The Law Of The Jungle Takes To The SkiesBy
Eastern Air Lines Inc. stops flying. Trans World Airlines Inc. cuts 50% of its international flights and lays off 2,500 people. The bad news is issuing from the airline industry in a steady drone. Since August, when the Persian Gulf crisis sent fuel prices soaring, the industry has lost more than $ 2 billion, experts estimate. Two airlines have filed for Chapter 11 protection. And strong airlines have bought or proposed buying almost $ 1.3 billion in assets from their weak or bankrupt brethren.
Is the U. S. airline industry ruled by the law of the jungle? Transportation Secretary Samuel K. Skinner doesn't think that would be all bad. "Consolidation is no grounds for panic," he told the National Press Club on Jan. 23. Delivering basically a new policy statement for the industry, Skinner outlined agency decisions that will hasten consolidation while opening the U. S. market to greater foreign competition and capital.
NO PANACEA. Skinner's most significant pronouncement concerned the rule barring foreign investors from owning more than 25% of the voting stock of a U. S. airline. Transportation will now interpret the rule much more loosely. Foreigners can own up to 49% of an airline's equity as long as the stake doesn't give them voting control. As for debt financing, it will not be considered a means of control. Skinner also outlined a series of decisions that are designed to stimulate the market for routes, liberalize bilateral treaties, and improve access to airports.
The new policy is of immediate benefit to Northwest Airlines Inc., which is struggling under a $1.5 billion debt load incurred in its 1989 leveraged buyout. Northwest won't have to buy back $250 million of the $400 million KLM Royal Dutch Airlines invested in the LBO. KLM will also be allowed to fly directly from Europe to Minneapolis, a Northwest hub. That will permit the two carriers to set up the kinds of marketing agreements that have eluded them since the buyout. USAir Inc. might also get a break. Having lost $450 million last year, the company may look for foreign investors, sources say.
While analysts and industry executives applaud Skinner's efforts to open the market, the new policies are no panacea. Analyst Kevin Murphy of Morgan Stanley & Co. doesn't expect a rush of rescue capital. "It's a step in the right direction," he says, "but it's not going to open up the floodgates."
It's probably too late to help some carriers, anyway. Eastern's long-expected demise shows how painful the airline crisis can be for the creditors and employees of the growing number of bankrupt carriers. During its 22 months in Chapter 11, Eastern lost $1.8 billion and burned through $685 million in cash set aside for unsecured creditors after asset sales. Those creditors, including the federal Pension Benefit Guaranty Corp. and suppliers such as Airbus Industrie, aren't likely to get anything more than lawyers' bills. Even some secured creditors, who have watched the value of their collateral--aging 727s and DC-9s--wilt by 20% or more, aren't sure how much they'll recover. In the end, 18,000 jobs will be lost.
SPIKING FARES. When the cash ran out, it didn't take long for Eastern to become a laboratory for free-market forces. Even before the bankrupt carrier finally grounded its planes on Jan. 18, its competitors were sweeping in to pick apart the company. Eastern trustee Martin R. Shugrue had tried for months to sell parts of the airline in a desperate bid to keep flying. But he didn't unload much until three days before the shutdown, when Delta Air Lines Inc. agreed to pay Shugrue $42.9 million for 18 gates at Atlanta's Hartsfield International Airport and a route to Canada. By Jan. 23, Shugrue had agreed to sell gates at Washington National Airport to Northwest for $23.2 million. Then United said it would pay $60 million for gates at both Los Angeles International Airport and Chicago's O'Hare.
Just as economics textbooks would predict, air fares in Eastern's former markets spiked after the carrier shut down. Competing airlines, led by Delta and USAir, no longer had to match the ailing carrier's kamikaze prices. That's O. K. with Skinner, as is the Darwinian ethos that deregulation encouraged. "Deregulation allowed airlines a greater latitude to make mistakes," he says, noting the industry's heavy debt. The consolidation, he adds, "is the inevitable result of market forces."
Captain H. Clay Faulkner, who piloted Eastern's last flight into Miami, sees it more simply: "We're a victim of the '80s--a decade of greed and debt financing," he says. The industry eventually may cure its ills by working itself down to a smaller group of the fittest carriers. But for Faulkner and his colleagues, it has been bitter medicine indeed.