FOR THE WEEK OF OCT. 10, 2005
A flood of bankruptcies signals trouble in major industries
Divide your classroom into two groups--one to represent the "pro" side of allowing businesses to file Chapter 11 bankruptcy and one to represent the "con" side of the issue. Provide a week's worth of newspapers to the class (with coverage of this event) and ask the students to tally all of the quotes related to either the pros or cons. Students should write out the actual the quote, who said it (including their title, organization they represent, etc.), and the date of the article. Discuss the merit of each quote and hold a class vote to determine whether students align with the pro or con side of the issue.
Discuss the idea of creating competition in the marketplace to benefit consumers and the ramifications of situations like Delta and Northwest. For example, if competition drives a business to bankruptcy or to close, discuss what might occur with the other businesses in that industry -- or with the industry itself. Have the students search a week's worth of newspapers to find out what predictions are being made in the airline, auto, and steel industries. Students should list who (or what entity) is making the prediction and on what basis they're making their prediction (such as historical precedent or speculation or "insider" information from a corporation).
Have students search a week's worth of newspapers to find quotes from consumers related to rising business costs in these or any related industries and the effects on prices and spending habits. Tally the quotes on a marker board to determine whether the reporting of consumer opinion shows a generally pessimistic or optimistic outlook for the future.
This week Delphi Corp., the nation's largest auto supplier, filed for bankruptcy protection as the costs to operate -- including labor, health insurance and pension benefits -- became too burdensome. The company makes almost every part you'll find on a car, from brakes to satellite radio receivers, and yet still lost millions of dollars over the last three years.
For similar reasons Delta Airlines and Northwest Airlines, two major companies in the airline industry, also recently sought bankruptcy protection, leaving customers to wonder whether their tickets and frequent-flyer miles would be honored.
On October 17 the rules for bankruptcy will change, making it harder for companies to take this path out of debt. As a result, a flood of bankruptcies from troubled industries, large and small, is expected before that deadline.
What does bankruptcy mean? A company that files for bankruptcy protection is out of money in a sense, but its filing in court allows it to continue to operate while it works out internal financial problems and adjusts its costs, usually by eliminating staff, reducing benefits, or perhaps changing the way it does business. During a Chapter 11 filing, the company is protected from being sued by its creditors--those to whom the bankrupt company owes money. Bankrupt companies sometimes emerge from their Chapter 11 status, returning to profitable or at least financially stable business operations.
Competition and other factors: The bankruptcies of Delta and Northwest demonstrated the seriousness of the financial problems in the airline industry. While the high costs associated with running a business--health insurance costs, pension payments, fuel costs--are partly to blame, other factors that probably contributed to Northwest and Delta's filing include the appearance of smaller, but more competitively priced, airline companies; the attacks of September 11, 2001 that caused many people to consider alternatives to flying; and, for those who did continue to fly, the use of the Internet to find bargain fares.
Where did the money go? Virtually all companies face financial difficulty in the area of providing health insurance for its employees. Another difficult area includes pension payments, the money that companies pay to employees who are retired. Delphi, in particular, sited the costs associated with union contracts as the reason for its financial crisis.
Why should companies get help? When two or more companies compete against each other for business, the consumer can choose which between them based on which best serves his needs and which has the lowest price. Should a company like Delphi get help to stay in business if it can't compete with another company that is able to do the same job for less money? But what happens to employees of that company who have families and mortgages and car payments and other expenses? And what about retirees who worked all their lives with a company promise they would get benefits when their careers are over? Are we helping the company or the employees who will get hurt if the company goes out of business?
What can workers do to protect themselves? People in troubled industries need to plan for the worst. Start saving money before the crisis in order to build up a cushion to help you get by without a pay check for at least a few months. Cut expenses to just the necessiities. Look for jobs at other companies while you still have a job. Further your education to make yourself more valuable to companies.
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