Airlines fear war would hit them savagely

The last time America went to war with Iraq, a sluggish economy and terrorism fears kept Americans close to home, thousands in the travel industry lost their jobs, and major carriers struggled to cope with record losses.

With a fresh conflict brewing, airline executives are bracing for a repeat and warning Congress of a potential industry collapse. Even without another war, industry officials say, most of the nation's airlines are in a day-to-day battle to remain viable as a result of a slow economy and the after-effects of the terrorist attacks last September.

"It's dismal," said Michael Wascom, a spokesman for the Air Transport Association, which represents major airlines. "Financial collapse is possible. More bankruptcies are a possibility."

The industry will support the Bush administration if it goes to war, Wascom said, but he added that a conflict with Iraq could "innocently complicate the airlines' current financial crisis."

If history is any guide, another Mideast conflict would hammer the airline industry when it can least afford it. Despite being awarded $5 billion in direct government aid, major carriers collectively lost a record $7.7 billion last year as passengers shunned air travel amid fears of terrorism.

The previous record loss, $4.8 billion was in 1992. With passenger numbers still down, the ATA estimates that the industry is on pace to lose another $7 billion this year, and analysts see no sign of a recovery.

"The impact [of war] could be a lot worse this time because you've got a whole slew of carriers that are financially weak right now," said Jon Ash, managing director of Washington consulting firm Global Aviation Associates. "If they have to take another hit, it could get pretty bloody."

Arlington, Va.-based US Airways filed for bankruptcy protection last month, and UAL Corp.'s United Airlines is threatening to follow suit. With the exception of budget carriers such as Southwest Airlines and AirTran Airways, the industry is struggling with deep losses and mounting debt. Southwest is the dominant carrier at Baltimore-Washington International Airport, and AirTran launched service from BWI in December.

Responding to the industry's economic concerns, key members of the U.S. House are drafting a bill that would give airlines another chance at applying for government-backed loan guarantees if war breaks out in the Persian Gulf. Congress approved up to $10 billion in loan guarantees to help the industry recover from the 2001 terrorist attacks, but the deadline to apply was June 28. So far, only one airline has received a loan guarantee, although US Airways has been given conditional approval.

In addition, the legislation would extend government-backed war-risk insurance for another year. The coverage is meant to protect airlines from losses resulting from war. Measures that would compensate airlines for certain security costs are also being considered.

"We must prepare the commercial aviation system to deal with the consequences of a conflict in Iraq," AirTran Airways' Chairman and Chief Executive Officer Joe Leonard told members of Congress Tuesday during a hearing on the industry's woes. "In the event of conflict, we expect that fewer customers will fly, and fuel and other costs will certainly rise."

Analysts said it's difficult to judge how much of the industry's troubles in 1991 were caused by the Persian Gulf war and how much was a result of the nation's economic ills.

But most agree that if war breaks out again, jet fuel prices will rise, passenger bookings will decline and the economy will slow even further. The impact is likely to be brief, but the combination could prove poisonous for some.

"Fuel prices have already been moving up," said Jim Corridore, an airline analyst with Standard & Poor's. "Any economic growth we're seeing is very tepid and probably will not be aided by war."

A look back

That was the pattern in 1990, when Iraq upset oil markets with its invasion of Kuwait. ATA statistics show that airlines lost $3.9 billion that year and $1.9 billion in 1991, when Operation Desert Storm drove Iraq out of Kuwait in the midst of a recession. Passenger totals declined about 3 percent in 1991, marking the first year-over-year decline in a decade. The effect was felt in all corners of the industry.

"That was the first time that travel agent sales had actually gone down from one year to the next" said Paul Ruden, general counsel for the American Society of Travel Agents, referring to the Persian Gulf war. "Trouble is, we also had a recession then, and no one is able to tease out the different threads."

Airlines added to their difficulties by engaging in a bruising and untimely fare war in a bid to entice reluctant travelers. Continental Airlines and America West sought bankruptcy protection as the industry losses continued through 1991 and into 1992. Eastern Airlines, Pan American World Airways and regional carrier Midway Airlines all ceased flying in the early 1990s after failing to emerge from bankruptcy.

Even Southwest, the only major airline to remain profitable in every quarter since last year's terrorist attacks, posted losses during the Persian Gulf crisis.

The Dallas-based carrier lost $4.6 million in the fourth quarter of 1990 and $8.2 million in the first quarter of 1991 before regaining its footing and posting a profit for the year. US Airways, the dominant carrier at BWI in 1991, lost $168.7 million in the first quarter of that year.

Response to attacks

The lingering effects of last year's attacks make it difficult to gauge how a conflict with Iraq would play out this time, analysts said. The industry has already cut costs drastically and eliminated much of the excess capacity in the system in response to a roughly 10 percent decline in passengers. Southwest says it is better positioned this time because it has reduced operating costs and hedged most of its fuel purchases in order to limit the impact of a spike in prices.

Similarly, many of the passengers who are likely to be deterred by terrorist fears and airport security delays have already left the market, analysts said.

"If and when the shooting starts, you might see people more inclined to put off any trips at least until they get a feel for how they think things are going," said Dan Kasper, managing director of LECG, a Cambridge, Mass., consulting firm that tracks the airline business. "But there is some reason to believe that the impact will be less this time around simply because we've already been traumatized by 9/11, so the fear factor will have already scared off a lot of the people who would have stopped flying."

A brief battle that goes well for the United States could remove much of the uncertainty that is holding back the industry, some analysts said.

"I think once you've got the Iraq uncertainty out of the way, you'd see a rebound," said Ray Neidl, an airline analyst with Blaylock & Partners LP.

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