Aerospace in 1991: U.S. Airlines
Struggling with relatively high fuel costs, burdensome debt loads, and revenue losses sustained during the air travel slump caused by the Persian Gulf crisis, many U.S. airlines hoped as 1991 drew to a close that the disasters of the preceding 18 months would not continue in the coming year in the aerospace industry. In July, it was estimated that 18.5 percent of all passengers on U.S. carriers were flying on bankrupt airlines.
The chain of bankruptcies began in early December 1990, when Continental Airlines filed for Chapter 11 protection from its creditors; analysts cited the company’s $2.2 billion debt as the major source of its troubles. Because the announcement came three weeks before Christmas, many travelers feared a horrendous holiday tie-up, but the airline managed to maintain business as usual.
Only a month later, on January 8, 1991, Pan American World Airways filed for bankruptcy, a sad fate for what had long been the leading U.S.-based international airline and a pioneer in intercontinental flight. For more than 50 years after its organization in the 1920s, Pan Am was essentially an international carrier. After deregulation of the U.S. airline industry in 1978, therefore, it was quickly challenged by U.S. rivals who had extensive domestic routes to feed directly into their new international operations. Although Pan Am eventually acquired some domestic routes, stiff competition from both U.S. and foreign airlines, together with the growing pressures of fuel costs and recession finally pushed the once-proud giant to the wall.
Since 1978, Pan Am had sold off considerable assets, including, in an autumn 1990 deal with United Airlines, its route authority between London and four major U.S. cities. The airline finally had no option but to sell its remaining choice routes. After months of spirited negotiations involving United, Trans World Airlines, and Delta Airlines, Delta emerged the winner by offering a deal worth about $1.3 billion. The normally conservative Atlanta-based operator picked up rights to dozens of routes all over Europe, Africa, and Asia, as well as Pan Am’s East Coast shuttle; it also inherited some 45 jet airliners. Pan Am survived only as a regional carrier, with service to the Caribbean and Latin America from its new headquarters in Miami. But in December, Delta backed away from its promise to help finance Pan Am’s remaining routes and the airline shut down. After a fierce bidding war with American, United bought Pan Am’s assets, pending approval by the U.S. Transportation Department of the deal, through which United would end up with the world’s most extensive international route system.
Eastern Airlines, long one of the giants of the industry and almost as old as Pan Am, was equally unfortunate. Mushrooming debts and labor controversies hampered its fortunes during the 1980s, and in 1986 it became part of the empire built by Texas Air Corporation and Frank Lorenzo, who also owned Continental. Eastern went into Chapter 11 proceedings in 1989 but experienced considerable pressure from its creditors and some of the financial maneuverings of Lorenzo, preventing it from effecting reorganization. Although Lorenzo was ousted in 1990, the airline’s creditors remained insistent. After 62 years of operations, Eastern finally shut down for good in mid-January of 1991. Its death, along with that of Pan Am, truly marked the end of an era in air transportation history.
Other U.S. airlines also faced deep problems. TWA defaulted on a $75.5 million bond payment in February, despite a recent sale of its Chicago hub assets and U.S.-London routes to American. Chicago-based Midway Airlines filed for Chapter 11 in March; Phoenix-based America West Airlines followed suit in June. In mid-November, Midway shut down operations after Northwest Airlines pulled out of negotiations to acquire it.
The growing troubles of smaller carriers created concern that the competitive structure of the U.S. airline industry was becoming compromised. By 1991 the ‘Big Three’ of the industry — American, United, and Delta — controlled over half the U.S. passenger market, and some reports predicted they would increase their share to nearly 63 percent in 1992. Among the so-called second tier of carriers, including Northwest, Continental, and USAir, Continental was forced to put up some of its route authority assets for sale and began discussing a possible merger with Northwest; USAir announced in October that it would try to obtain union consent to a temporary cut in salaries. (In spite of its difficulties, USAir bought 108 arrival and departure slots at New York City’s LaGuardia Airport from Continental in November and agreed in December to run the Trump Shuttle for up to ten years, with an option to buy after five.)
A recent report by the Transportation Research Board, an agency of the National Academy of Sciences, concluded that deregulation had not compromised safety in airline operations but warned that the benefits of lower fares from deregulation might disappear as consolidation continues. The board recommended that the U.S. Justice Department take a stronger position against proposed mergers and proposed that travel agents rely on their own computer equipment in booking flights rather than the systems owned by the airlines, which work to the advantage of larger carriers.
The dramatic changes within the industry also raised concern about the Civil Reserve Air Fleet program. Established in 1953, the CRAF scheme provided for a number of airliners to receive structural modifications so that they could be immediately pressed into service in case of a military emergency. During the Persian Gulf crisis the CRAF program proved invaluable, carrying two-thirds of all passengers and one-fifth of all cargo airlifted by the U.S. military into the theater of operations. In addition, many CRAF planes took over military missions elsewhere around the world so that military planes could concentrate their efforts in the combat area. However, the reshuffling of U.S. airliners follows the sell-off of assets from Eastern and Pan Am means that many older CRAF aircraft will be retired, thereby reducing the total CRAF fleet. In addition, a number of foreign airlines have invested substantially in U.S. carriers, and military planners want to make sure that foreign ownership will never compromise CRAF operations. Some of the schemes planned for aerospace in 1991 were all intended to make sure that U.S airlines would be more active where their services are needed such as the CRAF scheme.