Cautious Airline Sector Preparing for Takeoff
Travelers enduring long lines and random security checks at airports are an apt metaphor for the airline industry itself: As the carriers move forward from the tumult of Sept. 11, they’re doing so with slow, hesitant steps--and not without a good deal of scrutiny.
The industry last week closed the book on the worst year in aviation’s history, with Delta Air Lines Inc. and UAL Corp.’s United Airlines joining most of their peers in reporting staggering fourth-quarter losses. Altogether, the airlines lost more than $7 billion in 2001--a sum that would have been higher if not for the federal bailout package--and they’re still losing millions of dollars a day.
But now a few carriers such as United, Delta and AMR Corp.’s American Airlines cautiously are restoring service in selected regions of the country and recalling several hundred employees. Those carriers, along with most others, had taken the unprecedented step of slashing their operations by 15% to 20% after the terrorist attacks, throwing nearly 100,000 people out of work.
“Our industry is now in the transition period between crisis aftermath and the next stage--initial recovery,” Delta Chairman and Chief Executive Leo F. Mullin told analysts last week.
Indeed, 2002 stands as a critical test of whether the airlines can put last year’s crisis behind them and build on that recovery. It’s an immensely difficult task. To stop losing money and restore service on a widespread scale, the industry must persuade many more people to fly again and at higher fares. The airlines’ other main options are to keep cutting costs, including labor, or, if their losses persist, seek merger partners.
Even if the airlines keep rebounding, there’s another hurdle to clear: Efficiently moving those larger numbers of travelers through heightened airport-security checks. Otherwise, the airlines risk consumer backlash against long delays and late arrivals.
And a key factor in whether the industry can get back to its pre-Sept. 11 size is the U.S. economy, which is out of the airlines’ control. But if the economy strengthens this year, as many forecast, it should give the carriers the financial tailwind to continue restoring service and rehiring workers.
That’s the scenario embraced by the stock market, where airline shares have risen sharply since early November. “The major initial shock to the system following Sept. 11 has by and large run its course,” said Reno Bianchi, an analyst with Salomon Smith Barney in New York.
Even so, experts are debating whether the carriers will commit an old sin and restore service too soon--ahead of the economy’s comeback--in an effort to grab market share from each other.
Then there’s the debate over the airlines’ most important customer: the business traveler.
Most agree that business travel will pick up in tandem with leisure travel as the economy expands. But critics contend that unless the airlines simplify and reduce business fares, a sizable chunk of that market may not return for a long time, blocking a full recovery for carriers and their employees.
It’s an intricate puzzle to solve. Adding service and recalling workers means the airlines first need more passengers paying higher fares. But until the economy gets better, the carriers need fare sales to generate travel--which cuts into their profits. And without enough profits, airline executives are hard-pressed to justify putting more planes in the sky.
Here’s a closer look at some pieces of that puzzle--the airlines’ key segments and constituents--and how they might come together this year:
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The Airlines
After Sept. 11, when the airlines dramatically shrank their operations and begged for a $15-billion federal bailout to survive, many predicted the industry would never be the same.
Nearly four months later, they were partly right. The added security--including more random searches, 100% baggage matching and reinforced cockpit doors--is without parallel. Some of the weaker airlines, such as US Airways, may never return to their former size.
Yet many parts of the airline business haven’t changed much. The carriers still use fare cuts to quickly drum up sales. Organized labor and management continue to feud. Low-cost maverick Southwest Airlines did not cut back after Sept. 11 and another smaller carrier, Alaska Airlines, expects this month to return to its pre-attack operations.
Several others are taking a go-slow approach to bringing back service. American last week said it would restore 41 round-trip flights from its Dallas-Fort Worth base to 37 cities by March 2, start service between Oakland and New York and add flights to Boston. United said it plans to add 127 flights in April.
American, the nation’s largest airline, recalled 400 flight attendants, 800 reservations agents and hundreds of airport and ramp personnel. The steps are in response to “indications that air travel is increasing,” the airline said.
It’s a measured increase, however. United and Delta are resuming some of their service with 50-seat regional jets because there isn’t enough passenger traffic to bring back the larger, conventional jetliners on those routes.
The big question is how much more will the airlines expand this year or, to use the industry’s jargon, add capacity. Although the airlines would like to add capacity to earn bigger profits from the economy’s rebound, they don’t want to guess wrong and find themselves with too many empty seats if the economy continues to flounder.
“The bottom line is: Where is the economy headed, and how well and how disciplined will the airlines manage their capacity?” analyst Bianchi said. “Will they make the mistake of putting more capacity ahead of an economic recovery?”
The industry’s consensus is that the economy will grow stronger during 2002 but that the airlines will restrain their growth to ensure profits. Delta for one “will remain disciplined in our capacity decisions throughout 2002,” its chief financial officer, Michele Burns, told analysts last week.
One reason is that, regardless of predictions that the economy will rebound, the airlines can’t count on a rebound in business travel until it happens. Business fliers typically don’t book in advance, paying more for seats than vacation travelers who plan their trips, and thus account for most of an airline’s income. Business travel was down well before Sept. 11.
