Survival is top concern for airline industry in 2003
By Dan Reed
USA Today
After two years of record losses for U.S. airlines, even optimists' forecasts sound gloomy.
Some industry analysts say the nation's biggest carriers might lose only $3.5 billion this year — following $16 billion in losses in 2001 and 2002 — if they're lucky. Other major airlines might get through 2003 without following United and US Airways into bankruptcy reorganization — if they're lucky. The industry could break even next year — maybe.
As airlines announce 2002 results this month, there's little talk of prosperity — just survival. Of the 10 largest airlines, only discount king Southwest Airlines has remained consistently profitable through the industry's worst downturn.
Continental Airlines CEO Gordon Bethune is amazed at the depth of the problem. His airline, one of the top performers by most financial standards, lost $451 million in 2002 and expects another loss in 2003.
"We're beating the hell out of the competition, but we're still losing a ton of money," says an exasperated Bethune.
The prognosis: More upheaval, affecting not only the airlines and their 500,000 worried workers, but also millions of Americans and hundreds of communities that depend on their services. Fewer flights, fewer choices of flight times, less personal service, less food or no food, more hassles, even more demoralized airline workers; it's likely all part of the future.
The industry's prospects will likely rise or fall based on what happens in the Middle East.
The price of jet fuel — airlines' second-largest expense after labor — has risen nearly 30 percent, to almost 90 cents a gallon, in three months. That's partly because of the shutdown of Venezuelan oil production because of a national strike now in its seventh week, and partly because of growing concern about war with Iraq. Prices likely will rise further if U.S. forces attack.
If that happens, travel demand, especially in international markets, would be hurt. American Airlines CEO Don Carty says domestic demand is so low. "War probably won't take it much farther down," he said.
In international markets, he and others figure war could trigger a drop in demand of 10 percent or more.
Like most industry analysts, Sam Buttrick of UBS Warburg has a war built in to his 2003 forecast. He doesn't think that will push any more "carriers of consequence" into bankruptcy. But the kind of war he's counting on is a quick, decisive victory for the United States and its allies, as the 100-hour Persian Gulf war was a dozen years ago. If U.S and allied troops get bogged down in a longer, bloodier war, "all bets are off," he says.
Boiled down, the traditional network carriers — led by American, United, Delta, Northwest, Continental and US Airways — have two enormous, debilitating problems: high costs and sagging revenue.
Fast-growing discount carriers such as Southwest have captured about a fifth of the U.S. market — double the share they had a decade ago — by exploiting their lower operating costs to underprice the traditional carriers. Meanwhile, those airlines' top-revenue customers — the corporate travelers who once paid four-figure prices to fly weekday trips with little advance notice — are demanding lower fares or not flying at all.
Industry revenues are off 20 percent to 25 percent from 2001, says Dave Swierenga, chief economist for the Air Transport Association. Meanwhile, despite big cuts — 80,000 jobs and 10 percent in industry capacity — costs are down "only about 5 percent."
Most big airlines are trying to cut costs by 15 percent to 20 percent from 2000. So far, they've found ways to save about half that. Much of the rest is likely to come from labor, in pay and benefit concessions, and big productivity increases. Getting those savings could be tortuous for airline managers and workers, and for travelers and communities caught in the middle.
"Labor cost savings never come easily or quietly," says debt analyst Phil Baggaley of Standard & Poor's.
"You almost have to rely on the marketplace to generate additional revenues" to go along with big cost savings, Swierenga said.
How can the airlines increase revenue when they're reducing service and when business travelers have made it clear they won't pay huge premiums any more?
They will try to answer that question this year, and come up with a price scheme to make people want to fly at prices that will cover their costs. Here's what travelers might expect:
- Cash reserves and debt levels will be a bigger concern.
Baggaley estimates that American, United, Delta, Northwest, Continental and US Airways have added $25 billion in debt since 2000, mainly to finance their losses.
Now, some carriers' access to capital is drying up. Continental tops that category.
- Management-labor bickering — an art form in the industry — is likely to escalate as big carriers seek big concessions.
United's and US Airways' progress in obtaining billions of dollars a year in labor savings from their unions puts pressure on non-Chapter 11 airlines to cut their labor costs.
- More cutbacks in large-jet service by the big airlines as they push more domestic flying to their regional airline affiliates.
Tighter supply could mean fewer discounted seats and higher prices on the discount fares that remain.
- More experimentation with airfares and possibly the start of a simpler price structure.
Most observers expect a complete price restructuring by the middle of the year. Some worry that such a change could backfire and trigger pricing chaos. Everyone agrees change is needed, but they can't agree on what will work for both business travelers and the industry.
Earlier this month, United cut the price of about 40 percent of its business fares by about 40 percent. Rivals, including those who were experimenting with similar pricing structures in small test markets, matched the move in directly competitive markets but not systemwide. The message: They're not sure United's formula is the answer.
- Industry leaders will continue pleading with the government for tax relief and help in covering their huge new security costs.
