Updated from Sept. 15, 2005

The bankruptcies of

Delta Air Lines

(DAL) - Get Report

and

Northwest Airlines

( NWAC) are likely to ratchet up the pressure on the two largest remaining network carriers not in Chapter 11 --

American Airlines'

parent

AMR

(AMR)

and

Continental Airlines

(CAL) - Get Report

.

Both Delta and Northwest will seek to use the restructuring process to trim their fleets and labor costs, and they could even seek to terminate their traditional pension plans, giving them competitive advantages over American and Continental.

However, getting those changes in bankruptcy will take time, giving American and Continental some breathing room. Plus, the transparency of the process means those two carriers, which already have been savvy in reducing costs outside bankruptcy, will be able to follow every step of the transformations at Delta and Northwest.

Continental acknowledges the bankruptcies could create more obstacles at a time of high fuel prices and continued domestic fare pressure. "When competitors enter Chapter 11 and default on their financial obligations, including their employees' hard-earned pensions, it puts us at a cost disadvantage," the company said in a statement.

That doesn't mean the nation's No. 5 carrier won't soldier on. Continental says it believes it has "the right people, assets and route structure to fly through this storm and be a survivor, but there's no doubt that the clouds are darker and the air more choppy than they were two days ago."

An AMR spokesman said his airline's challenges haven't changed. "Fuel, taxes, pension obligations: those are the hurdles that we have faced and will continue to face regardless of what's going on at other carriers," he said.

Delta and Northwest intend to restructure into leaner outfits with fewer planes -- they can use Chapter 11 to return aircraft to lessors -- and fewer employees. Delta hopes to streamline its fleet by removing four types of planes by the end of 2006, which will reduce the cost of training pilots to fly different jets. It will also increase its capacity on more lucrative international routes. Northwest expects to become a "somewhat smaller airline" with about 5% to 6% less capacity by the end of 2005 compared with a year before.

Law and Order

AMR and Continental have already been rejiggering their networks to focus on routes with the best revenue, including international ones. Continental has also been focusing on high-end customers who buy first-class tickets.

Delta and Northwest intend to lower their labor costs during their trips through Chapter 11. In bankruptcy, companies can request judges to order lower "interim" pay and benefits if they can establish the cuts are necessary to restructure. Firms can also ask the court to permanently cancel contracts if talks on consensual agreements fail.

Of course those processes take time, notes Roger Frankel, head of the bankruptcy and creditors' rights group at Washington law firm Swidler Berlin. Interim relief typically takes at least two to three months, while getting the court to rule on permanent concessions takes longer because the companies must first make good-faith efforts to negotiate with workers.

What's more, getting permanent concessions, even in bankruptcy, can be distracting to an airline's management. Earlier this year,

UAL's

United Airlines

used the threat of having contracts terminated in court to wrangle new pacts from its unions, but only after contentious negotiations and strike threats.

American and Continental will be watching developments closely at the U.S. Bankruptcy Court in Manhattan, where Delta and Northwest filed for protection, and they can turn to their own employees and ask for more savings if need be. The latest two airline bankruptcies might even give American and Continental greater bargaining power, allowing management to argue that Chapter 11 is where airlines end up when they fail to adjust quickly to the industry's dire situation.

Cost Advantages

Continental has already shown the ability to bargain successfully and quickly with its workers. Earlier this year, it got $418 million in concessions after only three months from all of its unions except the one representing flight attendants.

What remains to be seen is whether Delta and Northwest try to terminate their traditional pension plans and hand them off to a government insurer. That's an option in bankruptcy that United Airlines and

US Airways

( UAIRQ) used, allowing them to jettison billions of dollars of liabilities and get cost advantages over the other legacy carriers.

Both Delta and Northwest have large

funding shortfalls in their pension plans and would benefit immediately from getting rid of their obligations. The federal insurer, the Pension Benefit Guaranty Corp., Thursday estimated the deficits at $10.6 billion for Delta and $5.7 billion for Northwest.

Both Northwest and Delta have been pressing lawmakers for more time to make their required pension obligations. Bills passed by the two Senate committees with pension jurisdiction -- the Finance committee and the Health, Education, Labor & Pensions committee -- would give the two carriers 14 years if they agreed to freeze their plans from accruing additional liabilities.

Northwest CEO Doug Steenland said Wednesday that while there are no guarantees, his company wants to continue to lobby for more relief and would do what it could to avoid defaulting on its pensions.

A Delta spokesman said: "We think the Finance Committee bill is a good start. We appreciate the committee recognizing that airlines need a unique rule that addresses their problems."

But

The Wall Street Journal

Friday reported that Delta CEO Gerald Grinstein had said 14 years would be insufficient for his company.

Even if Delta and Northwest change their minds, shortfalls at American and Continental appear to be less urgent, and the latter two carriers have said they expect to meet their pension obligations. American's plans are 80%-funded, while Continental was comfortable enough with its plans that it didn't lobby for airline-specific pension relief. Continental also has convinced its pilots to freeze their plan, preventing the accrual of future liabilities.

One way in which Delta and Northwest might emerge from bankruptcy to challenge American and Continental is by joining forces. Industry observers are already speculating about such an outcome.

"We would not at all be surprised if Delta and Northwest pursued a merger," says Helane Becker, airline analyst at Benchmark Co., a New York-based brokerage firm that does no investment banking. "They have very little route overlap. Northwest is strong in Asia/Pacific, and Delta has strong Atlantic and Latin American operations."