Airlines gasp to stay aloft

Shakeout: The old eagles of the industry struggle to adapt before changing conditions cause them to crash.

9/11 Three Years After

September 11, 2004|By Meredith Cohn | Meredith Cohn,SUN STAFF

Delta Air Lines chief executive Gerald Grinstein told employees this week that the financially strapped airline needed to reinvent itself to survive - a reinvention that needed to start with up to 7,000 fewer jobs.

Reinvention is a popular word in the not-so-friendly skies. The question is whether Delta, US Airways and United Airlines have enough time, or the collective wills, to reinvent.

With United in bankruptcy and struggling to get out, and Delta and US Airways both threatening to file if employees don't agree to concessions, the airline industry, after $25 billion in losses since 2001, stands on the verge of its biggest shakeout since the aftermath of the Persian Gulf War.

In the competitive showdown between the established airlines and low-fare competitors, victory might be at hand for the upstarts. That could mean lower fares are here to stay. But it also could mean thousands more job cuts, loss of service to some smaller communities and tough financial blows to some midsize cities whose economies have revolved around huge airline hubs.

"Eventually all airlines will become low-fare airlines or disappear," said David Swierenga, an industry consultant. "There is a place for these airlines, but they must cut their costs."

Major carriers have battled competition, recession and war before, and even overcame low-fare upstart People Express in the 1980s. But since the terrorist attacks of Sept. 11, 2001, there are new challenges.

Low-cost airlines now serve about 70 percent of the U.S. markets, up from 20 percent in 1990. Jet fuel prices have soared, and more vigorous security has added costs and frustrated travelers with lines so long some would rather drive.

Pay, work rules

The major carriers also are saddled with some enormous costs that low-fare carriers such as JetBlue, AirTran and USA 3000 don't have, such as pensions. And the upstarts don't have strict work rules that generally pay employees more for less work. Southwest Airlines, the grandfather of low-cost airlines, for example, uses its flight attendants to straighten up the planes between flights.

At the end of past economic downturns, the major airlines could always count on business travelers to come back. They bought high-priced, last-minute, first-class seats, historically contributing up to 70 percent of airline revenues. Frequent-flier programs, and maybe a need for some pampering, ensured the major airlines' dominance.

But no longer. The 9/11 attacks scared many business travelers away for security reasons, and once they decided to return to the skies, they refused to buy high-priced tickets, armed with the ability to find lower-fare tickets, even for last-minute travel, on the Internet.

The cost and technology of video-conferencing improved, enabling them to stay home in many cases. In some regions, travelers turned to the train.

And some are standing in line for seats at the Southwest gate with everyone else. The perks are no longer as good or as easy to obtain on legacy airlines, so business travelers' new loyalty is to their own pocketbook.

"It's the price for me," said Carol Harper, a Baltimore business traveler who was flying to San Antonio on Southwest last week. She said cost is her No. 1 factor when choosing an airline.

Until 2001, the airlines had little incentive to reduce big paychecks or find savings in other places. The economic good times during the 1990s produced profits for the major airlines. They bought planes, expanded routes and shared the wealth with their employees.

When the market changed - and the airlines didn't - revenue stagnated, and costs and debt piled up.

"It's a permanently transformed market," said Kevin Mitchell, head of the Business Travel Coalition, a consumer group. "Everyone wants cheap tickets."

Business model

The hub-and-spoke business model that major airlines once hailed as the epitome of efficiency has become one of the very reasons for their troubles. The philosophy was that an airline could pick up people in a large number of cities and feed them all into a central collection point, from where they would fan out to many other cities.

This system could move large numbers of people and made it economical for airlines to serve small cities. But it required huge overhead and left planes sitting on the ground at hubs, waiting for feeder flights to arrive.

Southwest offered a very different model: Short, direct, very frequent flights between markets with the most demand, keeping planes full and in the air for hours more a day, with lower, more predictable fares. When it proved year after year that its model would make money, imitators followed.

Dallas-based Southwest has grown increasingly bold about moving into the traditional hubs of legacy airlines and trying to dictate prices. At Baltimore-Washington International Airport, US Airways dominated until Southwest began moving in in the mid-1990s.

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