U.S. Airline Industry Faces Year of Devastating Losses : Travel: Iraq-induced fuel price hikes may lead to $2 billion in red ink. Fares will rise, carriers dwindle.
These are turning out to be the worst of times for the nation’s airlines, the most devastating 12 months the industry has ever experienced.
“This is going to be an awful year, dreadful, stinko,” said Robert L. Crandall, chairman of AMR Corp., the parent of American Airlines.
Estimates of the industry’s probable losses for 1990 range from $1.5 billion to $2 billion. At best, the deficit is expected to be double that of the airlines’ worst year to date--1982, when carriers collectively lost $733 million from operations.
Already, fares are going up and services are being reduced as the airlines struggle against the losses. And, over the longer term, experts say such measures won’t be sufficient to save some of the weaker carriers.
The chief culprit--although by no means the only one--in the industry’s troubles is the dramatic increase in the price of jet fuel resulting from the crisis in the Persian Gulf. Next to labor, fuel is the second largest expense for the carriers, accounting for about 15% of operating costs.
Their fuel bill is expected to balloon from $9 billion in 1989 to between $13 billion and $14 billion this year, Robert Aaronson, president of the Air Transport Assn., the industry’s main trade group, predicted. It could soar an additional $5 billion to $10 billion next year.
Another way to look at the cost of Iraq’s aggression: For each penny that jet fuel rises, the industry’s revenues are reduced by $160 million annually, according to George W. James, chairman of Airline Economics, a Washington, D.C., consulting firm. At American Airlines alone, it costs $26 million every time fuel costs go up 1 cent, Crandall said.
And, with fuel prices more than doubling from the 57-cents-a-gallon price before the Iraqi invasion of Kuwait, the pressure on airlines has been intense.
“We certainly feel more threatened by the fuel issue combined with what appear to be longer term trends in the economy than we have in many years,” said Edwin I. Colodny, chairman of USAir Group, which is unique in the industry in not having had a losing year since 1975.
The carriers were headed for losses this year even before the August invasion of Kuwait. Fuel prices had already jumped 25%, and airline traffic--and thus profits--had begun to level off. Even then, consumer caution was becoming evident, with people cutting back on vacation plans and businesses curtailing travel.
The industry could probably have muddled through a business downturn or even a mild recession. But then came the jump in fuel prices. And now, with little chance that fuel costs will drop dramatically any time soon, things will probably get worse before they get better.
“The airline industry,” Aaronson said, “is experiencing a financial crisis the likes of which it has never seen before.”
The industry’s problems have serious implications for the traveling public.
Already, scheduled service to some places has been cut as airlines trim unprofitable routes and ground some aircraft. Pan American World Airways and America West Airlines have dropped some flights, for example, and USAir announced that it would ground 24 older Boeing 727-200s over the next year.
Fares--up an average of 15% in the last six months, including a 5.8% rise on many routes that took effect last week--may continue to climb.
Daniel A. Hersh, an airline analyst with the Los Angeles brokerage firm of Bateman Eichler, Hill Richards, predicts that before it’s all over travelers will be paying 25% more for plane tickets than they did in the summer. However, some airline executives doubt that further fare hikes could take hold.
Also, service might suffer as carriers try to cut corners, analysts warn. Layoffs and hiring freezes already are spreading through the industry, and some carriers, including USAir, have postponed delivery of new aircraft.
California fliers remain the object of the airlines’ competitive affection, however. According to Hersh, each of the biggest U.S. airlines--American, USAir, United Airlines and Delta Air Lines--has “flooded” the California market with seats, increasing capacity on intrastate flights by about 150%.
With all those seats, and because of the low fares of Southwest Airlines on Oakland-to-Burbank runs and other routes, intrastate fares have come down about 60%.
Nationally, the bigger picture is that there may soon be fewer airlines to chose from, with all the disadvantages for consumers that accompany a lessening of competition.
Because of a speeded-up trend toward consolidation--the unintended consequence of more than a decade of airline deregulation--experts are predicting that soon only a few major carriers will be left.
Initially, the industry’s deregulation in 1978 spawned more than 200 new airlines. In the dozen years since, almost all of them have disappeared--victims of merger, liquidation or the loss of their permits to fly--which erased some established airlines, as well.
