Bankruptcy is in the air for more than one airline

US Airways' bankruptcy filing and a massive layoff by American Airlines have sparked new worries about the airline industry's worsening financial condition, as investors have sent carriers' stock prices plunging this week while speculation grows that giant United Airlines may also seek a bankruptcy restructuring.

However, US Airways' filing could trigger a string of long-overdue events that might eventually strengthen the loss-ridden industry, although at a cost of making air travel more expensive and less convenient for passengers, analysts said. The changes also could prompt some airlines to merge in order to better compete, analysts added.

US Airways filed for bankruptcy protection - becoming the first major airline to do so since the Sept. 11 terrorist attacks - in part because such a filing will make it easier for the company to win concessions from its creditors and employees, and to effectively shrink the carrier to make it profitable again, analysts said.

If US Airways is successful, it could pressure other airlines to seek lower labor costs or reduce their size as well, in order to better match their business to the lackluster level of passenger traffic, analysts said.

In the meantime, United and any other airline struggling to reach concessions with its employees can say "bankruptcy is a real, credible alternative, because look at the example of US Airways," said Alec Ostrow, a bankruptcy lawyer in New York.

Once the airlines' size and costs are more in tandem with travel demand, the carriers also might better be able to nudge fares higher and generate more income per passenger, Ostrow added.

"There will certainly be an effect in the industry and on consumers," Ostrow said. Under that scenario, "it's going to affect consumers in terms of decreased competition and a decreased ability to choose routes, times and carriers," he said.

But he and others agreed that most other major airlines are not in immediate danger of needing bankruptcy court protection.

The industry, which lost more than $7 billion last year, already was slumping before the Sept. 11 terrorist attacks sent travel into a nose-dive. Despite huge cutbacks in flights after the attacks, the carriers are still flying more seats than there are passengers, forcing them to cut fares even as most airlines' costs - especially their labor expenses - remain high.

The problem was especially acute at US Airways, which filed under Chapter 11 of the bankruptcy laws. In Chapter 11, a company keeps operating but is protected from creditors' claims while it designs a restructuring plan.

Getting federal help

Now there's another big player in the equation: Uncle Sam.

Both US Airways and United, a unit of UAL Corp., are seeking massive worker concessions not only to stem their losses but also to win federal loan guarantees of $900 million and $1.8 billion, respectively, so they can raise that cash from lenders. A total of $10 billion in guarantees was made available as part of the post-Sept. 11 federal bailout of the airlines, and the agency overseeing it is the Air Transportation Stabilization Board.

In granting any support, the ATSB expects an airline's workers, suppliers and creditors to make concessions to help the airline repay the loans and thus protect the U.S. taxpayers' interests. US Airways has made good progress on that front, but the company decided it needed the bankruptcy court's help to finish its restructuring.

A growing number of analysts fear United won't get a federal bailout because too few of its workers have agreed to pay cuts, which could force that carrier to seek bankruptcy reorganization as well.

"We have no confidence in the company's ability to avoid bankruptcy," analyst James Higgins of Credit Suisse First Boston said in a recent report.

United has some of the highest labor costs in the industry, "and in the current environment it's out of sync with the market" where inroads are being made by lower-cost, lower-fare airlines such as Southwest Airlines and JetBlue Airways, said Michael Allen, chief operating officer of Back Aviation Solutions, an industry consulting firm.

United spokesman Chris Brathwaite said "anybody who's speculating one way or the other is not as closely involved with the situation as we are. We're clearly focused on our recovery, getting a handle on our costs and working with the ATSB to secure a loan guarantee." Having airlines in bankruptcy at the same time they're seeking government aid "is unprecedented territory" for the industry, said Thomas Boland, a managing director of Seneca Financial Group, who helped the smaller airline America West get a loan guarantee from the ATSB early this year, the only one granted so far by the agency.

ATSB spokeswoman Betsy Holahan said the agency is still reviewing the requests from United and US Airways, and no date is set for a decision.

But investors weren't waiting for an outcome and sold airline stocks with abandon Monday. United's parent UAL Corp. plummeted $1.40 a share, or 27 percent, to $3.80 on the New York Stock Exchange.

Wall Street now values the entire company - which has 84,000 employees, 560 aircraft, $17 billion in annual revenue and is the nation's second-largest airline behind AMR Corp.'s American - at a paltry $291 million, about the price of two jetliners. And United's employees own 55 percent of the airline's stock.

Speculation that United might ultimately seek a bankruptcy filing was fed by United Chief Executive Jack Creighton, who told employees that the government appears likely to reject its loan-guarantee application without more worker cutbacks.

"We've gotten the clear feeling that we need more participation from all of our stakeholders in our cost-cutting efforts," he said in a recorded message.

But among United's unionized workers, only its pilots so far have agreed to givebacks. And while United has more than $2 billion of cash on hand, it's still losing at least $1 million a day and faces big debt payments in the coming months that could wipe out much of that cushion.