More Airlines Bracing for Possible Bankruptcy

January 22, 2003
By Trebor Banstetter, Knight Ridder Newspapers


FORT WORTH, Texas — As union leaders blasted American Airlines' labor cost-cutting strategy at a news conference yesterday, a report surfaced that the airline is preparing itself in case of a future bankruptcy filing.

Citing sources close to the matter, Reuters news service reported that American Airlines has hired bankruptcy lawyers in case a war with Iraq worsens the industry's already-critical financial condition.

The airline retained bankruptcy lawyers Marcia Goldstein and Martin Bienenstock of New York law firm Weil Gotshal & Manges, according to the report. The service said that Continental Airlines and America West also have hired bankruptcy attorneys and that Delta Air Lines and Northwest Airlines were "shopping around."

American spokesman Tim Doke would neither confirm nor deny the report, but said, "I think any carrier that's not exploring all of its options simply isn't being responsible."

He declined to specify whether those options include bankruptcy.

Doke noted Weil Gotshal has a long relationship with American, and, "They are clearly an extension of our legal department."

A firm's spokeswoman did not return phone calls yesterday.

Two major carriers, United Airlines and US Airways, filed for Chapter 11 bankruptcy protection last year.

American is scheduled to release its fourth-quarter and year-end earnings today, and the news is likely to be dismal. Many analysts expect the carrier's 2002 losses to top $3.5 billion.

Retaining bankruptcy lawyers doesn't mean a Chapter 11 filing is imminent. Given the state of the industry, some analysts said yesterday, most major airlines probably began preparing contingency plans for Chapter 11 filings months ago.

"It's not surprising at all," said Stuart Klaskin, an aviation consultant with the Klaskin, Kushner firm in Coral Gables, Fla., which has worked on airline bankruptcy cases. "If you're a major airline today, you need to have retained bankruptcy counsel, even if you're never going to use them."

That's because there are a limited number of lawyers experienced in such cases, he said. The major carriers want to have the best attorneys on retainer so they're not snapped up by competitors.

The airline also could be sending a message to its labor unions and vendors, said Aaron Gellman, a professor and analyst at the Transportation Center at Northwestern University in Chicago.

"I wouldn't be surprised if this were partly to put pressure on labor and other suppliers to give them deals now approximating what they would get in a bankruptcy case," Gellman said.

The news underscored the damage that a war could wreak on the airline industry, by pushing up already-high oil prices and depressing travel further. Most analysts agree that a war with Iraq would hurt the industry, but opinions vary as to the degree.

Analyst Jamie Baker of J.P. Morgan Securities in New York said in a recent report to investors that if economic growth continues this year and a war with Iraq was short and decisive, "It is unlikely in our opinion that bankruptcy courts will get any busier than they already are."

But a long, drawn-out conflict — particularly if it were coupled with more domestic terrorism — could be devastating, analysts say.

The revelation came as union leaders criticized airlines' recent attempts to partner with labor in a cost-cutting campaign.

American executives have requested a series of meetings with union officials to discuss the financial problems and have indicated they want to renegotiate closed contracts to bring down labor costs. The airline says it must cut up to $2 billion in labor costs to return to profitability.

But labor leaders blasted executives for asking employees for help while lobbying in Washington to change federal laws that govern airline contract negotiations. The major airlines want the laws rewritten to require "winner-take-all" arbitration to govern contract disputes, which would remove the unions' ability to strike.

The fight over those federal laws, called the Railway Labor Act, "will be one of the biggest labor fights you've seen in decades in this nation," said John Darrah, president of the Allied Pilots Association, which represents American pilots.

American officials countered that labor is making too much out of the lobbying effort.

"We are not attempting to take away basic rights in collective bargaining," said Don Carty, American's chief executive, and Gerard Arpey, the airline's president, in a letter to Darrah yesterday.

The executives pointed out that they already have identified $2 billion in operational cost cuts, and that, "Our No. 1 priority is and must be to work together to find the additional $2 billion in savings we need to keep this company viable and competitive."

Carty invited the unions to attend another meeting Friday.

American spokesman Doke predicted that labor would eventually come to the table.

"Once they realize we're not engaged in a sinister plot to take away their bargaining rights, they're going to be willing to sit down with us and work out what we all need to do to save this airline," he said.

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