Slate's Explainer: Why Do Airlines Go Broke?
ALEX CHADWICK, host:
This is DAY TO DAY from NPR News. I'm Alex Chadwick.
The news this week that both Delta and Northwest Airlines declared bankruptcy was not unexpected. Bankruptcy almost seems basic to the airline industry. The list of carriers that are or have been in Chapter 11 includes United, US Airways, ATA, Continental and the late TWA, which actually filed three times before disappearing for good. The explainer team at the online magazine Slate wondered why airlines go bankrupt so often. Here with the answer is Slate's Andy Bowers.
Mainly because they can't compete with younger rivals. Airlines almost never went bankrupt in the old days, when the federal board controlled every aspect of the industry, including ticket prices and routes. But after deregulation in 1978, so-called legacy carriers began facing lean and hungry upstart competitors. The legacy airlines, such as United and Northwest, pay more to fly their planes than newcomers like JetBlue and Southwest. They tend to have more veteran employees who earn higher salaries and more retirees who get pension benefits. Their union contracts, based on years of negotiation, often include more curbs on how much each pilot or mechanic can be asked to work. Given these higher costs, the legacy carriers have more difficulty competing on ticket prices. A history of credit troubles also makes it more difficult for legacy carriers to guard against oil price hikes by locking in guaranteed contracts.
Airlines seem to go bankrupt more often than any other business, but you'll find a similar pattern in other deregulated industries, like telecommunications, and in commodity industries. After all, steel is steel, so a customers just look for the best price.
How does bankruptcy help an airline? For one thing, a bankruptcy judge can impose a new contract and new wage cuts on a union, approve the transfer of pension obligations to the federal government and agree to eliminate some debts altogether. That said, bankruptcy carries very high legal and other costs, and airlines do what they can to avoid it.
CHADWICK: Andy Bowers is a Slate senior editor, and that explainer was compiled by Daniel Engber.
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