Airlines in Bankruptcy Land

by Charlie Leocha on March 30, 2007

When did bankruptcy become a deliberate management strategy for the airline industry? Somehow it has become the ultimate hammer with which to pound out excess costs and then reward executives in charge of the bloodletting for their “effectiveness.”

Delta Air Lines and Northwest Airlines are the two largest airlines still in bankruptcy. But United Airlines, Continental Airlines, America West, US Airways, ATA Airlines, Braniff International, Eastern Airlines, TWA, Hawaiian Airlines and Aloha Airlines have all reorganized under bankruptcy protection at one time or another, and some of these carriers are still operating.

Bankruptcy courts have just about rolled over and played dead for airline management. I can’t remember the last time I heard that pilots, flight attendants or other union members had been favored in any court decision that involved a confrontation with management.

Consider the damage. Stockholders have been wiped out. Pensions have been abandoned by the bankrupt companies. Flight attendants have seen their work rules changed dramatically. Pilots are being squeezed for more and more flight time. Aircraft orders have been canceled. Contracts with suppliers have been torn up. Terminal leases with airports remain unpaid.

The only parties in the current spate of airline bankruptcies that seem to be flourishing are the airline executives, the lawyers, and a handful of bankruptcy financing firms. This greedy triad has been working the bankruptcy system to line their pockets — and to hell with the rest of the players.

According to SEC filings in February and March last year, Glenn Tilton, the current CEO of United, was awarded more than $20 million by the airline’s board of directors; by some estimates, he is now one of the largest shareholders in the company that he shepherded into bankruptcy. According to UnionVoice.org, his handpicked legal firm, Kirkland & Ellis, has charged more than $50 million, and one attorney has pocketed almost $2 million in fees for a recent year.

USA Today reported only this week that SEC filings showed United’s top five executives received $25.7 million in the form of cash, stock or exercisable options. Of that, CEO Glenn Tilton received $9.3 million, the filing said.

CNNMoney.com reported as far back as 2003 that former CEOs have reaped stunning salaries and even more astonishing pension deals. The former CEO of Delta worked for the company less than six years and walked away with a pension promising a million dollars a year. Unlike the pensions of the airline rank and file, his retirement is protected and guaranteed by a special executive trust fund.

Similarly, though its former CEO Donald Carty was forced to retire when the size of his pension became public, other executives at American Airlines still enjoy the protection of a special trust fund guaranteeing their pensions. The pilots and flight attendants, on the other hand, may see their hard-earned pensions slashed and eventually sent over to the Pension Benefit Guaranty Corporation. They get no guarantees.

The American Airlines pilots are incensed at the phenomenal increase in pay that their airline’s top executives have seen. According to Airline Pilots Association figures, the five top executives at American stand to receive $26,498,899 this year, up from the $3,777,325 they received in 2002. During the same period, the pilots pay actually decreased 4 percent — even though they now spend 26 percent more time in the air.

According to Arianna Huffington, quoted in WorkingForChange.com, the former CEO and the former CFO of US Airways, who together piloted that airline into debtor’s land, reportedly each walked away with $35 million in salary, bonuses and stock options in 1998. They then feathered their retirement nest by receiving administrative credit for more than 20 years that they weren’t actually on the job. The CEO, Stephen Wolf, left the company with a $15 million pension cash-out just six months before US Airways declared bankruptcy.

Something’s rotten in Bankruptcy Land

Yes, something is definitely rotten about airline bankruptcies. Many of these figures are two and three years old because executive compensation is usually a closely held corporate secret that is only released when the SEC requires or it is leaked by unhappy workers.

Even recent announcements by Delta Air Lines that its workers will share in the airline’s profits once it emerges from bankruptcy are suspect, as the plans continue to treat executives as royalty. According to reports in the Atlanta Business Chronicle, Delta’s 39,000 non-contract employees will share an estimated $480 million in stock and cash payments (or about $12,300 each) while 1,200 executives will share a jackpot of restricted stock, stock options and performance shares estimated at about $240 million (or about $200,000 each). My arithmetic calculates that the executives are receiving 16 times the share of the non-contract employees.

What happens to you when you don’t pay your bills? Do you get a bonus or a lush retirement package? Of course not. And yet there seems to be no stigma attached to airline bankruptcy. In fact, the airlines are still being treated as highly respected corporations in the business community. They are allowed to compete and bid for new routes and they are allowed to restructure their fleets with multibillion-dollar purchases. It is business as usual — unless one of the bankrupt airlines is your employer or owes you money.

Theoretically, the bankruptcy courts approve major management decisions but, in fact, no bankruptcy court judge seems comfortable overriding airline management — even when unions fight the executives aggressively in court. The legal system seemingly follows a principle that the good of the corporation and its executives trumps the good of the employees, stockholders and creditors.

The inconvenient truth is that bankruptcy has become part of the management process in our country. In the airline industry, bankruptcy is the norm rather than the exception. It is used not to cull the weak and mismanaged airlines but to provide a shelter from which to pursue advantage.

Northwest Airlines is a case in point. It landed in bankruptcy court with more than a billion dollars in the bank. Management even claimed, as it declared Chapter 11, that it didn’t need the protection of the bankruptcy court to keep operating. It was a bold and shameless maneuver to use the bankruptcy courts to batter its unions, avoid paying its bills, and renege on its contracts.

For years the airlines were a regulated industry whose salaries, benefits, pensions and profits (and sky-high airfares) were protected by a cozy relationship with the government. Though the industry has been deregulated for more than a decade, legacy airline executives have found a new way to suckle at the teat of the government — this time through the bankruptcy courts.

When a system allows continued mismanagement and provides no apparent consequences for the failing executives, it puts the burden of pain on creditors, stockholders and employees who have done nothing wrong. And while bankruptcy actions have not much affected airline schedules, ticket prices and frequent-flier programs, the public is certainly paying for these bankrupt airlines’ mistakes. Taxpayers are footing more and more of the unpaid airline bills (money for the Pension Benefit Guaranty Corporation and for airport bonds both come from taxpayers) and court costs and higher prices are all passed along to consumers when the airlines don’t pay their bills.

Our seemingly endless bankruptcy process is no longer serving the public good. In this upside-down, Alice-in-Wonderland world of bankruptcy relief, the ones wearing the smug, Cheshire-cat smiles are the airline executives who created the problem in the first place, along with their bankers and lawyers.

Go figure.

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