Editor's Note. With US Airways (UAIR) filing for another bankruptcy, UAL (UALAQ.OB)-unit United Airlines headed into its second year operating under Chapter 11 and Delta Air Lines (DAL) fighting to avoid their fates, the airline industry is back on the brink of financial chaos, with no end in sight. Over the last two weeks, readers have reacted strongly to the industry's latest wave of troubles. Eric Gillin, airline reporter for TheStreet.com , responds to their questions and comments. Q: Your paragraph concerning US Airways' bankruptcy alludes to the idea that it was the pilots alone that caused the company to enter bankruptcy for the second time. All of the employees were against the total mismanagement of US Air by its executives. All the union employees, quite rightly, refused to take another "hit" again after giving up almost $2 billion previously to get US Air out of trouble the first time. But your article lays the blame for US Air's failures on the pilots' negotiations alone! -- H.A. A: Any management team that has filed for bankruptcy twice in two years after winning a government loan and billions in wage concessions from employees hasn't exactly done a good job. But the chronic need to assign blame here is a waste of time that hurts the industry; it is an emotional reaction to what is fundamentally a business problem in dire need of cold, rational analysis. Ask anyone on Wall Street who they blame for US Airways' second bankruptcy and they'll either say "both" or "who cares?" The industry has lost billions and billions of dollars in the last three years -- there's more than enough blame to go around here. On a deeper level, this letter illustrates why labor negotiations are so heated. For years, airline management teams have invoked the threat of bankruptcy to get out of contracts they signed during good times, generating a great deal of mistrust among the unions. How much? A week before US Airways officially filed for a second bankruptcy, one of its local unions sent out the following message to pilots:
"We will not be party to what ultimately took the form of an opportunistic and wholesale rape of the US Airways pilots' working agreement. Any successful transformation can only be accomplished through the efforts of an enlightened management, working in concert with its workers, not through the use of threats and attempted intimidation."The union has been so upset after years of negotiations with management that it was not even willing to sign a deal to save the carrier, with full knowledge that doing a deal on concessions under bankruptcy would likely be even worse. But when a management team squanders $5 billion in annual wage concessions and you're still upset, the only choices are to cut your pay or cut off your nose to spite your face.
Q: Why are the major airlines only now beginning to cut the top-heavy management fat? They have cut employee pay and benefits, but have refused to deal the same with management! Praise to Delta and Continental (CAL) for finally going after the top wage earners. -- L.R. A: A big part of the reason is that it's easier to fire thousands of faceless people than it is to fire your friends. But another reason is that the legacy carriers have made running an airline an incredibly complicated operation. Some of this is necessary -- like the logistics of hundreds of planes serving hundreds of cities, where the smallest issues can trigger a tsunami of delays across the network. And some of this is lunacy, like constantly adjusting a dozen different fares for the same flight in real time in the name of "yield management." As a result, it's hard to figure out which guys are nonessential, since airlines are terrified of even the tiniest operational glitch. Q: The Delta plan is supposed to be bad for AirTran (AAI) and JetBlue (JBLU) because Delta intends to focus more flights on Atlanta and JFK
in New York . If both AirTran and JetBlue have lower cost structures than Delta, isn't this more harmful to Delta than the low-cost carriers? While it will prevent AirTran and JetBlue from raising prices, it will only lead to more losses for Delta. So why is this a great plan? -- H.T. A: A tremendous question that highlights some of the lunacy going on in the industry at the moment. First things first: It's bad for AirTran because Delta has a 65% market share in Atlanta and any competitive response from Delta will make it harder for AirTran to retain customers while expanding rapidly. The same goes for JetBlue in the New York, Boston and Florida markets Delta is targeting. But is this a great plan Delta has? It's the best Delta can do. Because the airline dominates Atlanta, it can charge a premium on routes that aren't served by AirTran and others. And if Delta can cut costs, it can offer competitive fares on places where AirTran flies, while making more money on flights where AirTran doesn't fly. By adding 63 flights to Atlanta and juggling its schedule, Delta is staking its future to Atlanta, a market where it already makes money. It's not great -- but it's better than sticking around Dallas, where Delta was losing money. Q: Delta could be a great deal if the pilots cave, which I believe they will do because they don't want to lose their pensions in bankruptcy. Look at how much money they could have made when AMR (AMR) parent of American Airlines and their labor groups finally signed on for their concessions. The stock went from roughly $1.50/share to over $13. Hmmmm. Any words of wisdom for a Joe Shmoe investor on the Street? -- J. A: An investment in Delta stock is one of the biggest risk/reward on Wall Street at the moment. Few analysts I talk to think the carrier is worth buying ... but they were saying the same thing before AMR hit that 10-bagger two years ago. Like you, I think the pilots settle. And I think Delta cuts other labor costs, executes much of its restructuring plan but runs into trouble with bondholders, who have been a touch reluctant to work with Delta in recent weeks. In the end, I'm not entirely sure labor's sacrifice can offset Delta's $20 billion debt load, but if debtholders come around, even a little, Delta has a shot. In the end, my words of wisdom are these: Investing in airline stocks is so risky, Jim Cramer won't have anything to do with them.
Q: When -- and I believe they will -- the so-called low-cost carriers begin flying international long-haul routes, they will drive down the cost of business-class travel. And that will be the end of the legacy carriers as we have known them. My prediction is one of them will start within two years and it will start a slide. You may not be old enough but an airline called People's Express flew to London back in the early 70s, but failed for a variety of reasons. It's just a matter of time. -- P.T. A: You're not alone in this belief. It's going to take a bit of political wrangling to change the laws and restrictions governing international flight, known as "Open Skies" -- but William Alderman, president of Alderman and Co., a boutique aerospace investment bank, ultimately believes low cost-competitors will take to the international skies and enter the only market where network carriers have no competition. Why? In his view, the Airbus A380, a 600-plus seat super jumbo jet, will need places to fly. "There is no structural, rational reason for the international routes to be protected," Alderman said. "I personally believe it's the Europeans that push for Open Skies and it will be in direct relationship to sell A380s. The A380 is not a business traveler's airplane. I am not traveling with 600 people anywhere. I will pay an extra $91 to not be on one of those beasts. I'm not going through immigration with 600 people. But if you fly long haul with 600 people you can charge rock bottom for airline tickets and attract a new audience. The A380 will do on long haul what the 747 did to domestic travel." The regulations governing international travel -- which limit where foreign carriers can land in the U.S. and where U.S. carriers can land overseas -- were last overhauled in 1993. They're complex and, while better than those first signed in 1944, still in need of more work. I don't know about two years, but expect changes in the years to come.