This article from NYTimes.com has been sent to you by psa188@juno.com. Yes, It Was a Dismal Year for Airlines. Now the Bad News. December 16, 2002 By MICHELINE MAYNARD As bad as 2002 was for the airline industry, with two big bankruptcy filings, next year might be worse. Continued financial turmoil, growing labor-management confrontation, unhappy passengers and possible international conflict are looming. Even the most optimistic people involved with the industry have little clue about when a turnaround might come. "No one that I know of is predicting an opportunity for the industry to get out of this," said Kevin P. Mitchell, chairman of the Business Travel Coalition, which represents corporate travel departments and business travelers. "Even if the economy were to nicely firm up, that's an insufficient catalyst for recovery." The most immediate concern, though, is whether another airline, most likely American Airlines, will follow United Airlines and US Airways into Chapter 11 bankruptcy reorganization. Already, the United bankruptcy announcement on Dec. 9 and the US Airways filing in August have set in motion extensive industrywide cost-cutting measures. This year, airlines are expected to have the deepest losses in aviation history. Just days before United filed for Chapter 11 protection from creditors, American's chief executive, Donald J. Carty, began meeting with employees to ask for a freeze on wages and further cuts aimed at reducing expenses $4 billion a year. "The restructuring of our labor agreements is inevitable and fundamental to our long-term goal of remaining competitive and restoring profitability," said Mr. Carty, who, like other senior managers at American, is forgoing a raise for a second year. If United is able to reduce labor costs in bankruptcy court over the next few months, management at its competitors will certainly ask union leaders for similar concessions. But capitulation may not be automatic. "Airline employees are not going to want to change the conditions that have grown up over all the years since World War II, but they have to change, and change very dramatically," said Robert L. Crandall, a retired chairman and chief executive of American. The industry views the tough bankruptcy experience that US Airways has had as a cautionary tale. Going into its filing, US Airways seemed to have done everything right: it had won provisional approval for federal loan guarantees, unlike United, whose application to a federal loan board was rejected. US Airways also won concessions from its union, and engaged the Texas Pacific Group, a private equity firm that has invested in several troubled airlines, to prepare its reorganization. Texas Pacific, however, was outbid by the Retirement Systems of Alabama, which will take voting control of the airline once it emerges from bankruptcy. Before that happens, however, US Airways is trying to wrest more wage and benefit concessions from its unions. It has a real incentive in the threat by the retirement systems' chief executive, David G. Bronner, to withdraw its financing and send the airline into liquidation if the unions do not comply. Management is not the only group facing turmoil. Passengers are feeling the pinch of the airlines' drastic actions as well. Beginning Jan. 1, a number of big airlines will institute $100 fees for passengers who want to stand by for a different flight. (One exception is United, which decided to cancel the fees after passengers complained.) Airlines are putting in place "use it or lose it" policies, rendering nonrefundable tickets completely worthless if a passenger does not travel. They are not even good for a credit against future travel, as they have been in the past. Along with those changes, airlines are beginning to take aim at their frequent-flier programs as well. Delta Air Lines is leading a drive to give greater rewards to passengers who pay more for their tickets, bolstering mileage awards to full-fare coach and business-class passengers, and reducing them for customers who seek the cheapest fares. Given that miles have been one of the airlines' best tools for generating loyalty, Mr. Mitchell predicts the Delta move will further fuel the shift of passengers to low-fare airlines, which have their own frequent-flier programs. The low-fare carriers expect to pick up business in the year ahead. Southwest Airlines, which began transcontinental service this fall, will focus on adding flights from the cities it already serves, rather than adding destinations. That is a blow to the 115 cities on its waiting list for new service, but the strategy will give Southwest an even better chance to take on big carriers. One such is American, which competes with Southwest on 70 percent of its routes. Unlike its rivals, Southwest has been working on its labor situation all year. It has reached agreements with pilots and, most recently, ground personnel, which could prove to be great timing if other airlines are affected by labor strife. JetBlue, meanwhile, will be expanding service, too. This fall, after National Airlines went out of business, JetBlue was able to get a head start on service to Las Vegas, which had been planned for 2003. National had offered the only direct flights between New York and Las Vegas. JetBlue plans to add even more Las Vegas flights in coming months and has its own list of cities trying to win its business. Not all is rosy for the low-fare carriers, however. Both Delta and United have announced plans to create their own low-fare carriers, something they have tried and failed to accomplish in the past. The Delta low-fare airline, which has yet to be named, will operate between New York and Florida, using Boeing 757 jets that will be reconfigured to seat 199 coach class passengers. United plans to restart its West Coast shuttle, which was a success in its early years but ultimately fell victim to the dominance of low-fare carriers on California routes. The one unpredictable factor hanging over the industry, affecting both airlines and passengers, is what will happen in the case of a war with Iraq. With companies already cutting travel budgets because of the weak economy, any outbreak would provide another excuse for businesses to keep managers at home. Though leisure travel has largely bounced back from the September 2001 attacks, airlines fear that any level of uncertainty could cause people to put off trips until they feel more comfortable about flying. The uncertainties are one reason Mr. Bronner pushed management at US Airways to prepare a plan to deal with a war. Competitors probably have their own contingency plans by now, as well. Compared with war, the usual things that disrupt travel during coming months, like snowstorms, may seem easy to bear. http://www.nytimes.com/2002/12/16/business/businessspecial/16AIR.html?ex=1041058591&ei=1&en=9bd72b9014a8d76d HOW TO ADVERTISE --------------------------------- For information on advertising in e-mail newsletters or other creative advertising opportunities with The New York Times on the Web, please contact onlinesales@nytimes.com or visit our online media kit at http://www.nytimes.com/adinfo For general information about NYTimes.com, write to help@nytimes.com. 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