Airline industry expects bumpy ride to recovery By Dan Reed, USA TODAY After two years of record losses for U.S. airlines, even optimists'=20 forecasts sound gloomy. Some industry analysts say the nation's biggest=20 carriers might lose only $3.5 billion this year =97 following $16 billion in= =20 losses in 2001 and 2002 =97 if they're lucky. Other major airlines might get= =20 through 2003 without following United and US Airways into bankruptcy=20 reorganization =97 if they're lucky. The industry could break even next year= =20 =97 maybe. (Background: How airlines' finances have slipped over 2 years) As= =20 airlines announce 2002 results this month, there's little talk of=20 prosperity =97 just survival. Of the 10 largest airlines, only discount king= =20 Southwest Airlines has remained consistently profitable through the=20 industry's worst downturn. Continental Airlines CEO Gordon Bethune is=20 amazed at the depth of the problem. His airline, one of the top performers= =20 by most financial standards, lost $451 million in 2002 and expects another= =20 loss in 2003. "We're beating the hell out of the competition, but we're still losing a=20 ton of money," says an exasperated Bethune. The prognosis: more upheaval,=20 affecting not only the airlines and their 500,000 worried workers, but also= =20 millions of Americans and hundreds of communities that depend on their=20 services. Fewer flights, fewer choices of flight times, less personal=20 service, less food or no food, more hassles, even more demoralized airline= =20 workers; it's likely all part of the future. The industry's prospects will= =20 likely rise or fall based on what happens in the Middle East. The price of= =20 jet fuel =97 airlines' second-largest expense after labor =97 has risen= nearly=20 30%, to almost 90 cents a gallon, in three months. That's partly because of= =20 the shutdown of Venezuelan oil production due to a national strike now in=20 its seventh week, and partly because of growing concern about war with=20 Iraq. Prices likely will rise further if U.S. forces attack. If that happens, travel demand, especially in international markets, would= =20 be hurt. American Airlines CEO Don Carty says domestic demand is so low,=20 "War probably won't take it much farther down." In international markets,=20 he and others figure war could trigger a drop in demand of 10% or more.=20 Like most industry analysts, Sam Buttrick of UBS Warburg has a war built in= =20 to his 2003 forecast. He doesn't think that will push any more "carriers of= =20 consequence" into bankruptcy. But the kind of war he's counting on is a=20 quick, decisive victory for the United States and its allies, as the=20 100-hour Persian Gulf war was a dozen years ago. If U.S and allied troops=20 get bogged down in a longer, bloodier war, "all bets are off," he says.=20 Boiled down, the traditional network carriers =97 led by American, United,= =20 Delta, Northwest, Continental and US Airways =97 have two enormous,=20 debilitating problems: high costs and sagging revenue. Fast-growing discount carriers such as Southwest have captured about a=20 fifth of the U.S. market =97 double the share they had a decade ago =97 by= =20 exploiting their lower operating costs to underprice the traditional=20 carriers. Meanwhile, those airlines' top-revenue customers =97 the corporate= =20 travelers who once paid four-figure prices to fly weekday trips with little= =20 advance notice =97 are demanding lower fares or not flying at all. Industry= =20 revenues are off 20% to 25% from 2001, says Dave Swierenga, chief economist= =20 for the Air Transport Association. Meanwhile, despite big cuts =97 80,000=20 jobs and 10% in industry capacity =97 costs are down "only about 5%." Most= =20 big airlines are trying to cut costs by 15% to 20% from 2000. So far,=20 they've found ways to save about half that. Much of the rest is likely to=20 come from labor, in pay and benefit concessions, and big productivity=20 increases. Getting those savings could be torturous for airline managers=20 and workers, and for travelers and communities caught in the middle. "Labor cost savings never come easily or quietly," says debt analyst Phil=20 Baggaley of Standard & Poor's. Swierenga doubts such large savings are=20 possible. Even if they are, they won't solve the problem. "I've never known= =20 of any company that cut its costs by that much without cutting its revenues= =20 by as much or more," canceling out any benefit, he says. "You almost have=20 to rely on the marketplace to generate additional revenues" to go along=20 with big cost savings. How can the airlines increase revenue when they're=20 reducing service and when business travelers have made it clear they won't= =20 pay huge premiums any more? They will try to answer that question this=20 year, and come up with a price scheme to make people want to fly at prices= =20 that will cover their costs. Here's what travelers might expect: =B7 Cash reserves and debt levels will be a bigger concern. Some big= =20 carriers are going through cash the way Texas football players down=20 Gatorade in the 100-degree heat of August. Baggaley estimates that=20 American, United, Delta, Northwest, Continental and US Airways have added=20 $25 billion in debt since 2000, mainly to finance their losses. Now, some=20 carriers' access to capital is drying up. Continental tops that category,=20 too. "Continental concerns me," says consultant Scott Hamilton, an expert=20 in estimating market values of aircraft =97 critical numbers for lenders=20 deciding whether to lend to airlines. "Their operations are pretty good,=20 certainly better than most. But if the losses continue, I can see them=20 having to file Chapter 11 to preserve liquidity. I don't think it'll come=20 to that, and I certainly hope not. But it could." On the other hand,=20 Continental is one of the airlines that industry analysts give the best=20 odds of regaining profitability earliest. "It's a horse race between=20 Continental and Northwest" to return to profitability first, says J.P.