Taking Bankruptcy in Stride

Sept. 28, 2005 — -- "No one can operate a bankrupt airline. Who would buy a ticket?" Assumptions can be very costly, and this one was no exception.

In May 1982, that untested theory spurred the destruction of 12,000 airline jobs and the end of a pioneer U.S. airline named Braniff. That baseless assumption was not just the brainchild of the naive, young lawyers "helping" Braniff's very inexperienced new chairman plan for bankruptcy, it was the shared opinion of the airline industry at the time that an airline in Chapter 11 would have to be put on the ground and then, somehow, restarted later.

Use of the word "naive," by the way, is charitable at best in Braniff's case. An operating airline is a delicately balanced orchestration of people and machinery and fuel and money, and once it's parked, restarting it is improbable at best. (Once Braniff was no longer in motion, re-flying it was impossible with crews and aircraft scattered, fuel supplies embargoed and other airlines racing in to buy their gates.)

But the larger tragedy of the theory that you can't fly through bankruptcy is that the entire concept of Chapter 11 is built around saving the patient -- reorganizing and lowering the outflow of cash so a company can keep operating.

A year later, in fact (1983), another airline chairman of very questionable quality forced another legacy carrier -- Continental Airlines -- into Chapter 11 and continued right on flying (despite major safety problems resulting from his Wild West replacement of the pilot force).

In fact, Continental -- now restored to the status of an excellent airline -- has been in and out of bankruptcy court twice in the intervening years, meaning that the law did exactly what Congress intended.

Today we have four legacy carriers (and one fairly new carrier) in Chapter 11, and that includes United, Delta, US Airways (now being purchased by America West) and Northwest. In a previous column, I outlined why a bankruptcy filing actually helps the safety system and why you should have no special worries about bankruptcy affecting safety. But it's time to talk about the financial risk of buying a ticket on a bankrupt, operating carrier.