Count on one thing for sure in an airline bankruptcy: fees.
And one more thing you can be sure of: uncertainty about ultimate survival.
As for the fees, an armada of lawyers, consultants, investment bankers and accountants has been walking off with big paydays in the industry's most recent Chapter 11s.
Don't say we haven't been warned. None other than Doug Steenland, CEO at Northwest, cautioned earlier this summer that bankruptcies can be expensive.
Steenland singled out the current United Airlines bankruptcy. Just through June of 2004, fees in United's seemingly unending Chapter 11 topped $130 million.
In the year since then, the number has doubled to $259 million.
The spigot is still running. UCLA law professor Lynn LoPucki, a bankruptcy expert and critic of Chapter 11 fees, estimates they are now "well in excess of $300 million."And there's more to come. The United bankruptcy proceeding, filed in December of 2002, is expected to stretch on into next year.
Colorado aviation consultant Michael Boyd calls the proceeding "an absolute playground" for lawyers, consultants and other intermediaries.
The Rocky Mountain News in Denver and the Pittsburgh Post-Gazette have kept running tabs on the fees mounting in the Chapter 11s at United and US Airways.
The Denver paper reported last month that United's average monthly costs for "outside professional services" rose to $10 million this year. The Kirkland & Ellis law firm alone took home $72.8 million through June. In one month, the firm got $5 million for 6,000 hours $833 an hour.
US Airways, now in its second Chapter 11 in three years, had paid $34.2 million in fees to 21 firms throughthe end of July.
The biggest winner at US Airways: Seabury Group, an investment banking firm, at $7.6 million. The Post-Gazette reported that Seabury was paid $36 million for its work in steering US Airways through its first Chapter 11, in 2002 and 2003.
Last October, Northwest named Barry Simon, a former Seabury managing director and a veteran of bankruptcies at Continental and Eastern, as its general counsel.
The expertise such firms offer is critical.
However, UCLA's LoPucki says Chapter 11 fees have been rising at a rate of 7 percent a year, roughly twice the rate of inflation.
"In general, I think the professionals are being paid more than is necessary," he says.
Now for the uncertainty.
Airline Chapter 11s are complex tools that enable the carriers to restructure and emerge to see a better day.
But LoPucki counters that far more airline Chapter 11s fail than succeed.
He points to the results of a study done by Aviation Forecasting & Economics that looked at 117 airline bankruptcies from 1979 to 1992. Only one, Continental, survived.
Most of the bankruptcies since 1992 have also ended in failure, he says.
"This is not a good market to be moving out into," he adds, noting the soaring fuel costs and other problems that have been plaguing the industry.
Yet now, if Northwest and Delta file Chapter 11s, four of the nation's seven largest airlines will be in bankruptcy proceedings.
Northwest's own chief executive alluded to the risks in a message to employees this summer. "Commercial airline history is littered with the brands of once-proud carriers that sought court protection from creditors and never emerged from Chapter 11," Steenland said. "The significant majority of airlines that file for bankruptcy do not survive."
