Airlines Face Long-Term Retrenchment

By JAMES F. PELTZ

Sept. 23, 2001 12 AM PT

TIMES STAFF WRITER

Like most everything in America, the airline industry won’t be the same for a long time--if ever--after the terrorist attacks that used four U.S. jetliners as deadly missiles.

Within days, the airline business was pushed to the brink of financial ruin. To survive, the industry in a single stroke is erasing one-fifth of its operations, which overall move 650 million people a year and generate $106 billion in passenger revenues.

But the dramatic turn of events goes far beyond money. Consumers went from complaining about surging business fares, flight delays and congestion--and demanding Congress pass a “passenger bill of rights”--to simply worrying about staying alive in the air.

Now many passengers are too afraid or anxious to fly, or fret about the hassles at the ticket counter because of new security rules at the airports. So jets are taking off half empty, and the airlines are slashing their schedules to survive.

As harsh as it sounds, the terrorists unwittingly solved a big problem for the airlines by forcing them to retrench, perhaps permanently. Even before Sept. 11, the industry was in serious trouble because of the weak economy and badly needed to cut costs, some analysts said.

“This forced them to act when they would have been reluctant to otherwise,” said Barbara Beyer, president of Avmark Inc., a consulting firm in Arlington, Va. “There were too many employees and too much capacity in the system.”

Even so, the airlines are in disarray. They’re losing more than $200 million a day as a group, and are staring at perhaps $7 billion in combined losses for the year. Their stocks are in tatters, their credit ratings are being lowered and their insurance premiums are rising. Lenders shut off their borrowing ability, and the industry threatened to seek bankruptcy protection unless it got the federal bailout that includes $5 billion of direct, immediate cash.

In the meantime, their operations are being cut 20% or more and one, Continental Airlines Inc., abandoned service to 10 cities. It’s not expected to be the last to drop routes. And as they eliminate 20% of their schedules, they have to strip out at least 20% of their costs--so nearly 80,000 airline jobs have been cut and at least 30,000 more are expected to be eliminated.

‘Long-Term Downward Shift’

Airline fares also are suddenly in flux. Should the airlines raise fares because they’re bleeding cash? Or should they heavily discount fares to fill their planes? And with all of the other confusion, what even is the proper fare on a given route that would turn a profit?

That question, along with the airlines’ long-term woes, will not disappear with the federal bailout. So it’s very possible that the airline industry will stay in its shrunken form--and perhaps contract even more--over at least the next year or two.

There are “severe operating and financial burdens for United and the rest of the airline industry despite the possibility of any initiative on the part of Congress to provide some form of relief,” Moody’s Investors Service said last week as it lowered the credit ratings for United, a unit of UAL Corp., and other carriers.

No one knows when the public will return to the skies in numbers even close to what they were before Sept. 11, when an average plane took off 70% or more filled. The issue gets even murkier if the United States retaliates against the terrorism, adding to consumers’ skittishness about flying.

The industry “is facing a long-term downward shift in passenger traffic,” said Mark Oline, an analyst with credit-rating firm Fitch Inc. in Chicago.

Also, it’s unknown whether the carriers ever again will have the route networks they flew before the attacks. The carriers would restore flights only if the travel demand were there. But that’s likely to be years away.

Consider: When the airlines went into their last major slump a decade ago, it started with fears of flying related to the Persian Gulf War and with a drop in demand because of the U.S. economic recession. But the airlines kept losing money for four years and ultimately suffered a combined $13 billion in losses until returning to the black in 1995.

This time, the airlines’ schedule cuts mean consumers probably will see less-frequent service between cities rather than a wholesale elimination of service to small and mid-size destinations. Congress is leaning on the carriers to maintain service to less-populated regions in exchange for federal support.

But there’s also widespread speculation that in a year or two, there will be fewer airlines. The weakest carriers probably will have to seek merger partners--bailout or not--and U.S. antitrust regulators are expected to be less resistant to buyouts.

