U.S. Airline Industry Calls for Bailout
As Top Carriers Cut Capacity 20%
By SCOTT MCCARTNEY, SUSAN CAREY and GREG HITT
Staff Reporters of THE WALL STREET JOURNAL
The terrorist hijackings that shook a nation now threaten to shatter the nation's air-travel system.
In less than a week, the unprecedented two-day shutdown of U.S. airspace, an exodus of travelers and strict new security procedures mandated by the government have cost U.S. airlines close to $1 billion. In an industry that lives on razor-thin profit margins at the best of times, and which was already feeling the pinch of a slowing economy, few companies have that kind of money to spare.
Suddenly, many major airlines are in a panic, systematically cutting their capacity by around 20% while tapping their existing lines of credit and hunting for more cash. For example, Continental Airlines said Saturday that it would immediately furlough 12,000 workers of its 56,000 workers. Similar industry retrenchments could leave 100,000 airline employees out of work and ground about 750 passenger jets.
Airline executives are openly talking about an industry-wide liquidity crisis. Northwest Airlines, already heavily laden with debt, lost an estimated $23 million a day while grounded last week, analysts say, and has since drawn down its $1.1 billion revolving credit line. "Absent some [federal] intervention," says an executive close to Northwest Airlines, "there comes a point [when] you could see the whole airline industry in bankruptcy [proceedings] quick."
The industry is publicly pleading and privately lobbying for a congressional bailout. One worry: that looming legal liability issues for AMR Corp.'s American Airlines and UAL Corp.'s United Airlines, owners of the hijacked jets involved in last Tuesday's attacks on the World Trade Center and Pentagon, will hamstring the industry's ability to raise desperately needed cash.
"We need our Congress to intervene and save our industry,'' Continental Chairman and Chief Executive Gordon Bethune said this weekend. His comments followed Friday's failure in the House of Representatives of a push by airline lobbyists for emergency legislation that would offer $12.5 billion in loans or loan guarantees to airlines and $2.5 billion in direct aid. Talks continue, however, and Congress may consider a new plan this week.
Analysts say U.S. airlines could face losses of more than $4 billion this year -- substantially wider than the losses of $1.5 billion it faced before Tuesday's attack -- just from the continuing slump in business travel.
It is hard for many people outside the industry to understand how a temporary disruption in air travel could send a mature, well-financed industry into a tailspin in a matter of days. Indeed, to some skeptics so much panic in such a short space of time might seem like part of an orchestrated campaign to squeeze money out of a distraught Congress.
But airlines are highly leveraged creatures, with U.S. carriers shouldering $26.1 billion in debt, according to Salomon Smith Barney. Along with paying for airplanes that cost between $50 million and $250 million each, airlines have huge fixed costs in labor, leases and debt service. In fact, their costs are so high that airlines typically have to fill more than 65% of their seats in order to break even. In the best years, only 75% to 80% of seats are full. That means the presence or absence of just a few passengers on each flight means the difference between profits and losses.
And the industry doesn't have much of a financial cushion: The nine major U.S. airlines had $9.4 billion in cash and short-term investments on hand at the end of June. With the industry burning $210 million a day when airplanes are idle, all that cash would last less than 45 days.
"There is no posturing going on here,'' says a senior American Airlines executive. "We see a sharp decline in demand. We see the cash flying out the window, and no revenue coming in.'' U.S. airline executives had 15 conference calls among themselves last week, most about security issues but many addressing concerns about the financial future of the industry, according to people involved.
The industry's situation today seems more dire than in 1992, when the U.S. airline industry posted a combined net loss of $4.8 billion as the Persian Gulf War as well as a domestic recession caused travel to plummet. In the wake of last week's terrorist attacks, many corporations told workers to cancel trips, and many consumers are ditching any travel plans for the foreseeable future. In a Wall Street Journal/NBC News poll conducted over the weekend, 67% of those responding said they are somewhat or very worried about the risk of terrorism in connection with commercial air travel.
Online auction market eBay Inc. of San Jose, Calif., says it has banned work-related air travel for its 1,300 employees through the end of next week. After that, a spokesman says, the company will require business air travel to be approved by a vice president or higher to "keep domestic travel to an absolute minimum.''
Major computer maker Hewlett-Packard Co., which is based in Palo Alto, Calif., and has 88,500 employees, will limit air travel to "customer critical" trips within a region and ban intercontinental travel indefinitely, a spokesman says. Gillette Co., which is based in Boston, has told employees not to book trips until the middle of next week because its travel department is too busy trying to get stranded employees home. Thereafter, "we're strongly urging that only essential travel be taken," says spokesman Eric Krauss.
Continental's Mr. Bethune says his carrier, the nation's fifth-biggest in terms of passenger traffic, expects to take in only half its normal revenue for the next several weeks. Even if it can cut its costs by 20%, he says, Continental would have losses of more than $200 million each month at those revenue levels. (Last year, Continental had total revenue of $9.9 billion.) The airline, which along with Southwest Airlines was one of only two major carriers to earn a profit in the first half of the year, would likely have to seek bankruptcy protection before the end of next month, says Mr. Bethune.
