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.

Risk for Passengers?

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.

In short, there is none.

Of course, it's always wise to purchase airline tickets with a major credit card, which gives you substantial protection if the product (the seat you bought) isn't delivered. But even if you pay cash at the airport for a flight 10 months later, the chances that money will be lost is all but nil.

First of all, airline corporate leaders and the financial community in general have finally come to the common understanding that an operating airline has vastly more worth than a non-flying one, which means that creditors have a far lesser chance of recovering their money if they ground the golden goose. Everyone in the equation, in other words, is interested in keeping the airline flying, not putting it out of business, and that means the chances that your ticket will end up worthless are very remote.

Second, even in the past when major airlines have failed and shut down (such as Eastern, Pan Am and Braniff), the remaining airlines have traditionally stepped in to help out by honoring the defunct airline's tickets on at least a standby basis.

Of course, life isn't without its risks, which means that it is still possible that someday an entire airline will run completely out of cash and follow Braniff, leaving you in the lurch. The chances of that, however, are very small, especially with the legacy airlines.

The Fate of the Frequent Flier Miles

But what about frequent flier programs?

It's no secret that the airlines have all but given away the farm by building up gigantic repositories of mileage in their customers' accounts that are supposed to be exchangeable for free travel, and that they are all but desperate to find ways of getting out of that hole.

The method of choice -- being miserly with seats "available" for frequent flier use unless you double the miles spent -- has brought a continuous flood of lawsuits over the years, and irritated the very customers whose loyalty the frequent flier programs were designed to win. But because of the competitive pressures and the fact that business travelers who compile the most miles also provide the bulk of airline operating profits, wholesale ditching of a frequent flier program or cancellation of accrued miles would be competitive suicide, sending angry business travelers in droves to the competition.

In other words, the probability that your accrued miles will be in jeopardy at any legacy carrier in Chapter 11 is very minimal, and thus the need to go cashing them in immediately is very unlikely to be necessary. Pension plans -- a major covenant with the employees -- are on the chopping block, not frequent flier programs (which have no cash reserves).

What is a concern in airline bankruptcy, however, is any diminishing passenger service capabilities or attitudes.

For some reason, American corporate leaders in general seem to have trouble understanding that their companies are human organizations and that human beings -- when angry, upset, disillusioned, abandoned or otherwise disinterested in the company's mission -- give terrible service.

Of course, the leaders of bankrupt airlines have as their first responsibility the maintenance of the absolute highest safety standards. But right after that is the obligation to provide enough motivated people to do the job and do it well, with a major emphasis on good person-to-person service. That does not mean one-hour telephone waits for a reservationist, or charging for almost anything (such as curbside check-in) in order to make a buck and irritating customers in the process.

In fact, the history of my own Braniff International's alleged customer service toward the end stands as a cautionary example of how poor service from disillusioned people can turn a financial crisis into a complete disaster.

The only time, in other words, that a major airline's status of being in Chapter 11 should make you reluctant to buy its seats is if it can't figure out how to treat you as the most important cipher in the airline equation: the only thing standing between them and professional oblivion. Poor service, not bankruptcy, is the measure.