Airline tailspin began pre-9/11

Much of it is linked to dot-com collapse, loss of big spenders

Industry likely to shrink

Travelers can expect crowded planes, fewer flight options

August 18, 2002|By Paul Adams | Paul Adams,SUN STAFF

For a few glorious years in the late 1990s, the nation's biggest airlines erased years of losses and made serious money.

So much money that they went on a spending spree, buying hundreds of new planes in a frenzied grab for market share and giving employees fat contracts. Then disaster struck.

Sept. 11? Not exactly.

The terrorist attacks were devastating to the industry, but many airline analysts say the underpinnings of the current industry crisis can be found in the dot-com implosion that erased enormous personal fortunes and dragged down corporate profits. Suddenly, the free-spending business travelers - more than willing to spend $1,000 on walk-up fares in boom times - disappeared, leaving bloated airlines to fight over budget-conscious leisure travelers.

But those travelers had defected to low-fare carriers such as Southwest Airlines, JetBlue and AirTran, all of which have made money after the terrorist attacks as a result of their low costs and fiscal discipline.

"Anybody who points to Sept. 11 as the seminal event that started this radical change in the industry is deluding themselves," said Stuart Klaskin, a partner in aviation consulting company Klaskin, Kushner & Co.

Klaskin and others point out that major U.S. airlines were on pace to lose billions before terrorists struck the World Trade Center towers and the Pentagon.

The attacks accelerated - and significantly broadened - a restructuring that was destined to occur in the airline industry.

If major hub carriers aren't able to cut costs and shrink their operations to match reduced demand soon, the industry could face a new round of bankruptcies and failures, industry experts said.

Either way, air travelers will feel the effects for years to come. "I would say we're in the middle of a major restructuring in the industry," said James Corridore, an airline analyst with Standard & Poor's.

Arlington, Va.-based US Airways - once derided for its failure to adapt to market changes - was the first major carrier to give the industry a glimpse of its future.

With its back to the wall, the struggling airline persuaded its pilots and flight attendants to give up more than $550 million in annual pay and productivity concessions.

The carrier also won preliminary approval for a $900 million government loan guarantee and last week filed for Chapter 11 bankruptcy protection in a bid to erase debt it can no longer support.

In coming weeks, the nation's seventh-largest airline will shed dozens of airplanes and perhaps thousands of employees as it pieces together a restructuring plan that some say is prompting other carriers to alter course.

Two days after US Airways' bankruptcy filing, No. 1 American Airlines, the world's largest, announced that it would lay off 7,000 employees, retire old airplanes and retool its hubs. A day later, No. 2 United Airlines announced that it might follow US Airways into bankruptcy court unless it could cut labor costs and win concessions from creditors.

"Everybody is going to have to reassess their competitive strategy going forward," said Darryl Jenkins, executive director of the Aviation Institute at George Washington University.

When it's over, analysts said, airline employees will get paid less and there will be fewer of them. The largest airlines in the world will be a little smaller, leaving room for hard-charging budget airlines such as Southwest to get a little bigger.

Layovers at major hub airports will be longer as airlines spread flights throughout the day to make their operations more efficient, as American announced it would do last week.

Rows of roomy first-class seats will be removed to make space for more of the compact coach seats that most travelers are forced to squeeze into.

Rock-bottom discount fares will be harder to come by, but so will the four-figure business fares that corporate travelers have paid in recent years.

And the desert in the Southwest will be lined with more jetliners waiting to be brought out of mothballs when the next boom arrives.

"This is not going to be over soon," Klaskin said. "I think it will be another 18 to 24 months before we have reasonable stability."

The question is how many airlines will survive the crisis.

The Air Transport Association, a trade group representing major airlines, says revenue among its members is down 15 percent to 20 percent this year and that the industry is poised to lose $5 billion.

A loss that big would be the industry's largest ever, not including the unusual $7 billion loss precipitated by last year's terrorist attacks.

"What you're really saying is, `How long can the industry sustain those kinds of losses?'" said David Swierenga, chief economist for the Air Transport Association. "That's why I say it's a real possibility that there will be additional bankruptcies."

US Airways is the only major carrier to have headed to bankruptcy court, but many experts say United is a strong candidate.

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