Airlines scrambling to make it

Experts say it will take time for 'industry in crisis' to rebound

09/30/2001

By TERRY MAXON
The Dallas Morning News

The nation's airlines are flying into the future without a compass.

The world they faced Sept. 10 was gloomy but familiar. Fewer business travelers, high fuel prices and a faltering economy were the kinds of problems the carriers confront, and resolve, year after year.

But after the Sept. 11 terrorist attacks that grounded airlines nationwide, no one knows where the industry must go. Not five years from now. Not six months from now. Not a week from now.

"The future right now is this afternoon," airline consultant Darryl Jenkins said. "That's long-term planning now."

Everything has changed. The question isn't what airplanes to buy, but which airplanes to park. A hiring binge for the last five years has turned into a firing frenzy. Executives aren't trying to tweak the bottom line; they're trying to preserve enough cash to stay in business.

"The losses we face are truly staggering," said Donald J. Carty, chairman of American Airlines Inc., in a letter to employees. "They exceed anything we ever imagined at American. Right now it is survival, not profitability, that is our core challenge."

Almost everyone is predicting that a number of airlines will fail, and that the surviving airlines will be smaller in a year.

In 18 years at the helm of American, Robert L. Crandall coped with deregulation, soaring jet-fuel prices during the Persian Gulf War, several recessions and terrorist scares that cut into traffic. None of that, Mr. Crandall said, compares with the current situation.

"This is clearly the worst single event of our lifetime, probably the worst single event of this century. It's changed public perceptions about air travel and the general feeling of safety in the United States overall. This is substantially worse than all those problems," said Mr. Crandall, who retired in 1998 as chairman and chief executive.

'Resilient' industry

"Nonetheless, I think the industry is very resilient and the economy is strong, assuming we do the right things. I think five years from now we'll be back on track."

Delta Air Lines Inc. chairman and CEO Leo Mullin had top officials working on company strategy the week before the terrorist incidents. After the attack, "We defined a series of questions we now need to address, and the questions bore no resemblance to each other," Mr. Mullin said.

Of course, other industries have suffered blows that chewed through 100,000 jobs, as the first round of announced airline cuts will do. But what's striking about the post-Sept. 11 business climate is how swiftly and thoroughly it has staggered the airlines.

In a fortnight, the stock value of the 10 largest U.S. airlines fell nearly 30 percent, or more than $8.5 billion. Less than six months after sealing the TWA acquisition that made American the nation's largest airline, Mr. Carty now talks of the Fort Worth-based carrier as "a company in crisis in an industry in crisis."

Airline officials and experts defined three periods that the industry will go through: the immediate aftermath as carriers cut costs to conserve cash; a second phase as they stabilize their operations over months and try to get back passengers; and a still-hazy long-term future in which the new industry structure gradually emerges.

David Treitel, chairman of airline consultants SH&E Inc., said the first priority is stopping the cash drain. The $5 billion in federal financial aid will barely replace what the airlines have lost since Sept. 11, he said.

"The whole industry's resources are being depleted very rapidly right now," Mr. Treitel said.

For almost every airline, survival means getting smaller – fast.

American, Delta, Northwest Airlines Inc., Continental Airlines and others are reducing their operations by 20 percent.

US Airways will slash its capacity 23 percent. United Airlines, which was going to cut its schedule 20 percent, upped the cuts Friday to 26 percent as traffic falloff was worse than expected.

Airlines are now implementing job cuts, led by 20,000 at United. AMR Corp., parent of American, is also shedding 20,000 jobs, divided among American with 15,000, subsidiary TWA Airlines LLC with 3,000 and just under 2,000 at American Eagle Airlines Inc.

Most carriers are drastically reducing on-board services as well, with meals disappearing from all but long-distance flights. Airlines are selectively dropping their least-profitable destinations, reducing flights to other cities and substituting regional-carrier partners for mainline jets.

And older jetliners such as Boeing 727s and McDonnell Douglas DC-9s that would have been idled over the next several years will be mothballed in a matter of months.

Soon, the new, smaller industry will be in place. Then what?

The speed in which airlines get healthy is directly related to how quickly Americans decide to start flying again, industry officials say.

One problem, of course, is that the carriers already were hurting from the soft U.S. economy. Lucrative business travel was off sharply, and most airlines already were in the red.

Analysts had been predicting that the industry would lose $2 billion to $2.5 billion this year – its first losing year since 1994.

Mr. Jenkins, director of the Aviation Institute at George Washington University in Washington, D.C., predicts demand will return as the airlines start fare sales, travelers accept higher levels of security and the economy improves.

"In the next few weeks after we get over the grieving period and the mourning period, you will see airlines start discounting travel and doing things to get people back on planes, and they'll be very aggressive," he said.

"A robust economy is an airline's best friend, and our economy is anything but robust right now. That will be the hardest thing in the short term to get people back on planes," Mr. Jenkins said.

Rebuilding confidence

Aviation consultant Michael Boyd, president of the Boyd Group of Evergreen, Colo., sees rebuilding public confidence as a bigger hurdle.

The future of the industry remains in grave doubt, he said, because Washington isn't taking real steps to improve safety. Security checkpoints and control of airport access will still be inadequate under the Bush administration's plans, he said.

