Airlines fear war would hit them savagely

Industry veterans recall the miseries of 1990-1991

Current crisis could worsen

`Whole slew of carriers' are financially weak now

September 29, 2002|By Paul Adams | Paul Adams,SUN STAFF

The last time America went to war with Iraq, a sluggish economy and terrorism fears kept Americans close to home, thousands in the travel industry lost their jobs, and major carriers struggled to cope with record losses.

With a fresh conflict brewing, airline executives are bracing for a repeat and warning Congress of a potential industry collapse. Even without another war, industry officials say, most of the nation's airlines are in a day-to-day battle to remain viable as a result of a slow economy and the after-effects of the terrorist attacks last September.

"It's dismal," said Michael Wascom, a spokesman for the Air Transport Association, which represents major airlines. "Financial collapse is possible. More bankruptcies are a possibility."

The industry will support the Bush administration if it goes to war, Wascom said, but he added that a conflict with Iraq could "innocently complicate the airlines' current financial crisis."

If history is any guide, another Mideast conflict would hammer the airline industry when it can least afford it. Despite being awarded $5 billion in direct government aid, major carriers collectively lost a record $7.7 billion last year as passengers shunned air travel amid fears of terrorism.

The previous record loss, $4.8 billion was in 1992. With passenger numbers still down, the ATA estimates that the industry is on pace to lose another $7 billion this year, and analysts see no sign of a recovery.

"The impact [of war] could be a lot worse this time because you've got a whole slew of carriers that are financially weak right now," said Jon Ash, managing director of Washington consulting firm Global Aviation Associates. "If they have to take another hit, it could get pretty bloody."

Arlington, Va.-based US Airways filed for bankruptcy protection last month, and UAL Corp.'s United Airlines is threatening to follow suit. With the exception of budget carriers such as Southwest Airlines and AirTran Airways, the industry is struggling with deep losses and mounting debt. Southwest is the dominant carrier at Baltimore-Washington International Airport, and AirTran launched service from BWI in December.

Responding to the industry's economic concerns, key members of the U.S. House are drafting a bill that would give airlines another chance at applying for government-backed loan guarantees if war breaks out in the Persian Gulf. Congress approved up to $10 billion in loan guarantees to help the industry recover from the 2001 terrorist attacks, but the deadline to apply was June 28. So far, only one airline has received a loan guarantee, although US Airways has been given conditional approval.

In addition, the legislation would extend government-backed war-risk insurance for another year. The coverage is meant to protect airlines from losses resulting from war. Measures that would compensate airlines for certain security costs are also being considered.

"We must prepare the commercial aviation system to deal with the consequences of a conflict in Iraq," AirTran Airways' Chairman and Chief Executive Officer Joe Leonard told members of Congress Tuesday during a hearing on the industry's woes. "In the event of conflict, we expect that fewer customers will fly, and fuel and other costs will certainly rise."

Analysts said it's difficult to judge how much of the industry's troubles in 1991 were caused by the Persian Gulf war and how much was a result of the nation's economic ills.

But most agree that if war breaks out again, jet fuel prices will rise, passenger bookings will decline and the economy will slow even further. The impact is likely to be brief, but the combination could prove poisonous for some.

"Fuel prices have already been moving up," said Jim Corridore, an airline analyst with Standard & Poor's. "Any economic growth we're seeing is very tepid and probably will not be aided by war."

A look back

That was the pattern in 1990, when Iraq upset oil markets with its invasion of Kuwait. ATA statistics show that airlines lost $3.9 billion that year and $1.9 billion in 1991, when Operation Desert Storm drove Iraq out of Kuwait in the midst of a recession. Passenger totals declined about 3 percent in 1991, marking the first year-over-year decline in a decade. The effect was felt in all corners of the industry.

"That was the first time that travel agent sales had actually gone down from one year to the next" said Paul Ruden, general counsel for the American Society of Travel Agents, referring to the Persian Gulf war. "Trouble is, we also had a recession then, and no one is able to tease out the different threads."

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