The September 11th attack
Airlines reel from massive economic blow

By Michele Kayal
Advertiser Staff Writer

The day that terrorists seized U.S. commercial airplanes and used them as bombs against national icons swiftly and completely changed the economic world in which the airlines operate, and it's a change that Hawai'i's carriers — and the state's economy — will not be able to escape.

Fineasi Funaki of Honolulu checks the status at Honolulu International Airport of an Aloha Airlines flight to the Big Island. While airlines nationwide are struggling, interisland operations appear most vulnerable to any significant drop in leisure air travel brought on by last week's attack. As an industry, "we have our work unbelievably cut out for us," said John Happ, Hawaiian Airlines vice president of marketing and sales. Eugene Tanner • The Honolulu Advertiser

the attack on the nation's capital and the world's financial center will inflict a massive economic blow on the industry that could threaten the business of even the largest carriers.

Financially troubled Midway Airlines became the first casualty, shutting down on Wednesday, and was quickly followed by Ansett Australia on Thursday.

The airline industry was already expecting a combined $1.5 billion loss this year — its first since 1994 — but the destruction of the World Trade Center and attack on the Pentagon are expected to increase losses to as much as $10 billion this year and next, as skittish travelers shun flying.

In addition, new security measures required by the Federal Aviation Administration because of the hijackings could drive up airlines' costs.

Hawai'i's airlines work a leisure market where the profit margins are already thin, and added burdens are not good news. Interisland air service, while a lifeline for Island residents, is a money-drain for the carriers, which in the past two years have been adding more Mainland and long-haul routes to generate revenue. With analysts predicting a 20 percent drop in air traffic and a possible dip into a nationwide recession, these airlines could have an even harder time turning a profit.

"We, as an industry, we have our work unbelievably cut out for us through at least the balance of the year," said John Happ, Hawaiian Airlines' senior vice president of marketing and sales.

Aloha Airlines chief executive officer Glenn Zander declined to comment on the situation.

Reservations for trans-Pacific flights on Hawaiian have remained stable through Sept. 25, Happ said, suggesting that anyone who canceled has been replaced by a new passenger. But anything beyond those first two weeks, said Happ and others, is almost impossible to predict at the moment.

What happens next could be affected by whether there are more attacks, by the scope and particulars of any U.S. response, and by how the economy reacts.

Interisland operations appear to be the most vulnerable, since they depend on feed from airplanes coming from Asia and the Mainland. Depending on what turns the economy takes, Asia and Mainland carriers, as well as Aloha and Hawaiian, could adjust the number of planes they send to the islands. And the number of those planes could have a significant impact on the number of interisland flights that are offered.

"This is not a good thing for an interisland airline; we're acutely aware of that," Happ said. "Companies are not going to fly empty airplanes any longer than they have to, so you have to assume there's going to be some matching of capacity and demand."

And as go the airlines, so goes tourism, and as goes tourism, so goes Hawai'i's economy. Roughly 25 percent of the state's economy comes from tourism-related activities, so whatever happens to them, happens to state coffers. And though Hawai'i is more dependent on the airlines than any other state in the nation, the U.S. economy as a whole is likely to take a hit from a drop in airline business.

"I think it's pretty clear that we're going to see a recession that will be compounded for the airlines because of fears about flying and because businesses were already cutting back on travel," said Sherry Cooper, global economic strategist for Harris Bank of Chicago. "Now consumers will feel the same way."

The devastation within the airline industry will have a "multiplier effect" on the economy, Cooper said.

Delivering mail, carrying tourists, transporting raw materials to manufacturers and sending products bought over the Internet are just some of the everyday transactions that will take more time and money as carriers enforce tighter security and put fewer planes in the sky.

Helane Becker, an airline analyst at Buckingham Research in New York, said revenues will drop off significantly as 20 percent fewer flights are anticipated once the industry is up and running again. The costs associated with new safety standards set by the FAA are enough to put even the strongest carriers into bankruptcy, she said.

"I don't expect the industry has enough cash to weather this," she said.

In Washington, lawmakers are already considering a variety of ways to assist the airlines, including direct aid, loans and a bill that might limit their liabilities.

The chairman of a House aviation subcommittee, Rep. John Mica, R-Fla., said the amount of aid being discussed is between $2.5 billion and $12 billion, some of which would go to insurance companies.

"If there's not an infusion like that for the 10 airlines I'm aware of, they won't be around by the end of the year," Gordon Bethune, chairman and chief executive of Continental Airlines Inc., said Friday in a televised interview with NBC's Tom Brokaw.

By the end of the week, major carriers had really only just begun to regroup and they still had extremely sparse schedules. American flew about one-third of its normal schedule on Friday, while United and Delta also had limited service from only a handful of cities.

Aside from reduced travel and higher security-related costs, already lofty fuel costs could rise amid uncertainty about crude supplies in the event that U.S. military forces attack suspected terrorists in the Middle East.

"The airlines will be the most visible and notable economic casualty of this horrific event," said Robert J. Barbera, chief economist at Hoenig & Co. of Rye Brook, N.Y., calling it "an ugly economic backdrop" to the country's entire financial system for at least six months.

Advertiser news services contributed to this report.