United this weekend said it would slash service by 20%, joining Northwest, Continental and Delta Air Lines, which said they would trim capacity by a like amount. United sustained a net loss of $605 million in the first six months of the year, and Wall Street had projected even wider losses for the remainder of the year, before Tuesday's tragedies.
A person familiar with United's thinking says the company still has sources of cash, so its position "is better than some." The No. 2 carrier merely has to "pick up the phone and raise a billion" dollars from credit facilities from supplier Boeing Co. and a group of European banks, this person says. Moreover, UAL raised $1.5 billion in new money in August in an equipment trust financing, an offering of debt secured by its airplanes. Its cash balance now is $2 billion, plus $1 billion in the facilities it could call on, say executives familiar with the company. Still, United has several Boeing and Airbus jets scheduled to arrive in the next few weeks, and the airline "is going to need to talk to them about not taking them or taking them later," one such executive says.
Reagan National
US Airways Group tallied losses of $195 million in the first half and was in the midst of trying to come up with a recovery plan after the recent failure of its proposed merger with United. The Arlington, Va.-based airline may be especially vulnerable to a decline in traffic because automobile travel could replace many of the short hops it flies along the East Coast. What's more, serious questions have been raised about the future of Washington's Reagan National Airport, where US Airways has big operations. Flight paths at Reagan National, which remains closed, skirt the Pentagon and the White House.
US Airways is expected this week to cut its schedule by 20% or more, lay off 9,000 workers and ground 80 aircraft. Analysts believe the airline has more than $900 million of cash on hand, but it doesn't have a credit line to draw upon. Many believe the carrier, which has been hemorrhaging money since last year, is on the bankruptcy-protection waiting list if traffic doesn't return quickly. However, analysts think that US Airways does have some new aircraft it can securitize to raise cash, along with some other unencumbered assets.
But it also needs Reagan National, which anchors the southern end of US Airways' most lucrative operation, its Washington-New York-Boston shuttle. "Closing Reagan National Airport is an unacceptable, visible win for terrorism," Stephen Wolf, chairman of US Airways, said Sunday. "It must be opened with heightened security procedures."
American parent AMR posted net losses of $550 million through the first half of the year. The carrier, the nation's largest, was trying to price a $2.5 billion package of equipment trust certificates on the day of the attacks, and that deal didn't go through. Still, American carries a hefty cash position -- $1.5 billion as of June 30 -- and usually has a $1 billion revolving credit line available. It also owns, rather than leases, a high percentage of its planes, offering room to raise cash by refinancing jets, AMR executives say.
First in Line
American was first to signal a move to cut 20% of capacity, but has yet to announce layoffs from its work force of 100,000 employees. Concern runs so deep that American's pilots union says it has volunteered to waive some of its work rules if necessary to help the carrier get back on track.
In the long run, even if travel rebounds, airlines probably won't be able to fly the same frenetic schedules of the past. New security measures will not only slow passengers moving through terminals, but also airplanes moving at airports. The steps mandated by the Federal Aviation Administration require greater attention to baggage, for example, and careful security screening of caterers, cleaners and flight crews.
At airline hubs, workers won't be able to turn a plane around in 45 minutes, as has been typical in the past. So airlines will have to build more time on the ground into schedules, and they won't be able to get as many flights out of each plane each day. Adding 30 minutes at each stop means that a plane that used to fly six two-hour trips a day could fly only five. That means workers won't be as productive, and unit costs will rise sharply.
The result: Big hub-and-spoke airlines will likely have to find new ways to be efficient and restrain costs. Robert L. Crandall, the former chairman and chief executive of AMR and American who is often credited with perfecting the hub-and-spoke system, built an airline with smaller planes and high-frequency service so business travelers could fly whenever they wanted.
Now, Mr. Crandall says, airline managers will need larger airplanes to serve big markets with fewer flights; they'll need to develop new scheduling strategies. "It's hard to deal with a high-frequency, short-turn-time system and have good security,'' he says. "I was playing by one set of rules. Now the rules have changed.''
Strict security steps, Mr. Crandall and others say, are the only way airlines will win back the public's confidence. One step that airline executives, pilots and travel managers would like to see is a toughening of often-flimsy cockpit doors in order to prevent unauthorized entry. Airlines also would like the federal government to take over responsibility for airport security, replacing screeners at X-ray machines and metal detectors with federal officers instead of low-paid contract workers.
Transportation Secretary Norman Y. Mineta said he isn't sure Congress is willing to federalize airport security. "On the other hand," he said last week, "if we take it on our own and then we charge it back to the airlines, given the shaky condition of airlines right now financially, I'm not sure that that's a healthy thing for the economy."
Security over the weekend was extremely tight at many airports. In Seattle, security screeners made passengers unbuckle belts to check for hidden blades, and checked the backs and ankles of some passengers by hand. A cartridge razor blade was confiscated from the luggage of one traveler.
