=20 ---------------------------------------------------------------------- This article was sent to you by someone who found it on SF Gate. The original article can be found on SFGate.com here: http://www.sfgate.com/cgi-bin/article.cgi?file=3D/chronicle/archive/2003/03= /04/BU6422.DTL ---------------------------------------------------------------------- Tuesday, March 4, 2003 (SF Chronicle) Airlines pushed to the edge/Carriers sure to face even more losses if hosti= lities break out David Armstrong, Chronicle Staff Writer The nation's shaky airline industry could be flying into the heaviest turbulence yet if war with Iraq breaks out. To be sure, airlines will keep flying in the event of a U.S.-led invasion of Iraq. But industry experts say a major drop in passenger traffic -- especially on usually profitable international routes -- and a steep rise in costs for security and fuel will drive the airlines to losses of historic proportions. Air travelers will certainly feel the impact in the form of security delays, flight cutbacks, possible rerouting and higher fares. Jet fuel, the second-largest cost of airlines after labor, is particular= ly worrisome because it's "something the airlines can't control," said Darryl Jenkins, director of the Aviation Institute at George Washington University. "We've seen passenger traffic go down at the same time that fuel (costs are) going up. I have never seen it this bad." The price of jet fuel has skyrocketed to $1.20 per gallon, more than double what it was in February 2002, according to the Air Transport Association, the airline industry trade organization. Longtime observers say the dilemma facing the airlines is the worst since the Persian Gulf crisis of 1990-91, which depressed passenger traffic and obliterated profit. According to the Air Transport Association, U.S. airlines lost $10.6 billion from 1990 to 1992, and Pan American World Airways failed. But today's situation is far worse than what it was in 1991, said David Stempler, president of the Air Travelers Association, a nonprofit consumer organization based in Washington. "In the past, if one carrier was struggling, another one could jump in," Stempler said. "The airlines were in stronger financial shape in 1991. Now, everyone is struggling. They're parking aircraft in the desert. They're furloughing pilots." The 10 biggest U.S. carriers lost a record $11.3 billion in 2002, more than the three-year losses attributed to the Gulf War. American Airlines, the world's largest airline, lost a record $3.5 billion. United Airlines, which filed for bankruptcy protection in December, lost $3.2 billion. Overseas traffic is expected to be hit especially hard during any war wi= th Iraq. Advance international bookings already are down by 20 to 25 percent, according to David Swierenga, the transport association's chief economist. If the shooting starts, Swierenga said, the nation's airlines will lose from $2 billion to $4 billion per quarter. In the event of war, United, the world's No. 2 airline, said it will trim flights by 10 to 15 percent, according to Douglas Hacker, United's executive vice president for strategy. FAILURES LIKELY Swierenga didn't say which airlines might survive and which could be casualties of war, but the Aviation Institute's Jenkins said corporate failures are likely. By the time the war is over, Jenkins said, one or more major U.S. carrie= rs could well be among the casualties, falling not just into Chapter 11 reorganization but Chapter 7 liquidation. In a worst-case scenario, "We could see the loss of United and American," he said. United, which has lost $5.3 billion in the past two years, is trying to climb out of Chapter 11. The carrier has slashed 20,000 employees from its payroll, lowering its Northern California staff from 20,000 in late 2001 to about 16,000 now. United, the dominant carrier at San Francisco International Airport, has asked its major unions for benefit concessions, changes in work rules and major wage cuts. The carrier hopes to extract $2.85 billion in annual savings in wages, and has said it will ask the Bankruptcy Court to void its union contracts if no agreement on concessions is reached by March 15. Foreign airlines are experiencing similar financial difficulties and war- related jitters. British Airways, Europe's largest carrier, has trimmed flights and dropp= ed 10,000 employees during the past year. Last week, the airline canceled most of its flights to the Middle East and said that fears of war combined with weak business traffic may prompt it to pull the supersonic Concorde from service. Terrorism fears prompted the British government to station 1,500 troops and heavily armed police from Feb. 12 to 15 at London's Heathrow Airport, further unnerving travelers. FEARFUL OF FOREIGN TRAVEL Industry observers say transatlantic routes, a mainstay for United, American and British, are certain to suffer, in part because the United States and Great Britain would be the major powers fighting Iraq, and in part because Americans are fearful of foreign travel anyway. "Transatlantic travel will drop like a rock," said airline consultant Michael Boyd, principal of the Boyd Group of Colorado. "Americans think anywhere east of New York City is foreign," he said. Equating foreign travel with risk, Americans will stay home, Boyd said. In the event of a war with Iraq, industry observers expect the airlines = to offer some sweeteners to entice passengers. "You might see special clients being contacted and offered extra miles," said Terry Trippler, an airline expert for the Web site cheapseats.com. Scrapping cancellation fees, which run as high as $100 per ticket, for fliers who elect to change or drop their travel plans is another possibility, Trippler said. Virgin Atlantic Airways said on Feb. 20 that it will allow travelers who book flights between the United States and the United Kingdom by March 17 to change travel plans without paying cancellation or change fees, as long as they rebook on Virgin Atlantic and use their tickets by Dec. 31. But analysts doubt the policy will be widely matched at a time when airlines are scraping for every dollar they can get. And some say it's unreasonable for consumers to expect it. "I am really stunned to hear from travelers that they think the airlines owe them the right to change without fees," said Joe Brancatelli, editor and publisher of the travel business Web site JoeSentMe.com. "I mean, travelers have to occasionally take responsibility for their own lives," Brancatelli said. "If they are frightened and don't want to fly, I support their decision. But why do they think the airlines should underwrite their discomfort? That I don't understand." FARES ALREADY LOW Most observers think the airlines' room to maneuver is limited, especial= ly on issues such as fares. "I don't think fares can go any lower," said Christopher McGinnis, the head of TravelSkills Group, an Atlanta travel consultancy. "The round-trip fare from Atlanta to Amsterdam right now on Delta is $225." If war ends swiftly with a U.S.-British victory, disruption of the aviation system and the U.S. economy, which is heavily dependent on the ease of air travel, may be limited, said the Aviation Institute's Jenkins. "We're hoping we're seeing the worst right now," Jenkins said. "If it's a short war, we've already taken the major hit." In the meantime, the airlines are pressing Washington for tax relief and other aid. James May, president and chief executive officer of the Air Transport Association, has asked Congress to tap the strategic petroleum reserve to bring down fuel costs. The association also wants the government to shoulder post-Sept. 11 security expenses now borne by cash-strapped airlines. It has asked Congress to set aside the 4.3 percent fuel tax for the duration of any war, require the federal government to pick up the estimated $4 billion annual security costs the airlines have incurred since Sept. 11, and drop the $10 round-trip security tax, which the airlines collect from customers but cannot keep. SECURITY COSTS UP Security expenses jumped after Sept. 11, when the airlines were charged with reinforcing cockpit doors, increasing scrutiny of ramp workers and passengers and booking sky marshals in first class. Jenkins said that federal security fees and taxes make up about one-fourth of the cost of an average plane ticket. Given that Washington may have to finance a military campaign in a time = of deep deficits, there is no assurance the federal government will come up with any substantial aid for the airlines, Jenkins said. War or no war, Americans should keep flying, said Trippler. "It's only right for the economy -- not so much for the airlines, but for the economy," Trippler said. "During World War II, my mother left South Dakota to go to California to make airplanes; she was Rosie the Riveter. We're not asking people to make airplanes. We're just asking them to get on them." E-mail David Armstrong at davidarmstrong@sfchronicle.com.=20 ---------------------------------------------------------------------- Copyright 2003 SF Chronicle