In short term, crash adds to industry woes

Flight 587 disaster is expected to slow an already shaky recovery

More consolidation momentum

November 13, 2001|By Paul Adams | Paul Adams,SUN STAFF

Unless evidence ultimately points to another terrorist attack, analysts say, the crash of an American Airlines passenger jet in New York yesterday is unlikely to have a long-term impact on the airline industry, which is still reeling from the financial shock of the Sept. 11 hijackings that left nearly 5,000 dead.

But the apparent accident threatens to slow an already shaky recovery for the ailing industry and could add to growing momentum for a round of consolidation as airlines struggle to restructure in the face of mounting losses. Some analysts foresee a shakeout that would involve one or more airline failures and lead to a few smaller regional airlines being snatched up by the top three carriers.

And if yesterday's incident proves to be related to terrorism, analysts said, the industry would likely face a major restructuring beyond previous expectations.

In either scenario, travelers could find themselves with fewer choices among major airlines.

"The only thing that happened [Sept. 11 and yesterday] is that the whole restructuring process gets accelerated and it will be more dramatic than it would have been otherwise," said Barbara Beyer, an aviation consultant with Avmark Inc. in Arlington, Va.

American Airlines Flight 587 crashed in a working class neighborhood in Queens, N.Y., shortly after takeoff from John F. Kennedy International Airport yesterday, killing 255 passengers and crew and igniting new fears of terrorist activity. Federal investigators said the crash was likely an accident, but the incident is another blow to the nation's largest airline, which saw two of its jets hijacked in the Sept. 11 attacks. Shares of the airline's parent company, AMR Corp., were buffeted by the news, closing down $1.64, or about 9 percent, to $16.49 per share.

Airlines stung by aviation disasters have historically bounced back within two quarters, analysts said.

"Although we are cognizant of the recent events and timing of the crash, we think that the market may in fact be over-reacting if today's accident is not terrorist-related," Salomon Smith Barney analyst Brian D. Harris wrote in a note to investors.

Other analysts agreed, saying that the traveling public is sophisticated enough to handle the news of an aviation accident.

"The impact might be less than you think," said Michael Boyd, an Evergreen, Colo.-based aviation consultant. "We've seen this before and we'll get through it. If, however, it's a terror act of any kind ... it will be the worst fallout the airline industry has ever seen."

Many analysts have said the industry was poised for consolidation long before Sept. 11. But federal regulators quashed a proposed $12 billion merger between United Airlines and Arlington, Va.-based US Airways last summer, sending a strong signal to the industry that consolidation would not come easily or cheaply. With the industry now in critical condition, analysts suspect antitrust officials may apply a less stringent standard to airline mergers.

Antitrust experts said airlines could make liberal use of the "failing company" doctrine, which allows potentially anti-competitive mergers to proceed provided a company can show it would otherwise fail.

"A company has to be not only failing, but failing and facing liquidation," said Robert H. Lande, a University of Baltimore law professor. That's an exceedingly tough standard, Lande said, but it's one that may change in such extraordinary times for the industry.

"I think there's an unspoken hope from various government entities involved with commercial aviation that there won't be an acceleration in consolidation," said Stuart Klaskin of the Miami-based consulting firm Klaskin, Kushner & Co.

Most of the nation's major airlines are too weak to justify purchasing competitors. More likely, Klaskin and other analysts said, certain struggling airlines will be broken into pieces rather than merged. Likely candidates include US Airways, America West and, potentially, United Airlines, which has reported staggering losses in the first nine months of this year.

"Right now, nobody in this industry -- with the exception of Southwest Airlines and possibly a few others -- is prepared to even begin to look at acquiring somebody else's problems," Beyer said.

Labor and politics present another roadblock to consolidation. Airlines would likely have a hard time persuading labor unions to agree to mergers at a time when the industry is shedding staff by the thousands. Many labor unions have bitterly fought recent layoffs, saying airlines are taking advantage of the Sept. 11 tragedies to escape contractual obligations.

"It's hard to justify to labor that you want to go out and acquire a competitor when you're laying people off," said Robert W. Mann, a New York aviation consultant.

With a market capitalization larger than all other airlines combined, Dallas-based Southwest -- the No. 1 carrier at Baltimore-Washington International Airport -- is positioned to benefit from a shakeout. As other airlines cut back service, Southwest is poised to grow market share by taking over routes others abandon.

Other potential winners include small, entrepreneurial carriers such as JetBlue, Frontier Airlines and AirTran, which recently announced new service to BWI. All have low cost structures and the ability to react to market conditions quickly, said Klaskin, the Miami-based consultant.

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