The Washington region still is the home of Independence Air. A spokesman for its corporate parent, Flyi Inc., said last week that the company is "continuing to consider all possibilities" to strengthen its finances. But it's No. 1 on almost everybody's schedule for the next flight into bankruptcy.

Jerry Knight's email is knightj@washpost.com