New rules, and limited capacity, will likely push business fares higher in some markets. Airline executives note that some small, low-fare carriers may be the first to run out of money, removing the low fares in some markets. Yet if travel demand remains sharply constrained, the industry could find itself in costly fare wars as it flies with lots of empty seats.
To be sure, the history of the airline industry is one of boom and bust cycles. The industry has survived, but the names have changed as airlines endured oil price spikes, deregulation, overexpansion and recession.
Architects of airline deregulation were quick to warn policy makers against using the latest blow to the industry as a reason to return to strict government control of the industry. Alfred Kahn, the economist who helped deregulate the airline industry years ago, says he wouldn't object to government financial help for what he termed "a foreign-policy disaster." The added costs of security on airplanes and at airports, he says, are like the cost of national defense or highway police patrols. But, Mr. Kahn says, "It would be totally irrational for the government to extract re-regulation as a price for this aid or for the industry to ask to be re-regulated to save itself from competition."
Leasing Contacts
Executives in the aircraft leasing sector say that some airlines, particularly the smaller ones, have been in contact with them to discuss the possibility of deferring lease payments and raising cash by selling existing airplanes in their fleets to the leasing companies and then leasing them back.
Steven Udvar-Hazy, co-founder and CEO of International Lease Finance Corp. of Los Angeles, a unit of American International Group Inc., says his company has been contacted by a number of customers in recent days. "No airline has come to us and said, 'Here, take one of our airplanes back,' but they are looking for possible help in re-deploying surplus capacity."
Both House Majority Leader Richard Armey, whose north Texas district includes employees from Fort Worth, Texas-based American Airlines, and House Minority Leader Richard Gephardt, whose hometown of St. Louis is home to Trans World Airlines, recently acquired by American, pledged Sunday to try to approve a rescue package for the industry by the end of this week.
The lobbying effort has been intense. Thursday morning, Donald Carty, chief executive of American Airlines, telephoned Messrs. Armey and Gephardt. The industry, already hurt by weakening demand before Tuesday's attacks, was on the verge of a financial collapse, Mr. Carty told Mr. Armey. The suspension of air travel was costing the industry millions of dollars a day, and American and United Airlines face huge liabilities as a result of the deaths on the hijacked planes.
"We were so stunned, we hadn't allowed ourselves to think about anything else," Mr. Armey said. "The airlines gave us a wake up call."
Also pressing the airlines' case: Linda Daschle, a former deputy FAA administrator and the wife of Senate Majority Leader Tom Daschle. (Mrs. Daschle, who was working in American's Washington office last week, says she doesn't lobby members of the Senate, such as her husband, and referred additional questions to American.)
The airlines' wish list was long -- ranging from temporary relief from the 4.4-cent-a-gallon federal tax on jet fuel to easing of antitrust rules so airlines can discuss routing decisions.
But the airlines' most immediate need is cash. By 3 p.m. Friday, a bipartisan consensus had emerged in the House: $2.5 billion in cash, $12.5 billion in loans or loan guarantees and authority for the president to delay, for as long as six months, airline payments to the government, which would ease airlines cash-flow woes.
Late in the day, objections from other lawmakers surfaced. New York legislators, returning from President Bush's tour of Manhattan, feared the plan might divert resources from the relief of New York. Rep. Lloyd Doggett, a Texas Democrat, warned, "It sends a signal to others who will stand at the door of the Treasury for their subsidy."
So, House leaders backed off.
A Divided Team
The issue also has divided President Bush's economic team. Chief economic adviser Lawrence Lindsey has signaled his support for moving rapidly. But Treasury Secretary Paul O'Neill, budget director Mitchell Daniels and chief economist Glenn Hubbard weighed in against moving too quickly, especially with the insurance industry, the New York Stock exchange and others likely to receive federal aid. "We need to move fast, but we need to move carefully," Mr. Daniels said Saturday.
The administration's conservative economic team would like to keep the airline system viable without appearing to guarantee the existence of every airline. Among the options: taxpayer underwriting of the cost of heightened airport and airplane security; loan guarantees to encourage stronger airlines to buy planes and routes from weaker ones; aid to laid-off workers similar to that offered to those who lose jobs because of imports.
Airline chief executives will meet in Washington tomorrow, and are expected to confer with top Bush administration officials. With Congress taking a break for the Jewish New Year, which starts this evening, any action will be delayed until later this week, at the earliest. But the support of the bipartisan leadership -- who rarely agree on anything -- signals "to the markets that help is on the way," says Mr. Armey.
Write to Scott McCartney at scott.mccartney@wsj.com1, Susan Carey at susan.carey@wsj.com2 and Greg Hitt at greg.hitt@wsj.com3
Strong Headwind
The U.S. airline industry is facing a liquidity crisis as a result of last week's terrorist attack. Carriers burn cash rapidly because of their high fixed costs in labor, leases and debt service. Below, a financial snapshot of the largest airlines, ranked by passenger traffic. |
