For Airlines, 9/11's Impact Lingers
Price Competition, Weak Economy Add to Pressures
By Keith L. Alexander
Washington Post Staff Writer
Thursday, September 11, 2003; Page E01
Two years after the Sept. 11 terrorist attacks, the U.S. airline industry is still far from recovery.
In the aftermath of the hijackings, the major carriers have won billions of dollars in aid from Congress, mothballed planes, pruned services and cut workforces -- and are still piling up record losses.
"We thought we would be back to normal by now," said Gordon M. Bethune, Continental Airlines' chairman and chief executive. "We were wrong."
No one is predicting additional bankruptcies among the biggest airlines: United Airlines expects to emerge next year, and US Airways came out of court protection in March. Many analysts believe the industry has passed the worst of its crisis.
But the major carriers are still under heavy pressure. Low-cost carriers offering cheap fares are expanding routes and siphoning off increasing numbers of passengers, even once-loyal business travelers. The weak economy and the outbreak of severe acute respiratory syndrome, or SARS, also have trimmed the airlines' revenue. And a government reprieve from about $500 million in security taxes since June expires next month, further crimping the bottom line.
The industry's outlook also is complicated by a judge's ruling this week permitting lawsuits that seek to blame the airlines for injuries and deaths in the terrorist attacks. The second anniversary of the attacks prompted some travelers to stay out of the air today, with some U.S. airlines reducing flights by as much as 5 percent because of low demand, according to the Air Transport Association. That was significantly below the 25 percent cancellation level on the first anniversary.
The changed aviation landscape is forcing the carriers to adjust rapidly, and they are forging new strategies mostly based on deeper cost cutting but also in some cases involving the launch of their own low-cost airlines.
By some estimations, the airlines are expected to reduce their losses in the third quarter, but questions linger about their performance through the end of the year and into next.
David Swierenga, an economist at the aviation consulting firm Aero Econ, said he expects the airlines to rack up losses of $6 billion to $8 billion this year. Next year, the industry will lose about $3.5 billion, Swierenga estimates. If his predictions are accurate, the airlines will have accumulated losses of more than $30 billion since 2001, the longest and steepest period of red ink ever for the industry, Swierenga said.
A profitable year isn't likely until 2005, Swierenga said, adding that his forecast is contingent on the absence of another terrorist attack, war, SARS-like outbreak or plane crash.
Airline executives also believe a recovery is still a year or two away. Throughout the airline crisis, fares have remained fairly low as carriers sought to entice passengers into the air. Although the lower fares are a boon to travelers, they translate into less revenue for the big airlines. When demand shows signs of sustaining decent levels, passengers are likely to see fares rise, especially because in a downsized industry fewer seats will be available.
In the meantime, the airlines are competing with one another in a cost-cutting war. The industry still has too many seats available, even after grounding hundreds of planes and reducing capacity by about 20 percent. More aircraft are expected to be mothballed in the deserts of California and Arizona. Additional job cuts also may be needed beyond the 100,000 layoffs undertaken since the terrorist attacks.
"The guys who learn how to move fast enough will survive," Bethune said. "Those who don't, won't survive."
Business Travel Shifts
The old assumptions simply do not hold in the transformed industry. For decades, the airlines operated with high costs mostly associated with aircraft, labor and fuel. Many of those costs were offset by the high fares business travelers traditionally paid for convenient flights and good onboard service, including meals. But business travel was already slowing as the economy weakened about a year before the attacks. Today, business travelers still aren't flying on high-priced tickets, thanks to the Internet and the growth of low-cost carriers such as Southwest, JetBlue and Air Tran.
Congress helped prevent a collapse of the airline industry after the terrorist attacks by providing $10 billion in loan guarantees and $5 billion in grants. Sixteen carriers applied for loan guarantees, with five winning approval so far on about $1.6 billion. During the Iraq war, the government granted an additional $2.4 billion to help offset the airlines' security costs and to help them weather a drop-off in demand during the conflict.
The industry also got a better-than-expected boost from the summer season, traditionally a strong one for the airlines, as passenger demand picked up with the end of the war in Iraq and the waning of the SARS outbreak. As a result, analysts are predicting improved revenue growth for the quarter, though losses will prevail.
Samuel Buttrick, an airline analyst at UBS Warburg, said he expects the major carriers to lose a combined $400 million in the quarter, substantially less than his previous estimate of $800 million.
But many Wall Street analysts look warily toward the fourth quarter once the airlines' security tax waiver expires. Since travel typically slows during the winter months, the major carriers are expected to reduce their ticket prices to compete with the low-fare carriers, which have consistently reported profits, added newer planes and increased their flights and destinations.
"It could be a long winter," said John Heimlich, an economist with the Air Transport Association. "None of us are expecting a robust fourth quarter."
Longer term, three airlines are hoping to compete head-on with the low-cost carriers. The cheaper rivals such as Southwest Airlines and JetBlue Airways recently began nonstop flights between the East and West coasts, a popular route among business travelers. United Airlines and Delta Air Lines have launched their own low-fare operations. Taking a different approach, America West did not create a new airline but rather transformed itself into a low-cost carrier.
