Tuesday, May 01, 2007

Delta Airlines Set to Try Business Again.

Delta Airlines left bankruptcy protection earlier this week. The company had been reorganizing for 19 and a half months. A bankruptcy judge in New York allowed the company to leave chapter eleven protection by closing a $2.5 billion dollar loan to pay back creditors. It will unleash a new marketing scheme which includes painting 900 airplanes and a new advertising campaign which will cost $10 million. Delta Airlines supposedly entered Chapter 11 protection due to high fuel and labor (including pensions) costs. Delta's bankruptcy has cost the company more than $127.9 Million in legal fees. Creditors will receive anywhere from 62- 78% of their claims in the soon to be reissued Delta stocks (all facts from attached Associated Press article).

Although the company may have genuine reasons for bankruptcy with gas and labor costs, I don't believe for a minute that the company should be able to return to business. Airline companies often seek Chapter 11 protection from the government to 'reorganize.' Protectionism is not the answer. Pilots' unions and other unions do have unfair monopsony control of labor costs in the airline industry. Fuel prices are subject to changes. But it simply seems more likely the case of a senile industry. Delta Airlines, as well as many other airlines, are offering their services at higher per unit costs (diseconomies of scale). Many of the causes of diseconomies of scale sound very plausible in this case. Top Heaviness: albeit there is reason for management and chief officers of companies to receive large salaries, it makes a company bear high costs in wages and stock options to a very limited set of workers. Inertia: there may also be a lack of willingness to change. Slow response and isolation of decision makers: information not communicated efficiently and is mainly held by too few workers.

Chapter 11 is of course the logical move for Delta Airlines. But not for the market, government or taxpayers. I believe large companies should either never be allowed to return to business after bankruptcy, or only get one shot at it. I don't think painting nearly a thousand planes will make much difference. Delta ought to sell off all/portions of its' fleet to other airlines (dissolve or get diminish). Or it could also increase stock options to all employees to create incentives for profitability. Information may not be efficiently communicated in their previous manner, allow for some spontaneity. As for the unions and high pensions, who the hell knows.

No comments: