In August 2004, we reported on the financial condition of the airline  industry. At the same  time, low cost airlines have been able to continue producing modest profits  (see fig. Bankruptcy Is a Response to the Airline Industry’s Structural Challenges

Bankruptcy filings are prevalent in the U.S. airline industry because of long- standing economic structural issues that have led to historically weak  financial performance for the industry. Structurally, the airline industry is  characterized by high fixed costs, cyclical demand for its services, intense  competition, and vulnerability to external shocks. Since 1978, there have  been 162 airline bankruptcy filings in the United States, 22 of them since 2000. Airlines Seek Bankruptcy as a Means to Restructure, but Are Not Always Successful in Reducing Costs

Bankruptcy has played a prominent role in the U.S. airline industry since  deregulation because many carriers have used the bankruptcy code in an  effort to restructure their operations and cut costs—by, for example,  terminating defined pension benefit plans and rejecting high-cost aircraft  leases. Generally, major airlines have been able to reduce their costs during  bankruptcy. According to our  analysis of the Bankruptcy Research Database, airline bankruptcies  ranked fifth in overall duration (averaging 714 days), behind bankruptcies  in such industries as water transportation and petroleum refining, and  lasted significantly longer than the average for bankruptcies in all of the  industries in the database, which was 518 days. As a result, filings by companies not meeting one or the other  criterion were not counted. No Evidence That Bankruptcy Protection Harms the Industry or Hurts Competitors

There is no clear evidence that airlines in bankruptcy are harming the  industry or their rivals or that bankruptcy is a panacea for airlines seeking  an easy path to profitability. We also found that capacity  rebounded quickly in individual markets that experienced the liquidation or  retreat of a significant airline, as other carriers quickly expanded capacity  to compensate with little or no increase in overall average fares. Several  studies have also found that airlines in bankruptcy have not reduced fares  and did not harm rival airlines financially. Very Few Airlines Have Emerged Successfully from Bankruptcy

Very few airlines have emerged from bankruptcy and are still operating. Airline Pension Underfunding Contributes to Airline Liquidity Problems, Threatens Employee Retirement Benefits, and Is Costing PBGC Billions

Estimated minimum pension contribution requirements of $10.4 billion  over the next 4 years, combined with other fixed obligations, threaten the  liquidity position of the remaining legacy airlines with pension plans. When United and US  Airways terminated their pension plans and transferred $19.6 billion in  pension obligations to PBGC, participants lost a total of $5.3 billion in  benefits, and PBGC incurred costs of $9.7 billion to cover the gap between  guaranteed benefits and available assets. While cash from operations can fund some of these  obligations, continued losses and the size of these obligations put these  airlines in a sizable liquidity bind. If their plans are frozen so that their liabilities do not continue to  grow, allowing an extended payback period may reduce the likelihood that  these airlines will file for bankruptcy and terminate their pension plans in  the coming year. To assess the effect of airline pension underfunding on employees, airlines,  and the Pension Benefit Guaranty Corporation (PBGC), we relied on a  variety of sources.
Why GAO Did This Study

Since 2001 the U.S. airline industry has lost over $30 billion. Delta, Northwest, United, and US Airways have filed for bankruptcy, the latter two terminating and transferring their pension plans to the Pension Benefit Guaranty Corporation (PBGC). The net claim on PBGC from these terminations was $9.7 billion; plan participants lost $5.3 billion in benefits (in constant 2005 dollars). Considerable debate has ensued over airlines' use of bankruptcy protection as a means to continue operations. Many in the industry have maintained that airlines' use of this approach is harmful to the industry. This debate has received even sharper focus with pension defaults. Critics argue that by not having to meet their pension obligations, airlines in bankruptcy have an advantage that may encourage other companies to take the same approach. At the request of the Congress, we have continued to assess the financial condition of the airline industry and focused on the problems of bankruptcy and pension terminations. This report details: (1) the role of bankruptcy in the airline industry, (2) whether bankruptcies are harming the industry, and (3) the effect of airline pension underfunding on employees, airlines, and the PBGC. DOT and PBGC agreed with this report's conclusions. GAO is making no recommendations.

What GAO Found

Bankruptcy is endemic to the airline industry, owing to long-standing structural challenges and weak financial performance in the industry. Structurally, the industry is characterized by high fixed costs, cyclical demand for its services, and intense competition. Consequently, since deregulation in 1978, there have been 162 airline bankruptcy filings, 22 of them in the last five years. Airlines have used bankruptcy in response to liquidity pressures and as a means to restructure their costs. Our analysis of major airline bankruptcies shows mixed results in being able to significantly reduce costs--most but not all airlines were able to do so. However, bankruptcy is not a panacea for airlines. Few have emerged from bankruptcy and are still operating. There is no clear evidence that airlines in bankruptcy keep capacity in the system that otherwise would have been eliminated, or harm the industry by lowering fares below what other airlines charge. While the liquidation of an airline may reduce capacity in the near-term, capacity returns relatively quickly. In individual markets where a dominant carrier significantly reduces operations, other carriers expand capacity to compensate. Several studies have found that airlines in bankruptcy have not reduced fares and rival airlines were not harmed financially. The defined benefit pension plans of the remaining airlines with active plans are underfunded by $13.7 billion, raising the potential of more sizeable losses to PBGC and plan participants. These airlines face an estimated $10.4 billion in minimum pension contribution requirements over the next 4 years, significantly more than some of them may be able to afford given their continued operating losses and other fixed obligations. While spreading these contributions over more years would relieve some of these airlines' liquidity pressures, it does not ensure that they will avoid bankruptcy because it does not fully address other fundamental structural problems, such as other high fixed costs.