Amidst a financial crisis, legacy airlines struggle to stay in the skies
by Laura Fumiko Keehn
The airline industry suffered a huge blow following the terrorist attacks on Sep. 11, 2001. Officials estimated that the U.S. airline industry would lose $18 billion within the year. In the four years since then, the industry as a whole has endured many more challenges, including a continued drop in passengers and rising gasoline prices. The “legacy” airlines, or the large established airlines such as United, American, Delta and Northwest have suffered the most. Along with the aforementioned challenges, these airlines have the added burden of supporting long-established pension plans for extensive current and retired employees. They also have struggled against fierce competition from smaller, low cost carriers.
Many of the legacy airlines have, or are approaching bankruptcy. United went into bankruptcy in December 2002, a move which is allowing them to save approximately $3225 over the next five years, partially at the expense of employee retirement benefits. Unions are not happy, and the Association of Flight Attendants are threatening strikes. United stands by their decision however, claiming current losses will benefit the company long term. “The [bankruptcy court ruling] is critical to the future of United” said Jean Medina, spokeswoman for UAL to Reuters.
Delta and Northwest airlines similarly claim that they would need 25 years to repair the under funding of their pension plans, and are currently seeking legislation that would allow them to postpone payments. If these airlines follow in United’s footsteps in filing for bankruptcy, the U.S. taxpayers will end up shouldering the cost, as the pension plans for each of these legacy carriers will be the burden of the Pension Benefit Guaranty Corp, an organization run by the U.S. government to insure corporate pension schemes.
Other measures taken by these legacy carriers include pay-cuts. United faced strong resistance from the airlines machinist and mechanics unions when it sought a 25 percent pay cut.
According to Northwest Airlines Corporation CEO Douglas M. Steenland, investment is also a crucial measure in staying afloat. Competing against low cost carriers is one of the main sources of loss for the legacy airlines. Old-style large capacity aircrafts do not fill up in post 9-11 flights, costing the airlines lost revenue. Steenland believes that Northwest’s plans to invest in new, smaller long-range aircraft will allow more flexibility at a lower cost. Smaller planes means the capacity is filled more easily, and because they are long range they can fly at full capacity along competitive routes. This would allow for more direct flights. More importantly, Northwest will be able to offer international and long-range flights from smaller, less competitive cities, as opposed to fighting to fill huge capacity aircraft from a limited passenger pool in competitive airports such as Los Angeles International.
Following United’s bankruptcy, it remains to be seen how the remaining legacy airlines will fare against the continued challenges facing the U.S. airline industry.
This article is based on a presentation given by Douglas M. Steenland on May 25, 2005, organized by the American Chamber of Commerce in Japan.
Established in 1948, the ACCJ is now an influential organization representing the interests of international businesses in Japan. For information on ACCJ membership and upcoming events, see www.accj.or.jp
