Airline Bankruptcies and You

The oldest joke in the airline business is that to make a million bucks, you have to start with ten million. In a business with five percent margins even in good years, the combination of bloated personnel costs, poor labor-management relations, high fuel prices and the rise of pesky low-fare, good-service airlines like Southwest have all helped drive the old legacy carriers into the red. Now two of them, Delta and Northwest, have declared bankruptcy; another, much smaller airline, Virginia-based Independence Air, may soon join them. Couple that with two other flyers, United and U.S. Airways, which have been languishing in Chapter 11 for years and you get a picture of an industry in crisis. Since 2000 the airlines have destroyed $34 billion in shareholder wealth, according to industry analyst Vaughn Cordle, and are on track to lose another $6 billion this year.

Bankruptcy, of course, is not the end, especially if youre in the business of air travel. Two carriers flying today, Continental and America West, actually recovered. But the rise of the low-cost carriers, who now account for a quarter of all passengers in the air, up from less than 10 percent in the late 1990s, means that the big name carriers dont dominate as much as they used to, which could be one reason Washington is resisting a bailout like the billions of dollars given to airlines since 9/11.

If allowed to run their course without political interference, the bankruptcies will likely bring fundamental shifts and consolidation in the industry—if Department of Justice anti-trust lawyers go along. That will eventually mean fewer carriers and slightly higher fares. There will almost certainly be more mergers like the one that is already underway between America West and US Airways. Southwest, which traditionally remains aloof from its peers, recently paired up with bankrupt ATA Airlines. Continental, Delta and Northwest already have joined up in other ways, so it is possible those three airlines could become one. American Airlines, which in the past has cooperated with Seattle-based Alaskan Airlines, may want to revive that partnership.

For passengers the names may change, but there will be fewer flights and smaller planes. Cramped seats, decent fares and bare-bones service will be the order of the day. And airline executives may once again start to dream of making that million bucks.