The Brancatelli File



October 14, 2004 -- The Big Six begins reporting calendar third-quarter results next week and unlike Southwest Airlines, which shocked the world today by recording a 12 percent jump in earnings, the supposedly full-service carriers are going to register another set of gigantic losses.

The bleeding will run to about $1.5 billion this quarter. Which, of course, is on top of the $30 billion or more that the Big Six has frittered away so far this century. Worse yet, there will be no profit in the fourth quarter and no one expects any profits next year, either.

This would all be so much more grist for the mill but for the fact that the Big Six may now, finally, be at the end of their respective financial ropes. There's no revenue coming in, fuel prices continue to skyrocket, average fares continue to drop as the Big Six resolutely supports a destructive pricing system, debt is piling up, there's no new outside investment capital available and no candidates to buy assets should any airlines decide to start burning the furniture to raise operating capital.

Chances are that six months from now, after the historically lean first quarter, the entirety of the Big Six will join United and US Airways in bankruptcy.

Now I've never worried about these fools dying. I think badly managed companies that produce bad products and services at inexplicable prices should go out of business. Should they all perish--a word former American Airlines chief executive Don Carty once used to such great effect--we frequent flyers would probably be better off. Smarter, stronger, leaner, more responsive airlines would crop up to take their places.

But no one, not even me, ever thought that all six of these rotting carcasses would find themselves on Route 66 to Chapter 11 at the same time. Even I assumed that one or more of them would smarten up just enough to emerge from this period of post-9/11 chaos as survivors. I figured the Big Six would become the Big Three, just as the Big Six (plus mortally wounded TWA) emerged relatively healthy from the chaos that consumed the Big Ten after the 1991 Gulf War.

This all-fall-down scenario, which may be just months away, would be disastrous, especially for us as taxpayers. Faced with a "crisis" such as the entire Big Six in simultaneous bankruptcy, the politicians will go wild. They'll start handing the fools who run the Big Six billions and billions of dollars of tax revenue. A re-elected President Bush might be perfectly fine with lots of children being left behind, but he won't accept his airline friends going under en masse. And a newly inaugurated President Kerry won't react much differently, if for no other reason than he couldn't allow such a "disaster" to strike just as he is finishing his first 100 days in office.

And, to be fair, the all-fall-down scenario would have ghoulish financial implications. The Big Six carriers have more than $30 billion in unfunded pension obligations and panicky bankruptcy judges might allow them to dump the retirement programs on the Pension Benefit Guarantee Corporation, the quasi-government agency that acts as the payee of last resort. In the long run, the American taxpayer has to make good on the PBGC's responsibility.

And Route 66 to bankruptcy would mean a major dislocation in the economy. Delta Air Lines, for example, has about $20 billion in debt and required lease obligations. The other three currently solvent Big Six carriers--American, Continental and Northwest--are in a similar debt stratosphere. Combine that with what bankrupt United and US Airways owe and we're suddenly talking about maybe $100 billion. That's money owed to everyone from the airport sandwich-shop operator who accepts an airline lunch voucher to the importer who supplies in-flight pillows and blankets.

Are you ready to pony up $100 billion to pay off the Big Six' debt and another $30 billion to fund their pension obligations? Of course not. Are you ready to pay for half of it and hope that the sandwich-shop guy can survive with 50 cents on the dollar and the retired airline flight attendant can live on half of her fixed income? Probably not.

So what are we going to do? Two years ago, I wrote a column that suggested we nationalize the Big Six, pay off the shareholders at market value, then reorganize and refloat the carriers in some new and rational configurations. All of the Big Six were publicly trading then and the price would have been less than $4 billion at prevailing market-capitalization values. It would cost a lot less today--and I still think nationalizing and reconfiguring the Big Six makes sense.

But I also have another idea: The Federal Airline Reconstruction Corporation (FARC). This independent body would have one task: to bribe the Big Six into managing themselves like intelligent businesses.

Here's how it could work. Right now, there is about $11 billion sitting idle in the Aviation Trust Fund. That money comes from the excise taxes and fees we pay whenever we buy an airline ticket. Some of the fund is earmarked for capital projects at airports, but I suggest we need this money more urgently to prop up and revolutionize the Big Six.

With its $11 billion stake, FARC could work up some simple rules of conduct. Any Big Six carrier that wants a piece of the $11 billion would first have to agree to honor its existing debt and pension obligations. Any Big Six carrier that wants a piece of the action would further have to agree that management compensation could not top, say, $250,000 in annual salary and benefits.

And then, to ensure that the money from the Aviation Trust Fund is not wasted like the $5 billion in "grants" we gave the Big Six after 9/11, FARC would only pay on performance.

For example, any Big Six carrier that agrees to rationalize its fare structure would get some money. Rationalize your fleet and you get some money from FARC. Any carrier that reduces flights at airports that FARC estimates to be overcrowded gets a payoff. Depeak your hub to increase utilization of your existing equipment and workforce? FARC will pay for your wise choice. Launch service to an airport that currently has no jet service? FARC will give you some money. Voluntarily negotiate new labor rules and new salary and benefit packages so that your costs come down and your pension obligations shrink? FARC pays.

I admit here and now that this idea is out there. FARC may be an impractical fantasy. But it's worth talking about. So's the idea of buying up the Big Six now before they all go bust. So is any idea that proactively addresses the need to stop the Big Six from getting on Route 66 to bankruptcy and dumping upwards of $130 billion of trouble in the lap of the American taxpayer.

This column originally appeared at

Copyright 1993-2004 by Joe Brancatelli. All rights reserved.