The Day That 4 American Legacy Carriers Went Bankrupt
From the archives | This article was originally written and published on January 25, 2019.
September 14th, 2005 was truly a unique day for the United States’ aviation industry. That day Delta and moments later Northwest filed for bankruptcy in court. This put the air space above America in an exceptional position – 4 airlines were flying under Bankruptcy protections.
Delta, Northwest, US Airways and United Airlines carried half of the passengers in the United States. All 4 of them were also operating under the protection of Chapter 11, just not to get dissolved by creditors. But how did it get to this point, that 4 of the biggest 6 American airlines were in such dire financial straits?
Well, long story short, a lot of factors contributed to that fact. 2005 for the airline industry was the time, where anything that could have gone wrong literally went wrong.
If you‘re here for the long story, well then strap in! Because we‘re going to take it step by step and analyze each individual case for every airline. Then, we will try to sum up why did things go so south.
Legacy Carrier? Chapter 11? What?
In the previous chapter I have mentioned two very specific terms that some of you might not know of. If you do know them, just skip down a bit and we’ll meet in a bit.
First of all, let’s start out with what is a Legacy Carrier. A term that is unique to the United States, an airline is defined as a Legacy carrier when it has had established domestic routes before the aviation deregulation act of 1978. Another characteristic that defines a legacy carrier is that it offers additional services compared to a low-cost carrier. If a low-cost carrier makes money by squeezing every penny for food and priority boarding, then a legacy carrier runs on a completely different business model. If, for example, you purchase a ticket from Delta, you get a meal on a long flight and you can get a seat in first or business class.
Secondly, Chapter 11 is a part of the United States Bankruptcy Code. Chapter 11 permits organizations, such as airlines, to restructure their business while they face financial struggles. Let’s use an airline as an example. If a fictional airline called Big Earth Airlines had a lot of debt and it filed a Chapter 11 bankruptcy, then it would have the chance to take out new loans or talk with investors. It also would have the chance to cut costs – end leasing agreements, cut its workforce, or lower wages. Any profit made by the airline would firstly go to the new investors, then the carrier.
Another thing why Chapter 11 is unique – an airline is protected from anyone that they owe money to. Thus, it can operate as normal while restructuring the company.
So, with that out of the way let’s take ourselves back to September 14th, 2005.
Delta Air Lines
Delta already had big issues in its finances. For 5 years already it has not returned a single profitable quarter. The company was in a very bad situation.
A week before declaring bankruptcy, Delta sold off its subsidiary Atlantic Southeast Airlines. The airline did not cut pilots’ wages until 2004, when it finally held successful negotiations with its pilot union, while also constantly cutting jobs. The total amount of lost jobs summed up to be over 24.000.
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