THE EXAMPLE OF THE AIRLINES

Bloated costs. Mountainous debt loads. Lackluster sales. Nimble competitors stealing market share.

The survival of Chrysler, Ford and General Motors depends on solving such challenges that would look familiar to anyone who followed Delta Air Lines’ turnaround over the past few years.

After all, Delta and most of the nation’s major airlines also sought and got emergency bailout packages from the federal government after the Sept. 11 terrorist attacks —- only to later succumb to bankruptcy when they ran out of cash.

Most of the carriers emerged from their bankruptcies or out-of-court restructurings with leaner, more profitable operations that allowed them to keep flying even when fuel costs, their biggest expense, soared to record levels earlier this year. Delta, in particular, got high marks from industry watchers for what it accomplished during a relatively quick 19-month bankruptcy restructuring from 2005 to 2007, when it lopped off $10 billion of its debt load and substantially reduced labor costs.

So why isn’t Chapter 11 —- the corporate equivalent of hitting the reset button —- the proper solution for the ailing domestic automakers, which have been losing market share and struggling under heavy cost burdens for decades?

Some experts believe Delta and the other airlines that recently reorganized in bankruptcy —- Northwest, United and US Airways —- have provided a road map for the struggling Detroit Three. But others say the airline and auto industries are too different and the economic situation now is too tenuous to argue that a trip through bankruptcy is the best route.

“You’re talking about a completely different product. You’re talking different cost structures,” said Maryann Keller, a veteran auto industry analyst, consultant and author.

Auto manufacturers and airlines are “totally different industries” whose customers act differently when it comes to making buying decisions, she said.

When Delta filed for bankruptcy, Keller said, she continued flying on the carrier “because I only had one commitment. One flight. That’s it.”

By contrast, car buyers have to worry about whether the company will still be around to honor warranties and provide service and parts several years after the initial sale. In fact, she said, the Big Three already are being affected by those concerns whether they file bankruptcy or not.

“You have to live under a rock not to know that they are in financial difficulties,” Keller said.

November auto sales for Chrysler and GM —- the automakers considered most likely to fail —- plunged more than 40 percent compared with a year ago, worse than the industry average.

Keller argues that Chrysler, Ford and GM should renegotiate union labor contracts and debt agreements outside of bankruptcy court.

“You could do what Chrysler did. … They did it all outside of court,” she said, referring to the government-backed bailout of Chrysler in 1979. “That’s the model. Not the Delta bankruptcy.”

With the salesmanship of its then-chairman, Lee Iacocca, Chrysler won a $1.5 billion loan guarantee from the federal government that helped it stay out of Chapter 11. As part of the deal, the automaker came up with $2 billion in concessions from unions, white-collar employees, dealers, lenders and suppliers. Iacocca also cut his salary to $1 a year.

This time around, Chrysler, Ford and GM headed to Washington last week for the second time in a month, seeking $34 billion in federal bailout money. GM said it needs up to $18 billion, with $4 billion by the end of December to avoid running out of cash. Chrysler also said it needs cash immediately. They say the loans will allow them to continue operating until the economy improves and earlier cost-cutting moves bear fruit.

The automakers have so far said bankruptcy is not a viable option because it would cause customers to bolt and sales to plunge, dooming reorganization efforts.

In a report last week, JP Morgan analyst Himanshu Patel said GM has requested “just enough” aid to keep it going until later cost savings kick in, such as a lower pay scale for new hires. But Patel said GM still runs a “significant risk” of running out of cash if the recession lasts longer than expected.

JP Morgan recently said in a report that GM should use a prearranged bankruptcy filing, in which key creditors agree to concessions ahead of time, to get around state franchise laws that otherwise block it from eliminating brands and shrinking its dealer network.

Some experts still say Uncle Sam’s wallet shouldn’t be opened unless the Big Three agree to substantial makeovers, probably involving a trip through bankruptcy.

“The question is whether the bankruptcy takes place now or after we’ve thrown good money after bad,” said Jack Williams, a Georgia State University professor and bankruptcy expert. “Look at the numbers. It just delays the inevitable. … The longer you allow [the domestic auto industry] to lumber along in its bloated form, the more vulnerable it gets, and I think at some point you may find there’s nothing left to save.”

He said GM, like Delta, should bite the bullet and seek a speedy trip through bankruptcy by getting key stakeholders to quickly agree to concessions. In Delta’s bankruptcy case, the airline reached settlements with many of its creditors without lengthy disputes in court.

Under a Chapter 11 bankruptcy filing, a bankruptcy court allows a company to stop paying many of its bills for a certain amount of time while it renegotiates debt terms, labor contracts and other agreements with creditors, suppliers, employee unions and other stakeholders.

Darryl Laddin, a bankruptcy attorney with Arnall Golden Gregory in Atlanta, said Delta’s Chapter 11 filing and earlier airline restructurings may have paved the way for the automakers to renegotiate labor, debt and supplier agreements. Those higher costs have put the domestic automakers at a huge disadvantage compared with transplant manufacturers, such as Toyota and Honda, which have lower operating costs at their U.S. plants.

“While it’s a different industry, the airline did set a precedent as far as significantly reducing their labor costs,” Laddin said. “The dynamics for what can be accomplished are quite similar.”

Still, Williams, the Georgia State professor, said bankruptcy won’t solve two issues that will make it harder for the automakers to emerge as viable businesses.

One is finding money —- called “debtor in possession” or DIP financing —- to stay in operation during the bankruptcy.

“You had 30 DIP financiers back in Delta’s day, and many of them lined up” to bankroll the airline’s Chapter 11 restructuring, Williams said. Since the credit crunch that has decimated Wall Street, only a handful still provide DIP financing, he said. The government may have to fill that role, he added.

But Williams said the key issue for the Detroit Three, which have been losing market share to foreign manufacturers for decades, will be coming up with a new business plan to produce better-selling products.

In Delta’s case, “there was a viable business to be reorganized” once its costs were reduced, Williams said.

The automakers have “got to have a viable business plan, and they’ve got to have financing and they’ve got to have competent management” to emerge successfully from bankruptcy, he said. “I think their chances are good —- not great —- of coming out.”

IS BANKRUPTCY THE ANSWER?

Like Delta Air Lines, Northwest and other large carriers, the Big Three U.S. automakers could use the Chapter 11 bankruptcy process to ditch huge debt loads, cut high labor costs and retool business plans, some experts say. But others say the fragile economy and big differences between the industries make that route too hazardous for Chrysler, Ford and General Motors.

Similarities between major airlines before bankruptcy and the Big Three automakers

> Lost market share to lower-cost rivals

> Had industry’s highest labor and employee benefit costs

> Flawed business strategies hurt revenues

> Most damage to reputation and stock and bond prices predated Chapter 11

Differences

> Much higher product price for cars, making customers more cautious about purchase decisions, especially during times of financial trouble

> Auto manufacturers have much longer commitment to customers —- warranties —- so news of distress could drive off consumers

> Current credit crunch makes bankruptcy financing harder to get now than when major carriers filed for Chapter 11 a few years ago

> Carmakers are much bigger and more complicated companies (GM has 250,000 employees vs. Delta’s 75,000)

Source: Staff research