=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= /12/MN142439.DTL ---------------------------------------------------------------------- Wednesday, March 12, 2003 (SF Chronicle) Airlines worry they will be war casualties/Fears of takeover by the governm= ent George Raine, Chronicle Staff Writer War with Iraq could result in $13 billion in losses for already staggeri= ng U.S. airlines and even bring about a "forced nationalization" of the business, the industry warned Tuesday. An outbreak of war would come just as jet fuel prices are spiking -- up 108 percent over last year -- and have a chilling effect on travel, the airlines said. "The mere prospect of war with Iraq has already further weakened this industry, which is literally struggling to survive," according to the report by the Air Transport Association, a trade association and lobbyist for major carriers. In the event of a war, the airlines could lose $10.7 billion, cancel 2,2= 00 daily flights and result in the loss of 70,000 more jobs, the report said. A more extreme scenario, which combines war with Iraq and a domestic terror attack, envisions losses of $13 billion, a reduction of 3,800 daily flights and the loss of 98,000 additional jobs. Against the backdrop of its dire forecast, the association is seeking $4 billion from President Bush and Congress "to mitigate the damage that is being done by the extraordinary 'nonmarket' impact of terrorism and the prospect for war." The group also is asking Congress to suspend $9 billion in annual taxes and extend war-risk insurance. And it has asked Bush to release U.S. oil reserves to force fuel prices down. Congress came to the airlines' aid after the Sept. 11 attacks, granting them $5 billion in cash and $10 billion in loan guarantees to help offset losses resulting from the grounding of airplanes for four days and the reluctance of the public to fly. Earlier this year, however, Bush said market forces should shape the industry. It remains to be seen whether the association can successfully appeal to Congress. LOSSES OF $18 BILLION Rep. Ellen Tauscher, D-Walnut Creek, a member of the aviation subcommitt= ee of the House Transportation Committee, supports continuing war-risk insurance, and she often has said the federal Air Transportation Stabilization Board, which backs loans to airlines, "is clearly broken and needs to be fixed." Of the possible war, she said, "If we pre-emptively or unilaterally stri= ke Iraq, we could have worldwide disruptions in oil prices and a spike in aviation fuel prices, which could be the potential end for United Airlines, which employs thousands of people in the Bay Area." The association's report, titled "Airlines in Crisis: The Perfect Econom= ic Storm," is a collection of findings based on recent bookings, assumptions about the economy and passenger behavior, and data from the 1991 Persian Gulf War, after which four airlines were liquidated: Eastern, Pan American, Midway and Markair. U.S. airlines have lost $18 billion since the Sept. 11 attacks, the association said in the report. "With the imminent prospect of a war with Iraq, market trends and experience with the first Gulf War indicate strongly that this economic crisis could deepen rapidly," the industry said. "Should that occur, there is serious risk of chaotic industry bankruptcies and liquidations." It said, "The prospect of a forced nationalization of the industry is not unreasonable." "We pray we never, ever get to that point," said James May, chief executive of the association. United Airlines and US Airways Inc. have sought bankruptcy court protection, and American Airlines, the nation's largest carrier, is reportedly making inquiries about obtaining $2 billion in financing should it decide to follow. The centerpiece of United's proposed makeover is an airline-within-an- airline, a smaller carrier that would compete against Southwest and JetBlue, with employees paid less than those of the regular airline. Unions oppose the plan. Industry losses could mount to $10.7 billion this year, the report said. Jet fuel prices reached $1.20 per gallon in February, compared with 57 cents a year ago. Additionally, the association said, the airlines' cash reserves are nearly exhausted, and they have no ability to borrow. And taxes, fees and unfunded mandates since Sept. 11 have added $4 billion annually, the group complained. The association predicted losses of $6.7 billion this year even without war with Iraq. AIRLINES BLAMED Much of the industry's wounds are self-inflicted, said Morten Beyer, an aviation consultant with Morten Beyer & Agnew in Arlington, Va. "It's like Japanese hari-kari. They're cutting their guts out, not making any basic changes," he said. "They stick to what is tried and true -- 'My airline is better than your airline.' " The major airlines maintain expensive hubs, three times more costly than what Southwest, the profitable major airline, pays, and they give away 10 percent of their seats to frequent fliers, Beyer said. "United and American are doing the same thing -- holding their model as = it is -- and there's no way they can compete with low-cost airlines with that level of service and cost," Beyer said. Both carriers have a minimum number of seats in 777 airplanes that are licensed for more, he said. "If you want to go San Francisco to Boston, you can go any day of the we= ek on 300 flights operated by probably eight different airlines," Beyer said. "That is pretty wasteful competition, and even the nonstop flights have narrow- body, small airplanes, and that is wasteful. "The industry will not go away. People have to fly to get there from A to B. But the form of the industry may change. The government may have to buy them or take them over as they did Amtrak." For its part, the Air Transport Association said the federal government's raising of the terror alert status last month resulted in a 20 percent decline in advance bookings, even with fares at 15-year lows. The association's May said: "To try to meet the economic reality of the past two years, carriers are cutting tens of billions of dollars in expenses, have laid off 100,000 employees and have taken several hundred aircraft out of service. The nation's air carriers will continue to do all we can, but we fear that the consequences of this war will be severe." Predictably, the airlines' shares fell Tuesday. United's shares fell 2 cents to 97 cents; American's fell 82 cents to $1.59; Delta's fell $1.91 to $6. 75; and Southwest's fell $3.84 to $12.51. American's market value has plunged so far -- its stock price dropped 95 percent over the past year -- that it is losing its place in Standard & Poor's index of the 500 largest companies. The airline will be replaced Thursday by Apartment Investment and Management Co., a real estate investment trust. E-mail George Raine at graine@xxxxxxxxxxxxxxxx=20 ---------------------------------------------------------------------- Copyright 2003 SF Chronicle