“I don’t think they have any choice” but to let mergers go through, said Beyer of Avmark. She noted that AMR Corp., the parent of American Airlines, recently got approval to buy Trans World Airlines in large part because TWA was about to go bankrupt.

UAL’s effort to buy ailing US Airways Group was shot down by regulators on grounds United would control too many routes, especially in the Northeast. But with US Airways on the list of most-endangered carriers, along with America West and Continental, the Justice Department might be less inclined to block a deal, analysts said.

Before the attacks, there also were reports of preliminary merger talks between Continental, Northwest Airlines Inc. and Delta Air Lines Inc. Once the industry gets its cash infusion from Uncle Sam and settles down a bit, those talks might resume.

Slippery Slope Toward Re-Regulation?

All of this represents a sea-change for travelers. Before Sept. 11, the public outcry over airline delays and airport congestion threatened the aviation industry with re-regulation, namely a bill of rights proposed to reduce the hassles and keep passengers better informed.

Now federal authorities simply want to ensure passengers feel secure when they board a jetliner. So they are forcing the airlines and consumers to adapt to new regulations of a different sort, ones involving increased security to ward off another terrorist hijacking.

But analysts said it’s quite unlikely that the public, shaken and fearful about air travel in the aftermath of the terrorist attack, will do much complaining. Indeed, polls show most Americans are in favor of the added security. But polls also show people are still fearful to fly, regardless of tighter security.

“It’s unfortunate and it will cause a lot of inconvenience,” said James Gattuso, vice president for policy at the Competitive Enterprise Institute, a Washington think tank that normally advocates limited government involvement in business. “But given the events of this magnitude, it’s hard to say it’s unnecessary.

“There’s just an intense understanding on everyone’s part that this situation is special, that what’s happening now has been caused by a national emergency,” he said.

Lessons being learned from terrorist attacks also could mean still more regulations and additional costs for an airline industry that’s already buckling under the weight of the economy’s slowdown, higher fuel costs and higher labor expenses. But it appears the carriers will get financial relief under White House and congressional proposals to have the U.S. government take over airport security.

The airlines, which were deregulated in 1978, are not expected to see their route networks and fares come under renewed government oversight. But there is talk of beefing up airport-security equipment and personnel, strengthening jetliners’ cockpit doors to better protect pilots, and other security steps that might be in the form of new regulations or supervision from the Federal Aviation Administration.

Still, “is this the slippery slope toward massive re-regulation [of the airlines]? No,” said Michael Allen, chief operating officer of Back Aviation Solutions, a consulting firm in New Haven, Conn. “This is focused on a particular area--safety--due to a major tragedy.”

By the worst fate possible, the airline industry is going through a wrenching pullback that not only affects millions of travelers and more than 1 million airline and airport workers, but also countless people who depend on airline-related industries, such as tourism, hotels and restaurants.

But truth be told, the attacks are accelerating airline-industry shifts that were already poised to occur, said Stephen Levy, director of the Palo Alto-based Center for Continuing Study of the California Economy.

“If you see a change in the structure of the airline industry,” he said, “you will find that the causes well predated Sept. 11.”

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

STAYING ALOFT

A plunge in air travel after the terrorist attacks are pushing the airlines to the brink, forcing them to slash their schedules, eliminate jobs and seek a federal bailout. Here’s a look at the six largest airlines and their prospects:

AMR (American)

Headquarters: Dallas/Ft. Worth Airport (DFW)

Hub airports: DFW, Chicago, Miami, St. Louis

Schedule Cut: 20%

Jobs Cut: 20,000

Outlook: Largest U.S. carrier, relatively strong; needs U.S. protection from attack-related lawsuits.

UAL (United)

Headquarters: Elk Grove Township, Ill.

Hub airports: Chicago, Denver, San Francisco, Los Angeles, Washington

Schedule Cut: 20%

Jobs Cut: 20,000

Outlook: Another survivor, but needs the same liability protection as AMR to avoid banrkuptcy.