../../../MY_DOC%7E1/MY_DOC%7E1/ECONNEWS/South-Western%20College%20Publishing%20-%20Economics  
Early Release
Subject Bankruptcy
Topic Supply and Demand
Key Words Subsidies, Market Conditions, Costs, Revenues
News Story

United Airlines holds the dubious honor of filing the largest bankruptcy in the history of the aviation industry. In December of 2001, United Air Lines officially received court protection from creditors by filing Chapter 11 bankruptcy. Chapter 11 allows businesses to continue to operate under court supervision while attempting to restructure and reorganize their operation. United had initially hoped to exit the bankruptcy in approximately 18 months.

Airline industry sales have slumped significantly since the attack of September 11, 2001, and more recently demand has fallen because of the war with Iraq. In an effort to narrow the gap between revenues and costs, United is renegotiating contracts with workers and expects to save $2.56 million in the process. Additionally, United is negotiating with companies that lease their aircraft to obtain more favorable deals to improve the cost side of the equation for United. The company has also brought the contracts form many of its vendors to the bargaining table as part of the overall effort to reduce costs.

On the revenue side, sales have increased since the end of the war with Iraq and the expectation is for better sales in the future. Revenue is also being provided by the federal government. In an effort to help airlines survive the downturn caused by the war, the government has elected to provide subsidies to the airline industry. United Air Lines recently receive $300 million from this federal program.

United's CFO, Jake Brace reported that the company should meet the April and May financial targets set by creditors in the bankruptcy case. This is a sharp reversal of the company's stance in March when Brace did not expect to meet the targets. Brace told the Wall Street Journal that he fully expects the company to emerge from bankruptcy early. He hedged slightly, by adding, "But we want to come out a completely fixed company, not a partially fixed company."

(Updated June 2, 2003)

Questions
1.

What effect does a subsidy have on the supply curve?

2. What effect does reducing costs have on the supply curve?
3. What effect has the war with Iraq had on the demand curve of United Air Lines?
4. How will these shifts improve United Financial Position?
Source Meredith Grossman Dubner, "United Air Says Pondering Early Bankruptcy Exit," Rueters News Agency, May 21, 2003.

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