For Airlines, The Pain Is Global
Dan Ackman, 03.24.03, 9:13 AM ET
forbes.com
Not only are the U.S. airlines in crisis, so are the world's as its airlines have accumulated more than $30 billion in losses since Sept. 11, 2001, according to Giovanni Bisignani, director general of the International Air Transport Association, speaking at conference in Montreal over the weekend.
The war in Iraq could add $10 billion or more to the losses by year's end, the IATA said. While the problem is not new--and the losses started piling up even before Sept. 11, 2001--there remains no clear answer what to do. Few seem satisfied simply to let the problem run its course, which would likely include more bankruptcies and some liquidations. Since the terrorist attacks in New York and Washington, there has been a decline in the demand for airline services of a kind not seen since the dawn of aviation 100 years ago.
There is a widespread sense that Sept. 11 and related security concerns caused some, though not all, of the airlines woes, and since that Sept. 11 was an attack on the whole society, no one industry should bear a disproportionate share of the costs, as the airlines have done. That cost has come in the form of reduced demand from fear of flying, higher security costs and higher fuel costs.
On the other hand, if people don't want to fly, there is no way to force them, and at the root of the airline's problem is that it is nearly impossible to cut costs as fast as the drop in demand. There is not much the government can do about that problem either.
"At this point, the air transport industry must look beyond the horizon and re-invent itself," Bisignani said at a seminar of the International Civil Aviation Organization. "Our industry needs change. Government regulation keeps our industry from changing. This ICAO conference may well represent the last chance to set our industry on the right regulatory track," he added.
The IATA director backed "bilateralism," which means airlines would be allowed to merge more freely across borders. That process would start with the North Atlantic, he said, but he called on "all like-minded governments to begin the modernization of the bilateral system."
"The wave of globalization must eliminate national ownership limits wherever they represent an obstacle to development. These limits are denying airlines the freedom of action given to all other businesses," Bisignani added.
Whether those changes--which appear to be perennial bugaboos of airline globalists--would do anything to quell the current crisis is unclear. This is especially true when national giants like UAL's (nyse: UAL - news - people ) United Airlines are in bankruptcy and other large carriers like AMR's (nyse: AMR - news - people ) American Airlines and Continental Airlines (nyse: CAL - news - people ) may be headed in that direction.
Meanwhile, smaller airlines with regional bases and more limited routes like Jet Blue Airways (nasdaq: JBLU - news - people ) and Southwest Airlines (nyse: LUV - news - people ) are in much better financial shape. And Richard Branson, founder of Britain's Virgin Group, is reportedly reconsidering plans to launch a low-fare airline in the U.S.
In the U.S., airlines continue to lobby hard for relief. "The economic risks go far beyond the airline industry--the stakes for the entire U.S. economy are extremely high," said James May, president of the Air Transport Association, just before the Iraq war got under way. He said it took the U.S. airlines four years to recover from the first Persian Gulf war, and in the end, the airline industry lost more than $13 billion and eliminated 25,000 jobs, and seven large and medium-sized airlines were forced into bankruptcy--four of which liquidated.
"To try to meet the economic reality of the past two years, carriers are cutting tens of billions of dollars in expenses, have laid off 100,000 employees and have taken several hundred aircraft out of service," May said. Still, his "most likely scenario" projects 2003 airline losses of $10.7 billion, the loss of 2,200 daily flights and 70,000 additional jobs. The "more severe scenario" delineates losses of $13 billion, a reduction of 3,800 daily flights and the elimination of 98,000 additional jobs.
Airlines want $13 billion in breaks, including a federal government takeover of about $4 billion per year in security costs, an annual reduction of $9 billion in various aviation taxes and fees, and possibly the right to buy oil from government reserves at a discount. The have also endorsed aspects of the IATA agenda, the removal of barriers to foreign investment and ownership.
Some in the Bush Administration are reportedly giving the airlines a sympathetic hearing. Others say there is nothing they can do, apart from generating better economic conditions and greater security, which they say they want to do in any case.
The airlines say the government should not sit idly by because the airline industry is vital to the national economy. But the airlines problem may be that they serve that economy too well, even as they drift toward financial ruin. In the five years before 2001, U.S. airlines added 20% to their scheduled service (measured by overall available ton-miles). The percentage of that capacity actually used was heading down, even as the economy was going strong. Once the economy started heading south or sideways, the airlines financial fortunes tipped. A crisis was looming. The Sept. 11 terror attacks and now war have made that crisis much worse, and quite global, but no one, it seems, either in the U.S. or elsewhere, has any easy way to stem the tide. |
