Some say airlines to blame for woes

Analysts note industry slow to react to economy before Sept. 11 attacks

Terrorism Strikes America

Business Impact

September 22, 2001|By Paul Adams | Paul Adams,SUN STAFF

Things couldn't get much worse for airlines. With passenger loads down, the economy slipping toward recession and losses projected to reach $3.5 billion, many analysts said the industry was ripe for a round of layoffs and cutbacks.

That was before Sept. 11.

It took an act of terrorism before the industry was forced to act quickly, announcing more than 80,000 layoffs in the past week and appealing to the federal government for a $15 billion financial aid package.

Few, if any, dispute the need to rescue an industry many say is as essential to the nation's economy as electricity and fuel. But some analysts say the airlines' woes - and the size of the government bailout - might have been lessened, though by no means eliminated, had the industry acted before Sept. 11 to address its financial and structural problems.

"The only positive thing that happened [Sept. 11] was the industry said, `OK, now we've got to do something drastic," said Barbara Beyer, an aviation consultant for Avmark Inc. in Arlington, Va. "It's something they should have expected to do regardless, but they weren't going to do."

Airlines have historically been slow to react to changing market conditions. During the Persian Gulf war, which caused many tourists to cancel travel plans, and the recession of the early 1990s, the industry continued expensive routes and maintained staffing levels despite a significant drop in revenue. The result was a nearly $2 billion industrywide loss in 1991 and a $4.7 billion loss in 1992.

Though the drop in air travel caused by the gulf war doesn't compare to what happened beginning last week, Beyer and other analysts say airlines were equally slow to react to the revenue shortfall that began earlier this year primarily as a result of a slowing economy, higher labor costs and rising fuel prices.

"The industry has a history of wanting to over-serve during downturns," said Robert W. Mann, a New York aviation consultant. Mann and others said airlines probably would have been forced to lay off some employees this year without the impact of last week's terrorist attacks.

The question of whether airlines shoulder some of the blame for their financial woes is an important one as Congress delivers $5 billion in cash aid to the industry and $10 billion in loan guarantees. With the cost of last week's attacks mounting, Congress doesn't want to appear to be rewarding a reckless industry for its excesses while leaving other industries hurt by the attacks in the cold.

But even those who have criticized airlines for past excesses don't dispute that the industry was broadsided by something no one could have prepared for. The Air Transport Association, which represents cargo and passenger airlines, estimates the industry lost $1.34 billion during last week's airport shutdown. The losses are projected to grow to about $5 billion by month's end as a result of lost traffic.

However, Beyer and others say that doesn't mean airlines should get a blank check. The aid package should be restricted to costs associated with last week's attacks and not be used to help struggling airlines recover prior losses, some say.

"It's clear that Congress should feel no responsibility to bail out the industry on the basis of losses incurred prior to Sept. 11," said Paul Stephen Dempsey, a University of Denver transportation law professor and chairman of Frontier Airlines. Industry officials dispute suggestions that airlines could have done much to lessen their pain by acting to cut capacity or institute layoffs prior to last week.

Until this year, the airline industry had a record streak of profits. The nation's top 10 airlines enjoyed record load factors of about 72 percent in 2000, according to the Air Transport Association. That declined only slightly this year. The industry's revenue shortfall was caused by persistently high fuel prices, a slumping economy and high labor costs - all problems the association says airlines had little control over.

"Carriers were held hostage by their labor groups and wound up signing extraordinary settlements with labor," said David Swierenga, chief economist for the Air Transport Association.

And there were signs that several airlines were beginning to respond to the slumping economy by retiring older, less efficient airplanes and cutting capacity before Sept. 11.

"They had started to take action this summer to reflect the softening economy," said Richard Golaszewski, executive vice president of GRA Inc., a Philadelphia aviation consulting firm.

Still, some point to Dallas-based Southwest Airlines as an example of how the industry could have mitigated its suffering after last week's attacks. By keeping costs low and staying focused on its target market, the budget carrier has amassed a strong cash reserve that analysts say will help it weather the current crisis without instituting the kind of cuts other major carriers have announced.

"Their secret was they had the strongest balance sheet," Golaszewski said, "and they had the strongest balance sheet because they had the smartest strategy."

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