Big airlines have little to gain from Chapter 11

By Kyle Peterson - Analysis

CHICAGO (Reuters) - The threat of another round of major U.S. airline bankruptcies seems to have diminished, but it's not just because of tumbling fuel prices and sweeping downsizing.

For most of the top airlines, Chapter 11 simply isn't feasible considering the high cost of bankruptcy and the relatively small savings to be wrung.

"It's too expensive without the commensurate cost savings to gain," said Pia Thompson, partner at Reed Smith. Thomson previously worked for a firm that represented creditors during the bankruptcy of United Airlines parent UAL Corp (UAUA.O: Quote, Profile, Research, Stock Buzz).

"There's almost nowhere left to cut," Thompson said. "They've really done everything they can."

Since 2002, four of the top seven U.S. airlines have restructured in bankruptcy. Two others -- AMR Corp (AMR.N: Quote, Profile, Research, Stock Buzz) and Continental Airlines (CAL.N: Quote, Profile, Research, Stock Buzz) -- cut costs outside of Chapter 11.

During these large-scale reorganizations, airlines reined in expenses related to labor, airplane leases and facilities. Those steps, plus a series of fare increases, put the industry back on sure footing after a wave of low-cost competition pummeled large carriers.

But the good times didn't last. A jump in oil prices sent the price of jet fuel soaring and erased nearly all the gains airlines had made.

By the time crude oil notched a record $147.27 a barrel in July, analysts were predicting a fresh wave of airline bankruptcies. In the first half of 2008, industry analysts combed airline financial statements for signs that insolvency was near.

In April Frontier Airlines (FRNTQ.PK: Quote, Profile, Research, Stock Buzz), filed for Chapter 11, joining a string of smaller carriers that either declared bankruptcy or shut down altogether.

Oil prices have retreated some 26 percent since July, but a barrel of crude remains above $100, a price unthinkable to airline managers a year ago.

New fees and plans for sweeping downsizing in the fourth quarter have given carriers new traction and bolstered their share prices. But by no means is this a healthy industry.

"At this point, the big carriers ... can probably dodge the bullet and make it through the winter," said Ray Neidl, airline analyst at Calyon Securities.

"The next time some of these airlines go into bankruptcy, they will go pretty quickly into liquidation," he said.

FEES CAN'T BE JUSTIFIED

Reed Smith's Thompson said that despite talk to the contrary, Chapter 11 reorganization is not a viable option for airlines.  Continued...