Flying Through Chapter 11
Sept. 20, 2005 -- -- The idea that an airline in bankruptcy can still fly safely isn't intuitive. That an airline carrier can't pay its bills is enough to make any savvy flier nervous, since that could logically mean they might not have enough funds for maintenance and training.
Certainly we've been seeing for years the effect of tight budgeting in the area called "passenger service," a function that's declined almost to the level of an oxymoron: meals few and far between, employees too often sharp and impatient if not angry, longer wait times for reservations, extra charges for just about everything that used to be provided, and many more small insults.
Why, then, wouldn't the act of filing Chapter 11 signal a slippage of operational safety to the same levels as passenger service attitudes? Because a Chapter 11 filing can actually relieve pressure on that airline's safety system.
Confused? Let's take a look at the basics of why an airline management goes to court.
First, a major legacy airline such as Delta even today generates a mighty river of cash. But when the high fixed expenses of owning and leasing aircraft, paying for employee benefits and retirement plans, airport facilities, maintenance and training bases (and much more) combine with the operational expenses (such as fuel) generated when airplanes move, the cash flowing in has to equal the amount flowing out, or the airline has to make up the difference from somewhere else.
In more financially healthy days, a losing quarter meant using extra available cash to make up the deficit. When the spare cash ran too low, airlines used money borrowed from existing credit lines before pressing employee groups for major reductions in salaries and benefits and then selling things (such as airline divisions and airplanes) to raise more cash. When there was no more outside cash or credit left, airline managements had two basic choices if they wanted to continue to operate: One, start cutting into the actual operational expenses of the airline, which can include cutting into the margins of safety. Two, remove the yoke of the airline's nonoperating fixed expenses by filing for bankruptcy protection under the provisions of Chapter 11 of the federal bankruptcy code, the basic aim of which is to give a financially troubled company the chance to breathe while trying to transform themselves into a going concern that can once again make money consistently.
