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US Air Files for Chap. 11 Again

The Nation

The company says passengers 'should notice no changes,' but some analysts worry that the carrier may not survive this bankruptcy.

September 13, 2004|James F. Peltz | Times Staff Writer

The airline industry's financial crisis deepened Sunday as cash-strapped US Airways Group Inc., the nation's seventh-largest carrier, filed for bankruptcy protection for the second time in two years.

The Arlington, Va.-based airline mainly serves the Eastern half of the country, but its service includes 27 daily departures from California, including 11 from Los Angeles and five from San Diego.

Sunday's filing under Chapter 11 of the U.S. Bankruptcy Code allows US Airways to continue to operate while restructuring its debt. The company said that customers "should notice no changes to flight operations or customer service" and that its frequent-flier program remained intact.

But industry analysts said that US Airways' situation was dire and that it was possible the airline's reorganization would eventually dissolve into a liquidation that would ground the carrier forever.

"I would say it's 50-50 at this point," said Ray Neidl, an analyst at Calyon Securities in New York.

If so, it would launch a long-awaited shakeout of the industry, as other big airlines slash costs to survive in today's low-fare market or exit altogether.

"This is the beginning of the big restructuring of the industry," Neidl said. "Names will disappear."

Indeed, US Airways' filing means that two of the nation's largest airlines are flying in bankruptcy -- No. 2 United Airlines has been in reorganization for 18 months. Third-ranked Delta Air Lines is dangerously close to seeking Chapter 11 bankruptcy protection as well.

All are suffering because they have labor contracts and other operating costs, along with enormous debts, that are far too high to be covered by today's declining ticket prices.

Passenger traffic is strong industrywide and planes are flying relatively full. But travelers increasingly are turning to low-cost, low-fare airlines and demanding similar prices from their larger rivals, which is driving fares down across the board.

Under Chapter 11, a company continues operating but past debts are effectively frozen. The company is protected from creditors' lawsuits for payment while it works out a restructuring plan that must be approved by both creditors and the court. Creditors often see repayment of only a few cents on the dollar.

If US Airways does liquidate, taxpayers could find themselves on the hook. When the airline emerged from its previous bankruptcy in March 2003, it obtained a $900-million loan guarantee from the federal Air Transportation Stabilization Board, which was set up after the Sept. 11 terrorist attacks to help the airlines.

The ATSB said Sunday that it would "continue to work with US Airways as it seeks to restructure, and will work with the bankruptcy court to ensure that the taxpayers' interests are protected."

The ATSB otherwise was stingy in granting loan guarantees to the carriers, and the major airlines that didn't get federal backing also have continued to rapidly deteriorate. The airlines collectively have lost $27 billion in the last three years.

Bob Cowen, publisher of InternetTravelTips.com, predicted that US Airways wouldn't survive another reorganization.

"I think it's over for them," he said. "People will shy away from them for any advance tickets," and US Airways' high cost structure "just doesn't cut it in today's marketplace."

All the airlines have suffered from external shocks in recent years, from the plunge in travel after the Sept. 11 attacks to this year's surge in fuel prices. But the big airlines such as US Airways and United also are being hurt by the rapid growth of discount airlines such as Southwest Airlines and JetBlue Airways.

The discount carriers' expansion has meant that the traditional airlines must match the cheaper fares or watch their passengers flee to low-price rivals.

But the big airlines' labor expenses and other operating costs are much higher than those of the low-cost carriers. So while JetBlue might turn a profit by charging $199 from point A to point B, US Airways or United might lose money at that price.

The big airlines have tried to respond by slashing expenses in the last three years, including labor costs. US Airways sought an additional $800 million in savings from its 28,000 employees -- including 375 in California -- to help cut costs, which are among the highest in the business.

Its pilots and other labor groups resisted the latest call for cuts, saying they had sacrificed enough the last time US Airways filed for bankruptcy protection. But the airline was nearly out of time to strike a deal. Loan payments and other obligations due in the next two weeks helped prompt Sunday's filing. The company listed $8.81 billion in assets and $8.7 billion in debt.

"With cash obligations quickly coming due and the potential for defaults with some creditors imminent, the Chapter 11 filing became necessary to preserve cash," especially as the airline enters the slower fall and winter months, US Airways said.

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