Delta Air Lines and Northwest, the nation's third- and fourth-largest carriers, filed for bankruptcy protection yesterday as skyrocketing fuel costs accelerated the carriers' financial decline.
With the filings, an unprecedented four of the nation's seven largest carriers will be operating under bankruptcy protection, marking a low point for an industry that many analysts said had shown signs of turning a corner this year -- if not for the run-up in jet fuel prices.
Analysts expect Dulles-based Independence Air's parent, Flyi Inc., to soon join the pack of bankrupt carriers. Two carriers in bankruptcy protection, UAL Corp.'s United and US Airways Group Inc., have indicated plans to emerge in the coming months. AMR Corp.'s American Airlines, Continental Airlines Inc. and Southwest Airlines Inc., the other three major carriers, posted profits last quarter.
Despite the wave of bankruptcy filings, airline travelers should see little change. Frequent-flier miles are expected to be preserved because airlines cannot afford to anger their most loyal customers. Fares are likely to remain low because of intense competition from low-fare carriers. Federal officials have stepped up airline inspections, and safety does not appear to have been compromised by the industry's problems.
Airline workers, whose wages and benefits have been cut aggressively, are likely to face further hardship. The airlines are likely to further trim their workforces to become smaller, more efficient businesses. Older carriers, such as Delta Air Lines Inc. and Northwest Airlines Corp., are saddled with hefty obligations to pension funds that could be turned over to the federal government under bankruptcy protection, diminishing workers' retirement benefits.
The airlines beat next month's launch of a new bankruptcy law, which makes it more difficult for executives to collect retention pay. The new law also requires carriers to emerge from bankruptcy within 18 months.
Some industry observers think the bankruptcy filings could prompt consolidation. US Airways, whose creditors approved its bankruptcy-reorganization plan yesterday, is merging with America West Holdings Corp. in an effort to become a leaner, low-cost carrier.
"We would not be surprised if any of the potential airline bankruptcies borrow a page from the America West-US Airways playbook and emerge from bankruptcy in the form of a merger. That would be one way of achieving airline consolidation -- an objective that has eluded that industry for years," said Michael J. Linenberg of Merrill Lynch & Co.
Unlike the days when airlines filed for bankruptcy protection and were then liquidated, creditors are less likely to demand their assets -- namely, aircraft -- for fear that a huge number of planes on the market would drive down prices. Instead, bankruptcy protection leaves more room for airlines to negotiate with creditors. In many cases, the carriers are looking to reconfigure their fleets for greater efficiency -- a change that some consultants say is more difficult to do outside of bankruptcy reorganization.
"It's more difficult than ever to liquidate an airline," said Darryl Jenkins, visiting professor at Embry-Riddle Aeronautical University. "You have so many lenders of last resort who want to keep aircraft prices high."
Northwest said its decision to file for Chapter 11 bankruptcy protection was unrelated to its striking mechanics, who walked off the job several weeks ago to protest the company's effort to cut pay and reduce their ranks. The company blamed its fuel costs, which have risen to $3.3 billion annually, for preventing it from reducing its expenses enough outside of bankruptcy protection.
"We had developed a plan to restructure Northwest outside of Chapter 11 and have been implementing that plan," Northwest chief executive Douglas M. Steenland said. "Unfortunately, in addition to an uncompetitive cost structure, our efforts have been overtaken by skyrocketing fuel costs. . . . By filing for Chapter 11 now, we ensure that we have the means to complete the transformation of Northwest quickly and effectively."
The carrier expects to become 5 to 6 percent smaller by the fourth quarter, with layoffs expected, Steenland said.
Delta's filing was a "necessary and responsible step to preserve Delta's value" chief executive Gerald Grinstein said in a written statement. The company said it had secured $1.7 billion in debtor-in-possession financing to continue normal operations under bankruptcy protection.
Delta said yesterday that it would continue to pay wages, health care coverage, vacation and sick leave for its 52,000 employees but that further reductions in jobs, pay and benefits are likely.
Delta also said that it does not plan to make contributions to its pension plans that are due soon. "Missing contributions does not mean that our qualified plans stop paying monthly retirement benefits or that we have initiated the process to terminate the plans," Grinstein said, who added that he would push for pension-reform legislation. A statement from the company said "there can be no guarantees -- even with pension reform -- about the future of Delta's qualified defined benefit pension plans."
Delta does not have as many unionized workers as other carriers, but it is $21.6 billion in debt and posted a $1.5 billion loss for the first six months of the year. The airline operates a wide range of aircraft, which analysts say could be narrowed to provide more efficiency.
Northwest said that it is required to contribute $3.3 billion to its defined-benefit plans from 2006 to 2008 and that it would continue its move toward defined-contribution plans.
Because of their bankruptcy protection filings, Delta and Northwest will be removed from the Dow Jones Transportation Average index at the close of business Friday, Dow Jones said. They will be replaced by Overseas Shipholding Group Inc. and JetBlue Airways Corp.
Several aviation consultants and academics said Northwest and Delta bankruptcies represent the latest chapter in the industry's long and painful transformation. Nearly all of the older carriers have flirted with bankruptcy protection, and each has had to cut billions of dollars in labor and operating costs.
"Right now, you are kind of reaching the climax of a different environment," said Michael E. Levine, a former airline executive and now a research scholar at New York University. "All have to transform themselves."
Staff writer Keith L. Alexander and staff researcher Richard Drezen contributed to this report.