The airlines will be watching closely to see how much traffic they get during spring break and the summer travel season, but it’s the business traveler who will be key in restoring earnings.
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The Passengers
One such traveler is Rod Carter, a managing director in the Los Angeles office of investment firm RBC Dain Rauscher. A frequent flier who logged more than 100,000 miles last year, Carter said he flies as much as before on business, but that many others aren’t because of the weak economy.
“More and more I see a lot of bankers and lawyers I deal with asking their clients ‘Can this be done over the telephone?”’ he said.
Kevin Mitchell, who heads the Business Travel Coalition, an advocacy group, said “the airlines were absolutely blindsided by the falloff in business travel” last year. He said the carriers still underestimate how many companies are locking in travel restrictions, regardless of what the economy does, because the companies are fed up with high business fares.
“What the airlines don’t get is that many [chief financial officers] are asking: Do we really need to see the customer four times a year, or is twice plus the annual industry convention sufficient?” Mitchell said.
He added that business fares are “too complex, irrational, inconsistent,” and that if the airlines want to see business travel return to past levels, they must simplify and restructure the fares to narrow the gap between business and leisure ticket prices.
United, for one, concedes there’s a problem. Not only is business travel down, but “business travelers are finding access to real low fares” to keep a lid on their own companies’ costs, United President Rono Dutta told analysts Friday. “That’s hurting us.”
As for leisure fares, they’ve been on sale for most of the last four months, but whether they stay low seems to depend on the flight and what the economy does in the coming year.
If the economy heats up and the airlines don’t add capacity, their planes will be crowded--enabling the carriers to raise fares. For now, there are plenty of bargains on many domestic and international flights because of seasonally low passenger loads. Fares to Europe, in particular, are down sharply.
But Tom Parsons, chief executive of Bestfares.com, said prices to warm-weather destinations such as Hawaii and Mexico are rising fast.
“The price increases may mean that the airlines are making their first moves to boost yields after posting billions of dollars of red ink the fourth quarter,” Parsons said, referring to the industry’s term for average ticket prices.
Regardless, the typical surge in passenger traffic this spring and summer will put the new security measures to a major test. Most travelers are enduring the security checks because the long lines and delays, while inconvenient, are tolerable.
Plus, the drop in passenger traffic since Sept. 11 means planes are leaving and arriving on time more often.
“It’s definitely a hassle,” said business traveler Carter. “It’s more stressful. But you just deal with it, and it’s part of the new world.”
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The Employees
The dismissal of thousands of airline workers took only days, but it will be months or years before they all return. “The carriers are going to slowly feed capacity back into the system where it’s profitable, and very slowly feed back in people” to their payrolls, said Ash of Global Aviation.
There are bright spots. Southwest, Alaska and some small carriers such as JetBlue Airways had virtually no layoffs after Sept. 11, and those carriers hope to grow slightly in 2002, perhaps generating new jobs. The recall of hundreds of workers at American bodes well for some additional workers to regain employment as other major airlines gradually add back service.
But that’s little solace for most of the laid-off workers, said Frank Larkin, a spokesman for the International Assn. of Machinists. “While there are fractional increases in flight schedules, there is no indication that large percentages of the 100,000-plus employees are being recalled,” he said.
He said that although the airlines are adding some flights, they’ve also been cutting elsewhere--United recently closed four reservations centers in California and furloughed hundreds of workers. “From our perspective, it’s kind of premature to speculate about recovery while some airlines are still cutting jobs,” Larkin said.
The machinists and other unions continue to seek better contracts, and that’s continuing the long-standing friction between many airline unions and management. The tug-of-war is most evident at United, whose 15,000 mechanics are threatening to strike this month if the two sides can’t reach agreement.
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The Investors
Although the fear of flying that set in after Sept. 11 remains, the fear of owning airline stocks quickly dissipated, especially after President Bush signed the federal bailout bill. The American Stock Exchange’s index of airline shares has jumped 31% since Sept. 11, far outpacing the broader market as measured by the Standard & Poor’s 500 index.
Investors concluded that airline stocks, which plunged in the weeks after the attacks, had nowhere to go but up with the help of the bailout and the predicted economic recovery this year. The bailout included $5 billion in immediate cash aid and $10 billion in loan guarantees. But most airlines haven’t bothered with the guarantees, saying they have enough cash to sustain them until the market improves.
Several airlines, including the two biggest--American and United, each have more than $2 billion in cash on hand and the ability to borrow more, using their jetliners as collateral. They have until June 28 to decide whether they want the federal loan guarantees just in case.
Shortly before the terrorist attacks, the only profitable airlines were Southwest, Alaska and Continental, because the slowing economy and drop in business travel had pushed the other major carriers into the red. Now, as the industry recovers, analysts expect those to be the first to regain profitability in 2002, with the rest of the industry following in 2003.
But that’s barring any more shocks to the air-travel system, and assuming the economy improves as forecast. If events go the other way and the airlines’ losses start mounting again, some carriers could be forced to find merger partners to survive.
Delta’s Mullin, a proponent of consolidation, said any merger scenario “will be very dependent on economic trends” as the year unfolds. But he added, “The jury is still very much out on that.”
