Weaker Airlines Headed on Same Course as Pan Am : Transportation: Analysts say the industry’s long slump may put more carriers under.
The brutal industry slump that contributed to the demise of Pan American World Airways is not expected to end any time soon, leaving many to wonder about the fate of the nation’s other struggling carriers.
Industry analysts remain confident that the three “mega-carriers”--American, Delta and United--will weather the storm and continue expanding worldwide. But plenty of doubts swirl around carriers like America West and Continental, which remain aloft only under bankruptcy court protection from creditors. Carl C. Icahn’s Trans World Airlines has managed to stay out of bankruptcy court but will go that route soon.
Airlines strong and weak are suffering this year. Major airlines, battered by the recession and the impact of the Persian Gulf conflict, are expected to lose a combined $1.5 billion this year after losing more than $2 billion in 1990.
Profits may return next year, but they will be nothing to brag about, say industry observers. It won’t be until 1993 at the earliest before the industry emerges from the slump, according to analysts’ projections.
“You got a lot of turning around to do,” said Lee Howard, president of Airline Economics, an aviation industry consulting firm.
The healthiest category of major carriers includes global giants and small “niche” players.
The three largest carriers--American, Delta and United--are expected to post massive losses this year. American plans to postpone purchasing new aircraft, Delta’s effort to swallow the Pan Am operations it purchased earlier this year have proven much costlier than expected and United said it anticipates a record loss of about $200 million for 1991.
However, travelers have little to worry about when they purchase a ticket from the Big Three, say analysts. The mega-carriers have the huge domestic and international route networks as well as the financial resources to cope with the current downturn, say industry observers.
“I can’t think of any single incident that might really threaten any of those three,” said Daniel Smith, consumer relations officer at the Airline Passenger Assn. of North America.
Not all of the healthiest airlines are global giants. Alaska Airlines and Southwest Airlines are small compared to the Big Three. But they have pursued strategies that allowed them to flourish in an industry awash in red ink.
Seattle-based Alaska has focused its operations on the Pacific Northwest and has made inroads into the highly competitive California market. By sticking to its geographic market and avoiding cutthroat competition on cross-country flights, analysts figure that Alaska should remain healthy.
“I wouldn’t look for them to go nationwide,” said Michael J. Reilly, an airline analyst with Piper Jaffray & Hopwood. If they did, “then they will just be going up against the big boys.”
Southwest, like Alaska, has thrived by avoiding competition with much larger rivals. The Dallas-based carrier has become known for its discount fares and frequent, short-haul service.
“They never lost sight of their basic strategy: to keep the costs low so they could be the preferred, bargain airline,” said industry analyst Rose Ann Tortora of County NatWest Wood Mackenzie.
Between the ranks of healthiest and sickest airlines are two carriers--Northwest Airlines and USAir--that should survive the current slump. But they face a struggle to remain independent in the long run.
Northwest is loaded down with nearly $3 billion in debt stemming from a takeover two years ago by a private investment group headed by Los Angeles investor Alfred A. Checchi. The debt will make it difficult for the airline to upgrade service, modernize its fleet and expand.
“There is a lot of risk in that company only because of that huge amount of debt,” said Daniel A. Hersh, an airline industry analyst at Kemper Securities. “But given the difficult environment, they have fared OK.”
The Minneapolis-based airline, which failed in recent attempts to take over Midway and the Trump Shuttle, lacks a major route network along the Sun Belt and across the Atlantic to Europe. On the plus side, Northwest has long been a leading U.S. airline to fast-growing Asia, and it faces token competition in its Minneapolis and Memphis hubs.
After a nationwide buying binge during the mid-1980s, USAir encountered substantial difficulties in merging its newly acquired companies. USAir, which dramatically reduced its presence in California in the face of stiff competition, is struggling to reduce expenses.
“Their costs are still quite high in relation to the industry,” said George Pearson, vice president for information services at Avitas, a Reston, Va.-based airline consulting firm. “They cannot continue indefinitely with those costs at that level.”
The three weakest carriers are operating or preparing to fly under Chapter 11 bankruptcy protection. Their financial health will only deteriorate if the economy remains weak, say analysts.
America West and Continental Airlines, which filed for Chapter 11 bankruptcy protection the past year, have scaled back operations to reduce costs and sold off routes to raise badly needed cash. TWA, which is loaded with debt and saddled with an aging fleet, plans to make a prearranged Chapter 11 bankruptcy filing early next year.
Continental, with a large web of domestic routes and relatively low labor costs, stands the best chance of pulling through bankruptcy court, say industry analysts. America West and TWA have more daunting problems that will make survival difficult.
“I simply cannot recommend buying long-term passes” on any Chapter 11 airline, said Smith at the airline passengers group. “It just does not make any sense.”
Ranking the Carriers The nation’s three strongest airlines
Airline American Airlines Strengths/weaknesses Management, domestic routes/lacks major transpacific route network Airline Delta Air Lines Strengths/weaknesses Reputation for good service,management-labor relations/high costs associated with merging Pan Am operations Airline United Airlines Strengths/weaknesses Domestic and transpacific routes/expects a record annual loss for 1991 The nation’s three weakest airlines
Airline America West Strengths/weaknesses Low labor and operating costs/filed for Chapter 11, large debt, limited route network Airline Continental Airlines Strengths/weaknesses Low costs, large domestic network/filed for Chapter 11, large debt Airline TWA Strengths/weaknesses Transatlantic routes and valuable airport slots/plans to file for Chapter 11 next year, needs to modernize fleet