=20 Morgan analyst Jamie Baker. "But if you're asking which company can best=20 weather the downturn, it's probably Delta. They've got more cash." Delta=20 and American have the best combination of cash and assets that can be=20 pledged as collateral for loans, he says. Both might need those deep=20 pockets. Their losses are much greater than other carriers operating=20 outside Chapter 11. =B7 Management-labor bickering =97 an art form in the industry =97 is= =20 likely to escalate as big carriers seek big concessions. United's and US Airways' progress in obtaining billions of dollars a year=20 in labor savings from their unions puts pressure on non-Chapter 11 airlines= =20 to cut their labor costs. Robert Crandall, retired CEO of American,=20 suggested last fall that old-line carriers such as American, United and=20 Delta, saddled with many arcane and expensive work rules, could "cut 30% of= =20 their labor costs without touching one dime of (workers') pay or benefits."= =20 But lots more jobs would be lost. More likely, airline managements will ask= =20 for a combination of productivity improvements and cuts in pay and=20 benefits, spreading the pain around and putting union leaders into a tight= box. =B7 More cutbacks in large-jet service by the big airlines as they= push=20 more domestic flying to their regional airline affiliates. The shift to=20 regional jets in midsize and smaller markets began well before the Sept. 11= =20 attacks, says Jeff Shane, deputy assistant transportation secretary, the=20 Bush administration's top airline policy expert. But the attacks increased= =20 the rate of change and the size of the markets where it is taking place.=20 The big airlines' regional affiliates have grown 26% in a year, Shane says.= =20 That growth should continue apace for several years as airlines seek to=20 bring supply in line with demand. Tighter supply could mean fewer=20 discounted seats and higher prices on the discount fares that remain. =B7 More experimentation with airfares and possibly the start of a=20 simpler price structure. Northwest CEO Richard Anderson says revenue from= =20 business travelers through the first 11 months of 2002 was off 36% from the= =20 same period in 2000, and off 11% from the same period in 2001. "Business=20 passengers =97 and their employers =97 have become much more price= conscious,=20 and more willing to trade inconvenience for a lower price," he says.=20 Something has to change. Last March, leisure travel-dependent America West= =20 was the first with lower fares aimed at attracting weekday business=20 travelers unable to plan trips weeks in advance. Last fall, American, Delta= =20 and Northwest began experimenting with similar schemes. Most observers=20 expect a complete price restructuring by the middle of the year. Some worry= =20 that such a change could backfire and trigger pricing chaos. Everyone=20 agrees change is needed, but they can't agree on what will work for both=20 business travelers and the industry. Earlier this month, United cut the=20 price of about 40% of its business fares by about 40%. Rivals, including=20 those who were experimenting with similar pricing structures in small test= =20 markets, matched the move in directly competitive markets but not=20 systemwide. The message: They're not sure United's formula is the answer. =B7 Industry leaders will continue pleading with the government for= tax=20 relief and help in covering their huge new security costs. Air travel "is= =20 the highest-taxed good or service available," complained Duane Woerth,=20 president of the Air Line Pilots Association, to the Senate Commerce=20 Committee. The tax bite on a $200 round-trip ticket with a connection each= =20 way is 25.6%, or $51.20, he said. Most of the taxes are flat fees on=20 tickets, so taxes add a bigger percentage to the cheap fares that are the=20 staple of low-cost carriers. Carol Hallett, the retiring president of the=20 Air Transport Association, complains that while the new security procedures= =20 imposed on the industry are necessary, airlines' security costs have=20 skyrocketed to more than $4 billion annually. Those costs, she says, can't= =20 be passed on to passengers, who already refuse to pay enough to cover=20 airlines' operating costs. "We don't charge a security fee to protect our=20 citizens from terrorists when they ride a subway (or) ... visit a museum,"= =20 she says. Security costs are "breaking the back" of an industry that's=20 already economically crippled, "and it threatens the strength of the=20 national economy," she says. *************************************************** The owner of Roger's Trinbago Site/TnTisland.com Roj (Roger James) escape email mailto:ejames@escape.ca Trinbago site: www.tntisland.com Carib Brass Ctn site www.tntisland.com/caribbeanbrassconnection/ Steel Expressions www.mts.net/~ejames/se/ Site of the Week: http://www.atlanticlng.com TnT Webdirectory: http://search.co.tt *********************************************************