Just a few of the well-known names that have vanished:
--National Airlines merged with Pan Am.
--Ozark Airlines merged with Trans World Airlines.
--Frontier Airlines was bought by People Express, which was acquired by Texas Air Corp., which has since changed its name to Continental Holdings.
--North Central Airlines and Southern Airlines merged into Republic, which was then taken over by Northwest Airlines.
Who will go next? The devastating economics of the last half of 1990 have candidates for the airline graveyard stacked up at the gate.
Sources maintain that bankrupt Eastern Airlines has only a slim chance of surviving in the current climate. It has already sold off its most lucrative operation--the Northeastern shuttle--and it was forced to sell its Latin American routes, another money-making operation, to American.
Financially ailing Pan Am, which has been disposing of assets for the last decade, has agreed to sell its London routes to United. And Pan Am plans to auction off its Northeastern shuttle just to scrape up enough cash to see it through the winter.
Last week, the company was forced to seek postponements of $62 million in debt payments; days later it announced a $29.1-million quarterly loss. It gave fuel prices much of the blame for a deficit in its busiest third quarter ever, in terms of passenger traffic.
Continental Airlines considered, but then rejected, a Chapter 11 bankruptcy filing just two weeks ago. And TWA is teetering, too.
Without a dramatic reversal of fortunes, one or more of these airlines is likely to collapse soon, experts say. Candace Browning, an airline analyst with Wertheim Schroder & Co., predicts disaster by year’s end. “The terrible results of the fourth quarter will hasten the restructuring of weak carriers,” she said.
Even the healthy airlines--American, Delta, USAir and United--have been hurting: reporting losses, trimming schedules or making other cost reductions. Delta had an operating loss of $73.6 million in the third quarter; USAir lost $120 million.
American’s parent company made $175.5 million in the first nine months of the year. But Crandall, its chairman, says the outlook for the rest of 1990 is dismal. “The fourth quarter is (going to be) so bad,” Crandall said, “that we may end up losing money for the entire year.”
Still, the handful of strong airlines is expected to ride out the storm, picking up assets from weaker carriers in the meantime and, thereby, becoming even more dominant.
“It is almost certain that a year from today, the big (carriers) will be bigger and a couple (airlines) may no longer be flying,” said Thomas Longman, an airline analyst with Bear, Stearns & Co. in New York. “The amount of industry consolidation is almost directly proportional to fuel and the economy.”
For both the airlines and the flying public, unless fuel prices decline, the worst is yet to come.
New taxes on tickets and surcharges on airport usage will begin going into effect on Jan. 1. The costs of higher-priced airline labor agreements also will be passed on to the consumer.
To make matters still worse, once some carriers take their planes out of service, airports will be forced to raise the landing fees charged remaining flights to make up for the lost revenues.
All these will make it even harder for the airlines to turn a profit. And one plus for travelers will detract further from the carriers’ bottom lines.
Because most passengers--especially those not flying on business--make their plans months in advance, the full effect of the Nov. 1 fare hikes won’t be felt until early next year. Most of the 32 million passengers who will travel in the United States during the holidays will do so at the fares in force before the latest increases.
“Although (the airlines) have gotten a couple of fare increases, these take a while to work through the system,” said Hans J. Plickert, an airline analyst with The Transportation Group, an affiliate of the New York investment firm of Paine Webber. “But, at $1.20 a gallon, there is no way you can make money in the airline business.”
FARES TAKE OFF
With fuel prices spiraling higher in the wake of the Iraqi invasion of Kuwait, the nation’s airlines have boosted fares an average of 15% in the last three months. Examples:
CURRENT ROUTE JULY FARE FARE L.A.-CHICAGO One way with no restrictions $551 $648 Typical deep-discount fare $338 $398 (advance purchase, non-refundable supersaver) SAN FRANCISCO-DALLAS One way with no restrictions $496 $584 Typical deep discount fare $378 $445
Source: American Airlines
AIRLINE INDUSTRY SLUMP
Third quarter, 1990, earnings for other major airlines--TWA, Continental and Eastern--have not yet been announced. Northwest Airlines is privately held and not required to release financial data. Earnings data below is for comparable periods during fiscal years 1989 and ’90.
