The Airlines Could Show Big Three the Way

The airline industry thinks the automakers are nuts.

After all, while "bankruptcy is not an option" has become a mantra for automakers, the legacy airlines expect to post profits in 2009, largely because recent bankruptcies prepared them to deal with the troubled economy.

Auto executives reiterated their stand at a Senate Banking Committee hearing Tuesday, with General Motors ( GM) CEO Rick Wagoner proclaiming that "80% of consumers would not consider buying a car from a company in bankruptcy."

Chrysler CEO Bob Nardelli agreed, while Ford's ( F) chief, Alan Mulally, generally stayed away from the topic. "We believe we have sufficient liquidity to make it through this slowdown," he said.

Between 2002 and 2007, four of the six legacy carriers went through Chapter 11 bankruptcies, and all four emerged better off.

Delta ( DAL) recently merged with Northwest to form the world's biggest airline. US Airways ( LCC) joined forces with America West to create a carrier far more successful than either was individually.

UAL ( UAUA) failed in a seemingly endless, almost comical quest to find a merger partner. But it did shed $7 billion in annual costs, including more than $3 billion in labor expenses.

The airlines' experience earlier this decade offers a lesson for the automakers, says Michael E. Levine, a senior lecturer at New York University School of Law and a former airline executive.

For decades, legacy carriers and automakers dominated their respective markets, facing virtually no competition. The airline industry was regulated, and the auto industry might as well have been. When lower-cost providers came along, the existing major players were so entrenched they couldn't cope.

The airlines "had been protected, and they had built in the cost of relationships that might or might not have made sense, but were unmanageable after deregulation," Levine says. "It is basically the same story for the automakers."

That history makes it hard for GM's Wagoner to consider bankruptcy, Levine says: "It's hard for him to get his head around the idea that he would take the company through a bankruptcy restructuring, in which you have to become politically unpopular." After all, bankrupt companies reject decades-old financial relationships with partners including dealers, suppliers and other leaseholders and, of course, labor unions.

"Part of the reason you have to go into bankruptcy is to renegotiate labor contracts ," he says. Given that the once adversarial relationship is now more of a partnership, "it's easier in bankruptcy court, with a gun to your head."

Without question, it took time for the airline industry to reach the point where bankruptcy fell within its comfort zone. "When airlines first contemplated going into Chapter 11, they were told no one would fly on a bankrupt airline," Levine says. "It turns out that wasn't true."

In the 1980s, two airlines used bankruptcy largely as a technique for battling their unions. Both Continental ( CAL) and Eastern were Frank Lorenzo properties. A 1983 Continental bankruptcy was intended to break union contracts. The 1989 Eastern bankruptcy came in response to a strike.

Eastern eventually shut down, as did Pan American World Airways, which followed it into bankruptcy in 1991.

Still, the Pan Am bankruptcy may be instructive for the auto industry. For one thing, management and labor worked together to forge contract terms for a new Miami-based Pan Am. They reached a deal, after working through the night of Dec. 3, 1991.

However, in court the next morning, that plan collapsed, idling 7,500 workers, because Delta decided at the last minute not to provide promised financing. Delta did, however, acquire Pan Am's Kennedy hub, saving the jobs of about 8,000 employees who came with it. Today, the Kennedy hub is a major asset, underpinning Delta's international expansion.

The success of the recent bankruptcies has been even more obvious.

In the case of US Airways, then-CEO Bruce Lakefield, a retired Lehman Brothers executive, approached bankruptcy with the idea that he wanted to save jobs. "I didn't really come into this for anything but that reason, and that mission was accomplished," he said in a 2006 interview. "Whenever I ride an airplane, and I ride fairly often, more people thank me than I could ever imagine."

Delta not only survived its bankruptcy but also, more than any other carrier, took the opportunity to remake itself, emerging as an international airline and dramatically boosting its level of unit revenue relative to competitors. The subsequent merger with Northwest built on that base.

At one point at Tuesday's hearing, Sen. Mike Crapo, (R., Idaho) referred to bankruptcy, noting: "Delta Air Lines went through it, and now we see some significant progress there," but he could not erase the specter of the bankruptcy bogeyman. "We just can't be confident that we'll be able to successfully emerge from bankruptcy," said Chrysler's Nardelli.

Ron Gettelfinger, president of the United Auto Workers, went even further, seeming to view bankruptcy as a contagious disease. "If one of these companies was to go into bankruptcy, he said, "I would almost bet it would take another one with it, or possibly all three."