- CHICAGO (Reuters) - The bankruptcy
filing by US Airways is a stark reminder of the financial perils facing
the U.S. airline industry nearly a year after the devastating Sept. 11
attacks, with No. 2 United Airlines also in danger as travel slumps, keeping
fares cheap.
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- Industry losses topped $10 billion in 2001 and so far
this year, and show no signs of abating. Faced with such staggering shortfalls,
big airlines like US Airways with high fixed costs cannot afford business
as usual.
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- Parent company US Airways Group Inc. of Arlington, Virginia,
filed for Chapter 11 bankruptcy protection late Sunday, rattling an industry
still smarting from a prolonged decline in air travel and fares at 15-year
lows.
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- A big concern among investors is that airlines operating
in bankruptcy can and often do cut fares sharply, dragging other airlines
down further and delaying an industry recovery.
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- Shares of major U.S. airlines plunged in New York Stock
Exchange trading on Monday, with United parent UAL Corp. -- another very
high-cost airline, dropping most.
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- UAL, the second largest airline behind No. 1 American
Airlines' parent AMR Corp., fell nearly 30 percent on the opening before
rebounding to trade 21 percent lower at $4.10. United is trying to win
wage concessions from unions but so far has succeeded only in getting pilots
on board.
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- UAL has a huge debt payment to make in the fourth quarter,
nearly $1 billion. Its pilots won a big pay increase in 2001 but have agreed
to give back 10 percent in return for stock options. Machinists also secured
industry-leading pay raises earlier this year but won't concede anything
as yet.
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- Also down on the big board: AMR, off 13 percent to $8.33,
No. 3 Delta Air Lines down 5 percent to $13.93 and No. 5 Continental Airlines
down 9 percent to $8.30. Several of those prices were new lows even for
the depressed era after Sept. 11.
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- RISKY BUSINESS
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- Filing for bankruptcy protection is a risky move, analysts
said. Sometimes airlines emerge healthier, as Continental did in the 1990s
after two rounds in the courts. On other occasions, they die, like the
venerable global icon Pan Am.
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- "It is virtually impossible to handicap outcomes
given this news," said Gary Chase, airline analyst at Lehman Brothers.
"Our current expectation is that US Airways will emerge slightly smaller
than its present size but largely intact, and in relatively short order."
The airline pegged the first quarter of 2003 for its emergence from the
courts.
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- US Airways was headed for a bankruptcy court hearing
on Monday to win approval of $500 million in emergency financing to keep
flying while it sorts out bills and cuts costs.
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- Joe Hopkins, a spokesman at United, said the US Airways
action does not affect United's recovery plans outlined late last year,
even though many industry experts have speculated that United would be
the next to head to bankruptcy court, possibly in the fourth quarter of
this year.
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- "Our answer is that US Airways' action doesn't change
anything at United Airlines," Hopkins said. "We're continuing
to pursue our financial recovery plan."
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- UAL, 55 percent owned by employees, is seeking a new
chief executive to replace outgoing interim CEO Jack Creighton. But so
far, it has had no luck securing a leader, as many candidates have reportedly
shunned the job. Problems with labor unions are weighing on the airline,
too.
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- THE FEEDBACK LOOP
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- UAL Chief Financial Officer Jake Brace was quoted in
the Wall Street Journal on Monday as saying the airline is hearing "negative
sentiment" so far from the Air Transportation Stabilization Board
on its loan guarantee application.
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- The Journal, the New York Times and the hometown Chicago
Tribune have all come out with strong editorials recommending against a
United bailout.
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- The ATSB was created after the Sept. 11 attacks to bail
out the airlines, first with $5 billion in direct cash aid and then with
another $10 billion in guarantees to private sector loans. United is seeking
backing for $1.8 billion of loans.
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- So far, only America West Airlines and, conditionally,
US Airways have won their requests.
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- "We put the odds of United not getting their loan
guarantee at 80 to 85 percent," said Deutsche Bank airline analyst
Susan Donofrio. "We think this would pave the way for a possible bankruptcy."
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- A BAD BUSINESS MODEL?
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- According to the American Society of Travel Agents, the
problems at US Air and United highlight a bad business model.
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- "US Airways is a cut finger," said Richard
Copland, president of the group, in an interview.
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- "There's a cancer out there that no one's addressing,"
he said. "They (the government) gave the airlines $5 billion 10 months
ago. What happened to the $5 billion? Doesn't anyone realize the business
model isn't working?"
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- The financial woes at US Airways and United are all the
more pointed after a merger plan between the two failed in mid-2001. Government
regulators said at the time they would file suit to block the merger on
antitrust grounds.
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- Since then, the CEOs of both airlines, James Goodwin
at UAL and Rakesh Gangwal at US Airways, have left.
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