And with cash running out, he said, airlines don't have much time to win back the public's confidence.

"The next two months are critical until we get people back on airplanes," Mr. Boyd said.

Mr. Crandall takes a much less downbeat view.

"The important point is, people will still want to travel. They have wanted to travel in the past. They will want to travel in the future. Once confidence is restored and the airline system is once again regarded as conveniently usable, they'll go back to flying," he said.

More hard times ahead

Even after airlines shrink 20 percent or more, Wall Street expects the financial bleeding to continue through the middle of next year at least.

Airline analyst Brian Harris of Salomon Smith Barney Inc. predicts that airline revenue will fall 35 percent in fourth quarter 2001 compared with the same period in 2000. His outlook for 2002 isn't much better: down 20 percent year over year in the first quarter, and 10 percent in the second.

Not until the third quarter does he expect airline revenues to be higher than the previous year. And it won't be a healthy comparison, because 2002's third quarter will be compared to this year's abysmal third quarter that included the terrorist attacks.

As a result, Mr. Harris forecasts every major carrier except Dallas-based Southwest Airlines Co. to lose money in 2001, and only Southwest and Continental to show a profit in 2002.

In this second phase of the industry's recovery effort, being 20 percent smaller still may not be enough for a return to profitability.

This period will see some airlines go out of business or be gobbled up by stronger competitors, analysts say.

"Any time you go into an economic downturn, you're going to lose an airline or two," Mr. Jenkins said. "That's just the way it goes. My concern is that with the bailout, we may be strengthening some that should have failed. Federal aid should not be designed to save an airline that would have gone out anyway."

Some carriers may limp along for years. For others, the end may be near.

"There are certain carriers we could lose very quickly in the short term who have never made any impact on any market," Mr. Jenkins said.

"But the way the other guys operate and everything about them, though, is going to change dramatically. American Airlines taking out food service is just like the beginning volley. It's going to be a different environment," he said.

Mr. Harris' estimates show two major carriers, US Airways Inc. and America West Airlines Inc., running out of cash in first quarter 2002 even with the federal bailout.

That makes them prime candidates for federally guaranteed loans. Both say they're taking the tough steps needed to remain long-term players.

The degree of consolidation depends on how far federal antitrust regulators will go in permitting airline mergers, especially any transactions involving the big three – American, United and Delta.

United's purchase of US Airways was blocked this year by the U.S. Justice Department.

But beyond forecasting an industry with fewer, smaller carriers, analysts can't predict with precision what will happen in this months-long second phase.

Unique problems

Each airline has its own issues.

For example, Mr. Treitel said, the future of US Airways is tied up with that of Reagan National Airport near Washington, D.C. That airport is still closed to upgrade security, and with it goes a lot of US Airways' flights.

Mr. Harris of Salomon Smith Barney said the industry's problems may lead Delta to abandon its small hub at Dallas/Fort Worth International Airport, where it trails far behind American in size. (Delta says it's not leaving.)

In addition, Mr. Harris said he would not be surprised if Southwest reduces service at St. Louis, where weak TWA is being replaced by strong American Airlines.

"There'll be plenty better places for Southwest to put its planes in the years ahead, like Baltimore," Mr. Harris said. Southwest is already positioned to benefit there from post-attack fallout: US Airways is folding its low-cost MetroJet unit at Baltimore-Washington International Airport.

Factoring in security

Once the airlines work through this upcoming survival struggle, they must figure how to adapt their own operations to what looks to be some permanently changed assumptions.

A major question is how much new security rules will slow airport operations.

A number of analysts have questioned whether US Airways, Southwest and other airlines with many short-haul flights will lose passengers who'll choose other methods of travel.

Mr. Crandall said he doesn't think that will be much of a factor, once passengers get used to the new procedures.

"I tend to think that's overstated. For example, driving to Austin is a long drive. So if it takes me an extra half-hour at each end, I think I'm still going to fly," Mr. Crandall said.

But even if it retains its customer base, Southwest must continue to "turn" its airplanes quickly to maintain its industry-leading productivity – and profitability.

Analysts say it may be challenged to be able to land, unload and load its Boeing 737s in only 20 to 25 minutes as it does now.

"Southwest once told me that if they had to increase the time of their turn by even an average of five minutes per flight, it would reduce their profitability by somewhere around 25 percent," Mr. Jenkins said.

"My guess," Mr. Crandall said, "is that Southwest will continue to turn their airplanes quicker than most airlines," although perhaps not as quickly as before.

Other airlines will have to adapt, too, if security procedures slow their plane-handling times.

For example, the airlines might have to jettison the practice of saturating popular routes with frequent service – sometimes hourly or half-hourly. Instead, Mr. Crandall said, carriers could cut flights but use larger airplanes, such as Boeing 757s rather than smaller MD-80s.

"I would guess that there would be somewhat fewer flights, but a good many more seats," he said.

As disrupted and uncertain as things are now, Mr. Crandall said, industry executives have to understand that the bad times will end.

"Remember, it's not the end of the world," Mr. Crandall said. "It's a terrible setback. It obviously is a circumstance that will put terrible pressure on the balance sheet and the income statement. But the airline industry is going to survive. The country can't survive without it. As a consequence, it will survive."