The bankruptcy subsidy


About a week ago, Delta Air Lines and Northwest Airlines both declared bankruptcy. That makes American Airlines the only major airline not to have been in bankruptcy proceedings in the last dozen years or so. The bankruptcy laws must be changed before the incompetent, debt-ducking, bankrupt carriers gang up on American Airlines — with aid and assistance from the government — and force it into court protection.

Back in 2002, I wrote a column predicting the competitive bankruptcy situation in which we now find ourselves. My warnings went unheeded. Now, for the first time in modern history, an entire industry is being run with most of its capacity buried under bankruptcy protection – all because bankruptcy laws punish workers, stockholders and creditors but reward poor managers and executives.

As it is being applied to the airlines today, bankruptcy amounts to an unfair government subsidy to the incompetent. If nothing changes, the last surviving honest, fair-dealing, legacy airline in the United States will be forced into bankruptcy protection, too — if only to remain competitive.

This doesn’t have to happen. Bankruptcy judges must place constraints on airlines in bankruptcy, limiting their activities in the marketplace. Airlines should not be allowed to become pricing predators while under the protection of the courts, nor should they be allowed to bid on new routes or build new routes until they emerge from bankruptcy.

Amazingly, the U.S. Bankruptcy Code seems to protect only management. It allows managers to deep-six employee pensions (this after years of underfunding those programs), cherry-pick which contracts the airline will honor, and cut prices to match the lowest fares in the industry, even when the airline’s cost structure does not support such pricing.

After stealing from their workers’ pensions, ruthlessly cutting salaries and benefits, unethically dodging debts, welching ignominiously on signed contracts and awarding floundering managers unjustified bonuses, these same airline executives are given leave by the bankruptcy courts to engage in predatory pricing.

United Airlines and US Airways have already turned their employee pension programs over to the Pension Benefit Guaranty Corporation (PBGC), thereby slashing the retirement incomes of loyal pilots, flight attendants, customer service staff and mechanics, many of whom had already suffered several rounds of salary reductions. It appears that the management gurus at Northwest and Delta will follow the examples of these amoral corporate trailblazers.

To date, newspapers and TV news outlets have focused their attention on the survival of the airlines in bankrupcy. But bankruptcy spreads its ruin far and wide. It’s time to take a look at all the small businessmen and taxpayers who are being ravaged by the system that was ostensibly created to protect them.

Caterers, lawyers, consultants, software publishers, electronics manufacturers, landlords, rental car companies, automobile dealers, hotels, municipal agencies, retirement planners and many other creditors have been left high and dry with bankruptcy payouts of as little as seven cents on the dollar. Many of these creditors are small businesses whose owners have mortgaged their homes to produce products for which the morally and financially bankrupt airlines will never pay.

National and local taxpayers are hit in the pocketbook, too. They are ultimately the ones underwriting PBGC’s coffers, and they are the ones making good on defaulted payments to airports, unpaid local taxes and downgraded ratings for municipal bond issues.

While in bankruptcy, the court-protected airlines need not pay their bills, but they are permitted to offer market-leading pricing. A quick glance at the listings of low weekend fares on shows a disproportionate number of the “special” low fares being offered by United and US Airlines. This should be outlawed.

And how about this: Rumors are flying around the major airlines that United Airlines has offered a Chicago baseball team a deal it can’t refuse in return for operating many of its charters. Until recently, both American and United vied for this prestigious contract. Now, with better cash flow under bankruptcy protection, United has a financial advantage that allows it to win a bidding competition it once regularly lost. American simply cannot afford to sign on to such a deal because American actually honors its debts.

U.S. bankruptcy laws should severely limit the activities of airlines operating under the veil of bankruptcy. They should, at the least, enact the following propositions:

* No airline in bankruptcy should be allowed to set predatory pricing.

* No airline in bankruptcy should be allowed to jettison its pension programs without first liquidating assets to fund them. If selling assets results in the dissolution of the airline, so be it: The assets will go to a financially healthy airline and will strengthen the industry.

* No airline in bankruptcy should be allowed to compete for new routes until it proves it can support the route structure it has already created.

Bankruptcy is an admission of incompetence, and management must not be rewarded for it. Rather, bankruptcy should be hard penance. The requirements of bankruptcy protection should, therefore, point an onerous and difficult path toward corporate rebirth.

If the bankruptcy courts follow rules like the ones I’ve suggested, the airline industry will emerge from this financial mess in a stronger position. Airlines will be loath to enter bankruptcy and, should they find themselves there, they will be fighting to emerge from court rather than settling into its comforting legal arms.

Unfortunately, our system coddles failed airline executives by protecting them from creditors, allowing exhorbitant salaries, approving bonuses for performance that could only be achieved while being shielded from creditors, and showering legal firms with millions of dollars. At the same time, the system strips stockholders of equity, workers of their pensions, and small businesses of accounts receivable. All in all, the current bankruptcy system works as a government subsidy.

If it continues down the current ill-advised path, the bankruptcy system will eventually destroy the few remaining honorable carriers.