Tough Times for US Airlines

Four bankruptcies, a merger and one in the wings are the result of domestic carriers reacting to harsh market conditions.

It’s a litany of woes heard from all transportation modes during the past months: Ever rising fuel prices are daunting, to say the least. Business is not good. Surviving in today’s economically challenged environment is more difficult than ever. For air carriers seeking a partner with whom to merge has seemed an avenue toward survival. Those who have not been successful have faced up to the harsh realities and shut their businesses.

While three air carriers have gone out of business and filed for bankruptcy protection, a fourth, Frontier Airlines, has sought Chapter 11 protection but will continue its normal business operations as it reorganizes. The carrier explains that the precipitating cause for its filing is because there has been an unexpected attempt by its principal credit card processor to increase its “holdback” of customer receipts, which threatens Frontier’s liquidity.

Frontier is 14 years old and is the second-largest carrier at Denver International Airport. From its Denver hub it serves 62 US cities in 36 states, six cities in Mexico, one each in Canada and Costa Rica. However, Frontier had notified the US Department of Transportation (DOT) that after April 13, it would no longer fly between Los Angeles and San Jose del Cabo in Mexico. The DOT has proposed awarding rights to that route to United Airlines.

Frontier has handled its own cargo operations which should continue as normal while the airline is under bankruptcy protection. Sean Menke, the carrier’s president and CEO, says. “Frontier is committed to delivering exceptional customer service and we intend to continue delivering on that promise with normal operations throughout our reorganization process. To be clear, we filed for very different reasons than those of other recent carriers, and our customers and employees can be confident that we intend to keep on flying and providing outstanding service and products.”

Aloha, ATA and Skybus have shut down their operations. For Aloha Airlines, passenger traffic ended March 31after the carrier filed for bankruptcy protection. Cargo and aviation services operations will continue. The shut down is the result of a crowded Hawaiian air market. Aloha competitors include Hawaiian Airlines and low fare go! that was inaugurated by Mesa Air Group in June 2006. With both Aloha and go! competing for inter-island business, it was only a matter of time before one or the other would have to go out of business.

“We simply ran out of time to find a qualified buyer or secure continued financing for our passenger business,” says David Banmiller, president and CEO of Aloha. “We had no choice but to take this action.” The carrier will work with its code share partner, United Airlines, to assist its passenger customers. Aloha is reported to have operated a fleet of 26 Boeing 737s in order to serve five destinations in Hawaii and six in the continental US. Hawaiian Air has promised to maximize its aircraft and resources to keep inter-island traffic and cargo moving, says its president and CEO, Mark Dunkerley, as reported by our sister publication, Air Transport World. Mesa Group chairman and CEO Jonathan Ornstein said that go! will increase its daily flights by nearly 74%.

Saltchuk Resources, with headquarters in Seattle, is said to have offered to buy Aloha cargo operations. Any purchase is subject to approval of the US Bankruptcy Court. Saltchuck has several business operations in Hawaii and owns Alaska’s largest cargo carrier, Northern Air Cargo, that also uses Boeing 737s.

ATA Airlines and Skybus couldn’t fight declines in traffic and jumps in fuel costs. In describing precipitating factors in ATA Airlines filing for Bankruptcy protection, Doug Yakola, the carrier’s COO cited “the cancellation of a critical agreement for our military charter business,” as well as the “tremendous spike in the price of jet fuel in recent months.”

The agreement was one that included ATA as a member of the FedEx team that provides airlift contracts for moving military personnel and their families to and from overseas destinations. According to ATA, FedEx had informed the airline that it would not be a member of the team for the federal fiscal year that begins in October 2008. “This termination is a full year earlier than the term specified in a letter of agreement between FedEx and ATA,” says ATA. Since the carrier’s scheduled service had suffered greatly from increases in fuel costs and the arrangement as part of the FedEx team represented most of ATA’s charter business, the carrier concluded that it was necessary to seek bankruptcy protection.

ATA had handled its own cargo business, principally at locations in Chicago and Dallas in the continental US, at Hilo and Honolulu in Hawaii and at Guadalajara, Mexico. Shipments pending with the airline could be retrieved at shipper’s local ATA Cargo facilities. The airline was not making payments for loss, damage or pilferage of cargo claims, suggesting those who have such claims submit them to the Bankruptcy Court. Court filings and claims information is available at www.bmcgroup.cm/ataairlines.

With headquarters in Columbus, OH, Skybus Airlines began flying in May 2007. It sought to compete as an extremely low-cost airline, using Ireland’s Ryanair as a business model. As with Ryanair, Skybus flew to secondary US airports rather than those that are larger, with heavier traffic. In order to generate revenue, it also sold merchandise on board and carried interior and exterior advertising. As one of the only totally non-union US airlines, at the time it shut down, Skybus was faced with a pilot’s unionizing campaign that offered strong prospects of being successful. Skybus did not handle its own cargo; instead it had a relationship with Mercury World Cargo for moving air freight.

