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Major changes loom for airlines

Dallas Morning News

DALLAS — With Delta Air Lines Inc. and Northwest Airlines Corp. now in bankruptcy, the airline industry appears headed for a major shakeup.

Whether that means mergers, liquidations or something else, the dire situation of the industry’s oldest, biggest players suggests major changes are inevitable, industry analysts and legal experts said Thursday.

“If we find ourselves with a majority of the industry operating in Chapter 11, then I think there’s going to be a lot of pressure for consolidation,” said finance professor Michael Alderson of Saint Louis University, “which will be just a way of effecting a partial liquidation of the industry.”

On Wednesday, the nation’s third-largest carrier, Delta, and No. 4 Northwest sought protection from creditors in a New York federal bankruptcy court. No. 2 United Airlines Inc. and parent UAL Corp. have already spent nearly three years in bankruptcy proceedings, and No. 7 US Airways Group Inc. is nearly at the end of its second visit to bankruptcy court in the past three years.

Dallas bankruptcy lawyer Mark MacDonald said U.S. companies have an incentive to file now rather than later. Major changes in bankruptcy laws go into effect Oct. 17, and corporations filing after then will be forced to reorganize and exit Chapter 11 proceedings much faster.

Delta and Northwest probably had that deadline in mind when they filed; competitors pondering bankruptcy undoubtedly are mulling it as well, he said.

“I think many bankruptcy attorney are saying leap quick,” MacDonald said.

Alderson said with more than half the capacity of the U.S. airline industry operating under Chapter 11, healthier airlines are feeling the pressure to cut costs in bankruptcy as well.

“Chapter 11 is a strategic tool that lets you abrogate contracts, reduce your costs and potentially dump your pension obligations on the federal government,” he said. “Once a majority of the industry is operating with that competitive advantage, you have a strong incentive to get in as opposed to staying out.”

Aviation consultant Ron Kuhlmann said it’s wrong to conclude the airline industry itself is troubled, even with some of its biggest players in bankruptcy.

“The reality, though, is that the airline industry is just fine,” said Kuhlmann, vice president with Unisys R2A Transportation Management Consultants in Oakland, Calif. “We have unfortunately begun to identify the industry with individual corporations.”

He challenged the idea that there’s too much capacity in the industry, noting that most airlines are flying with more than 80 percent of their seats filled with paying passengers this year.

“That means fliers have not been dissuaded,” Kuhlmann said. “One of the reasons is that they are getting products they want at prices they can afford to pay. Unfortunately, a significant chunk of the industry can’t make money doing that.”

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