In United's case, the full-fare business traveler still stands at the center of its strategy. It is working hard to attract frequent fliers through promotions it launched in the summer. "We can successfully compete with the low-cost carriers if we offer the business traveler a product that they want to buy and a price they want to pay for it," said Jake Brace, United's chief financial officer. "The economy is going to go up and down over time. We know that. Therefore we need to have a cost structure that is resilient and can continue producing the right kind of financials even when the business traveler is not flying."
United, which last December became the largest airline to file for bankruptcy court protection, is aiming to emerge in the first half of 2004. It still needs to submit its reorganization plan and deal with the rejection of a "handful" of aircraft leases, Brace said. The airline has succeeded in securing about $2.56 billion in annual wage and benefit cuts from employees. The key hurdle in its emergence from bankruptcy is its $7 billion underfunded employee pension plan. United must resolve its pension problem to receive a crucial federal loan guarantee for about $1.8 billion.
United, which lost two planes in the Sept. 11 attacks, also is developing a plan for its regional jet operations at Dulles International Airport, where it is the largest carrier. After 14 years, Dulles-based Atlantic Coast Airlines said it no longer wants to operate regional jets for United, choosing instead to transform itself into a low-cost, low-fare airline. United executives said the two airlines will continue their partnership at least through the first quarter next year as discussions ensue on their future relationship.
Delta's low-cost carrier, called Song, began operation out of Dulles yesterday with flights to Florida. Song is a direct assault on AirTran and JetBlue, both of which have expanded the number of their low-fare flights to destinations serviced by Delta. Delta also is trying to cut costs by about 15 percent by the end of 2005 and to persuade its pilots union to agree to pay cuts.
America West, once a traditional carrier, now presents itself as a low-cost, low-fare airline. The Phoenix-based carrier, on the verge of bankruptcy after the terrorist attacks, was the first to apply for a loan guarantee. It used $380 million in guarantees awarded in December 2001 to restructure its operations to take on its low-cost rivals.
In March 2002, America West lowered its fares by up to 70 percent. It also stopped requiring travelers to stay over a Saturday night or purchase round-trip tickets in order to get the lower fares.
Since the changes, the airline has experienced an increase in travelers who purchase their tickets seven days before their flights, often the business traveler. Before the shift, business travelers accounted for about 20 percent of America West's passengers while vacationers made up the additional 80 percent, said W. Douglas Parker, the airline's chief executive. Today, business fliers have grown to about 35 percent and leisure travelers have dropped to 65 percent. The airline was one of the few top carriers to report an operating profit in the second quarter.
"America West would not have survived without that government aid and without our transformation," Parker said. "Today, you would not have a low-cost airline that is radically changing the pricing industry."
An East Coast Struggle
US Airways is facing stiff competition from the low-fare airlines along the East Coast, where it offers the most flights and where the low-cost carriers are particularly strong. The airline also is trying to reduce costs at Pittsburgh International Airport, one of its largest hub airports, where it is losing money because of the drop-off in travel. The Arlington-based airline is preparing to resume selling shares to the public in coming months after it was delisted by the New York Stock Exchange at the time of its bankruptcy in August 2002. It emerged from bankruptcy in March, having pared its debt by about $2 billion.
American Airlines, which also lost two planes in the attacks, narrowly avoided bankruptcy earlier this year after cutting costs by $4 billion. Executives and unions engaged in heated battle, with employees finally accepting $1.8 billion in pay and benefit cuts. Management and workers clashed again in April when it was revealed that chairman and chief executive Donald J. Carty failed to reveal to union officials that he and other American executives had been awarded bonuses while workers' pay, benefits and jobs were being cut to avoid bankruptcy. Carty was ousted and replaced by Gerard J. Arpey, then American's chief operating officer.
Arpey sharply reduced American's operations at its St. Louis hub to cut costs further in a bid to escape bankruptcy. He also added seats on American planes, effectively rolling back the airline's pledge to provide more legroom throughout coach on flights to vacation spots where it competes with low-cost carriers.
The restructuring at American is attracting attention on Wall Street. Last week, Gary Chase, an analyst at Lehman Bros., raised his rating of AMR Corp., American's parent, to "equal weight" from "underweight," noting that revenue at American had outperformed the industry and that the carrier's profit potential is greater than previous estimates.
Michael Linenberg, an airline analyst at Merrill Lynch, said he believes American's turnaround plan should result in "lower costs as well as improved revenue." Linenberg last week sharply reduced his prediction for AMR Corp.'s loss in the third quarter to $111 million from $239 million.
Linenberg also expects Continental to squeeze out an operational profit in the third quarter as its cost-cutting begins to bear fruit. He predicted Continental would earn about $13 million, revising his earlier estimate of a $16.25 million loss.
Continental's profit would be the first for a full-service airline since the attacks -- and without the help of government aid. Several larger airlines reported profits in the second quarter only because of infusions from the government.
"The industry has changed a lot since September 11," said United's Brace. "It has done so more rapidly perhaps than at any time in its history." |
