For all the heat and light generated by Qantas in recent months, the brutal reality is that most of the whiners don’t understand that the airline business is a recipe to lose money. Nor do they understand that government ownership is no protection or panacea; it’s just that the losers are taxpayers instead of private shareholders.
Anyone who’s bagged Qantas and its board and CEO for being hard-nosed in grounding the Qantas domestic and international airlines in the recent dispute should think again and take a look at what the parent company of the huge American Airlines did overnight, that and the multi-billion dollar fiddle the Indian Government is trying to get away with to keep the incompetently-run, government controlled Air India in the air.
AMR Corp filed for Chapter 11 bankruptcy protection early today, our time, despite having $US4.1 billion in cash on hand. The reason? It wants to use the US bankruptcy laws the restructure will trigger by cutting employee, interest, plane financing charges and other costs. It will be brutal and employee pension funds will take a hammering because many are high cost defined benefit plans with huge deficits (as were the funds at GM and Chrysler when they collapsed).
That cash pile will enable it to keep flying without getting special loans from banks, who will pay a cost in the bankruptcy, just like employees, Boeing, Airbus and other suppliers.
American Airlines will keep operating but management will carve billions of dollars from pay, entitlements and pension benefits (which include health costs in the US). It will make what Qantas tried to negotiate with some of its recalcitrant unions here look like a Devonshire tea party.
The board of AMR has taken the “nuclear option” and deliberately bankrupted the company. The airline hasn’t been grounded, but all costs have been and will be slashed. While Australian law doesn’t give Qantas that freedom, there was no suggestion this option was being contemplated.
AMR’s American Airlines was in fact the only major US airline not to file for bankruptcy in the past decade, but reality has caught up with it. It has the highest labour and operating costs in the business because it didn’t go bust, unlike competitors such as United.
AMR said its operations will continue as normal throughout the process, which US analysts say could take up to two years to resolve. AMR struggled against bankruptcy for years as fuel prices soared to record levels and the GFC and then recession stopped higher-paying business travellers at home. The company is expected to post its fourth straight year of losses in 2011, and most analysts quoted in media reports this morning see that trend to continue through at least 2013.
Meanwhile in Asia, Air India has reached broad agreement with a consortium of 26 banks to restructure $US3.45 billion in debt and keep the loss making state-owned carrier airborne.
Media reports said that as part of the deal the government is considering repaying the airline’s $US3.45 billion of debt over the next decade, a form of state aid that will upset the country’s privately owned airlines (one of whom, Kingfisher, is on the edge of collapse itself with high debts and low cash flows).
The debt deal comes as the government’s aviation ministry proposed allowing foreign airlines to take a stake of up to 26% in domestic carriers, a move which could provide the likes of Kingfisher with much needed funding. But that will be unpopular if the strident opposition to a similar move to allow foreign owned retailers to operate in the country, announced only last week, is any guide.
But the latest deal will only relieve pressure on Air India and won’t solve its problem: it has a total debt bill (before the new deal) of $US9 billion and expects to lose $US1.5 billion in 2011. It has already been handed more than $US600 million in state grants in the past two years, despite triggering an intense air fare cutting campaign that is coming close to bankrupting the entire industry, thanks to the rising pressure from high fuel costs (India has to import much of its oil needs).
Both the AMR filing and the Air India bailout illustrate the realities of the airline business, which many people in Australia who bag Qantas and its management don’t understand as they demand the lowest possible airfares, high wages and high levels of service, and forget about costs. And Qantas could be in the firing line because American is its OneWorld alliance partner in the US.The Financial Times Lex columnist summed up the situation on airlines perfectly in the paper’s Asian edition this morning:
“Since deregulation in 1978, there have been two-and-a-half times as many US airline bankruptcies as fatal accidents, according to Air Transport Association and Airdisaster.com data … In the entire recorded history of the US airline industry, cumulative earnings have been negative $33bn.
“It is not for lack of trying — airline executives are obsessed with efficiency. Last year’s US passenger load factor of 82 per cent was the highest ever and a third more than two decades earlier. A new hit TV programme in the US about defunct airline Pan Am plays on nostalgia about when air travel featured meals, legroom and, er, friendlier flight attendants. Since deregulation, however, prices have risen only 70 per cent, or a third as much as underlying inflation. The economic benefits have all flowed to passengers, airports or aeroplane manufacturers and financiers.
“This seems odd given the still high barriers to entry, limited competition on many routes, and a steady rise in passenger numbers worldwide. But airline economics, involving high overheads, sensitivity to economic and geopolitical shocks, and an aversion to empty seats encourage ruinous competition.”
On Monday, Qantas announced that its interim profit would fall because of the impact of the industrial activity up to the end of October, the costs of the grounding, the higher dollar and fuel prices.
The airline said it expects to post an underlying pre-tax profit of between $140 million $190 million, or for the six months to the end of next month. That would be down from $417 million a year earlier, or a drop of as much as 66%. But it is a profit “underlying” otherwise. AMR Corp will report losses in the billions of US dollars, as will Air India, for years to come.
But aren’t some of Qantas’ problems due to mistakes in aircraft purchases and choices of routes?
Nice one, Gavin, and let’s not forget joyce’s competitive pay rise for himslf. Positively reeks of good competitional behavior.
Qantas are reaping what they have sowed over the past 20 years of bad management decisions and deserve all they get AFAIC!
How on earth can a company with 4.1 billion in the bank sue for Chapter 11? Is the claim based on forward estimates of some sort?
Chapter 11, often put forward as an advantage of US bankruptcy law in that it enables bankrupt companies to keep running while they get their house in order rather than call in the receivers, has wrecked the US airline industry. The problem comes when Chapter 11 becomes routine over an entire industry – the airlines in Chapter 11 keep running with a substantial cost advantage over the solvent ones, dragging them down until they also end up in Chapter 11. There is no equilibrium from bankrupt carriers going out of business and allowing the solvent ones to expand their market share. The result is the entire industry staggers under overcapacity and competitors with a Chapter 11 cost advantage. In this scenario, AA going into Chapter 11 was inevitable.
This is the dirty little secret of the changes that the Lex columnist attributes to deregulation – it is actually the result of an industry that is cannibalising itself. How much lower can conditions go?