The major move toward a merger is between Delta and Northwest Air. Talked about for some time and nearly completed last month, the merger of the two airlines was announced despite the fact that all concerns of all pilots have not been met, stockholders have to agree and regulatory approval must be won.

The coming together of Delta Air Lines (DL) and Northwest Airlines (NWA) would create an entity with annual revenues projected at $35 billion, with 800 aircraft and 75,000 employees. No cash will change hands, as this would be an all-stock transaction, explains DL. The combined enterprise would be valued at $17.7 billion and be called Delta.

Current DL chairman, Daniel Carp, would be chairman of a new board of directors. NWA chairman, Roy Bostock, would become vice chairman. The board would include seven current DL directors, five NWA directors and one member of the Air Line Pilots Association.

The airlines have promised that no hubs will be closed, that they will remain in Atlanta, Cincinnati, Detroit, Memphis, Minneapolis/ St. Paul, New York’s JFK, Salt Lake City, Amsterdam and Tokyo’s Narita.

Both airlines are members of the SkyTeam Alliance and claim to have a common IT platform and look to accelerate joint venture integration with Air France/KLM. In a statement reflecting on the merger, Air France/KLM said, “We are confident we can quickly build a global partnership between Delta, Northwest, KLM and Air France in the form of a joint LTventure offering a network with extremely attractive multiple hubs. This merger between Delta and Northwest facilitates the implementation of this transatlantic joint venture combining the Air France-KLM Group and the new Delta group encompassing Northwest.”

One key to the move by the two airlines to move to finalize the merger was that the 6,000 DL pilots agreed to a new contract independently of NWA pilots. To now, mutually acceptable terms regarding seniority and other matters between the two pilot groups could not be reached. Airline management felt it could not go forward with the merger without a pilot accord. As might be expected, 5,000 NWA pilots are strongly opposed to the merger, saying they “will be disadvantaged in obtaining a joint contract and potentially in the seniority list integration process.”

These pilot issues could present serious problems for the merged airlines. For example, although US Airways and America West merged in 2005, stone throwing between the two airline’s pilots continues today. While the two groups continue to seek agreement without arbitration, America West pilots have evidenced frustration with the process and have begun separate negotiations with US Airways management on future Airbus A330-200 widebody flying.

Promising to hold a series of hearings in the months ahead to examine the consequences of the NWA-DL merger, Congressman James Oberstar (Dem.-MN), Chairman of the House Transportation & Infrastructure Committee, claimed that, “If this merger goes forward, other carriers will follow, there will be a cascade of mergers. Other airlines and network carriers will not be able to withstand the potential power of the largest airline in the world; it will be a globe straddling, mega carrier.”

Oberstar’s reference to other mergers no doubt includes one that has been rumored since the first publicly announced moves by Northwest and Delta. It is thought that movement toward a merger has been accomplished by United Air Lines and Continental Air Lines.

Pilots for those two carriers have said their concerns will have to be addressed before they would agree to such a merger. “The management teams of United and Continental must understand one hard fact. The pilots of our respective airlines will not allow any merger unless management meets or exceeds our demands to be treated fairly and equitably,” they said.

There may be challenges to the merger by stockholders. As the agreement between the two airlines was announced, NWA shares fell 8.4%, or 94 cents, to $10.28. DL’s stock price fell 12.6%, or $1.32 a share, to $9.16.

Meanwhile, DL and NWA hope to gain approval from the Department of Transportation and Department of Justice before the end of the year, when the merger-friendly Bush Administration leaves office.

Drawn from coverage of air cargo in our August 2007 issue, here is recent data showing the amount of cargo carried by the airlines discussed in this article. These figures were shared with us by our sister publication, Air Transport World.

A FTK is a freight tonne kilometer, representing 1 tonne of cargo carried 1 kilometer. It’s a worldwide standard of measure for the amount of traffic moved.

Airline FTK (000)
Aloha Airlines 12
ATA Airlines 8
Delta Airlines 1,809
Frontier Airlines 14
Northwest Airlines 3,312
Skybus 0*

* Skybus outsourced its freight business to Mercury World Cargo

TAGS: Archive
Hide comments

Comments

  • Allowed HTML tags: <em> <strong> <blockquote> <br> <p>

Plain text

  • No HTML tags allowed.
  • Web page addresses and e-mail addresses turn into links automatically.
  • Lines and paragraphs break automatically.
Publish