A Note on the US Airline Industry

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Case Details:

Case Code : BSTR139
Case Length : 24 Pages
Period : 2001-2004
Organization : Varied
Pub Date : 2004
Teaching Note :Not Available
Countries : U.S.A
Industry : Aviation

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This case study was compiled from published sources, and is intended to be used as a basis for class discussion. It is not intended to illustrate either effective or ineffective handling of a management situation. Nor is it a primary information source.

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"The airline industry is highly capital-intensive. It requires a highly dedicated, skilled work force that demands high wages. It's like trying to ride a bull, managing the airline business."

- Raymond E. Neidl, an airline analyst in 2003.1

"Despite putting in billions and billions of dollars, the net return to owners from being in the entire airline industry, if you owned it all, and if you put up all this money, is less than zero,"

- Warren Buffet, Investor in US Airways in 2003.2

Bankruptcies Galore

In September 2004, US Airways, the seventh largest airline in the United States (US), filed for bankruptcy - the second time in two years. The event came as no surprise to observers of the US airline industry, as it had long been evident that US Airways was in a precarious financial position.

Early History

The management of the airline had also been warning since early 2004 that the airline might have to file for protection under Chapter 11 of the US Bankruptcy Code3 if it failed to obtain deep pay cuts from its unions. The cuts were to be a part of a strategic overhaul that would turn US Airways into a low-cost operator. However, disillusioned by the airline's performance during its first bankruptcy, the unions refused to concede the cuts. US Airways was the first airline to enter bankruptcy after September 11,4 and it used the court's protection to reduce its debt and cut overall annual costs by $1.9 billion during the period. The airline finally emerged from its first stint with bankruptcy in early 2003, with the aid of a $1 billion loan from the US government.

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Analysts however, believed that a bail-out would not come as easily the second time and that the bankruptcy might eventually end in the liquidation of the airline. US Airways was not alone in its predicament.

Most of the other airlines in the industry were also operating under immense financial pressure, with the exception of low cost carriers (LCCs) like Southwest Airlines (Southwest) and JetBlue Airlines (JetBlue). United Airlines (United), the second largest airline in the US, was operating under bankruptcy since December 2002 and in mid-2004, was denied a government loan of $1 billion that would have helped it emerge from protection. In early 2003, American Airlines (American) just managed to avoid bankruptcy, by getting its unions to agree to deep pay and benefit concessions. In mid-2004, Delta Airlines (Delta) warned that it might have to file for Chapter 11 protection if it failed to obtain major cuts from its pilots' union.

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1] Edward Wong, "Airline Economics: Fasten your seatbelts," New York Times, December 9, 2003.

2] Edward Wong, "Airline Economics: Fasten your seatbelts," New York Times, December 9, 2003.

3] Chapter 11 of the US Bankruptcy Code allowed companies to operate and restructure their debts while granting them protection from creditors.

4] September 11, 2001, was the day on which terrorists hijacked four passenger planes and crashed them into important buildings in the US, killing over 3000 people. The attacks had an extremely adverse impact on the US economy, more so the airline industry.


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