Sun could shine again for airlines By Dan Reed and Marilyn Adams, USA TODAY The USA's largest airlines may finally have hit bottom in the worst=20 downturn in their tumultuous history.A year from now, they either will be=20 in better shape =97 even if it means a trip through the bankruptcy courts = =97=20 or several of them could be gone. It's been 18 months since the Sept. 11 terrorist attacks, and two years=20 since the industry's profits began their stomach-churning slide. Passenger= =20 counts and pricing are weak and may get weaker. The Iraq war ensures a=20 third year of heavy losses. Despite the airlines' cries of alarm and clamor= =20 for federal aid, the entire industry is not about to go bankrupt. Discount= =20 airlines outhwest, JetBlue and AirTran are even expected to report profits= =20 for the first quarter. Other airlines are finally attacking bloated costs=20 with a ferocity they never have before, the start of what could be the most= =20 powerful overhaul of airline economics in a generation. After years of rising costs at the nation's biggest airlines, the trend is= =20 moving the other way. Three carriers have obtained, or are close to=20 getting, huge savings from unions, lenders, aircraft lessors and vendors. =B7 US Airways emerged from Chapter 11 bankruptcy on schedule Monday= =20 with nearly 19% lower costs. =B7 United Airlines' pilots union agreed Thursday to new work terms,= =20 saving the world's No. 2 airline $1.1 billion annually. Other United unions= =20 are also being pressed for cuts. But in case it can't get consensual=20 agreements, United's parent, UAL, also is asking the court overseeing its=20 Chapter 11 bankruptcy case to impose new, less-expensive work terms=20 beginning in May. =B7 American Airlines' parent, AMR, appears to have avoided what would= =20 have been the largest Chapter 11 filing in industry history. It reached=20 agreements with negotiators for its three unions on contracts saving the=20 company $1.6 billion a year. Results of ratification votes are expected in= =20 two weeks. Coupled with $200 million in savings from non-union and=20 management workers and $2.2 billion in operational and financial cost=20 savings, American is cutting $4 billion from its annual budget. It has=20 promised to seek bankruptcy protection if it doesn't get the agreements,=20 and then labor would be asked to give up even more. Additionally, US Airways renegotiated its deals with aircraft lessors and=20 lenders while it was in Chapter 11 to save $490 million a year. UAL is=20 seeking $500 million a year in savings from its lenders and lessors. And if= =20 American's lenders and lessors don't meet the airline's demands for big=20 reductions in its monthly aircraft lease and rental payments outside of=20 bankruptcy court, airline officials have made it clear they will use the=20 bankruptcy process to squeeze them even harder. Together, American, United= =20 and US Airways represent about 45% of the industry. So rivals will be=20 compelled to replicate those savings, even if it means threatening Chapter= =20 11. When bankruptcy reorganization becomes "a credible alternative," says=20 UBS Warburg airline analyst Sam Buttrick, "labor, lessors and creditors=20 will make substantive contributions." In fact, two big carriers not=20 immediately threatened by bankruptcy have already launched efforts to match= =20 the lower labor costs coming at US Airways, United and American. In recent= =20 weeks, Delta and Northwest have invited their unions to join talks aimed at= =20 reducing labor costs. Delta has focused on reducing headcount, shifting lots of service to its=20 regional-jet-flying affiliates and launching =97 on April 15 =97 a low-fare= =20 airline named Song. More than $1 billion in annual costs were eliminated=20 last year, and that number is expected to grow to at least $3 billion by=20 the end of 2005. Delta Senior Vice President Tom Slocum says Delta's moves= =20 haven't been as eye-catching as some rivals' because it isn't "in as=20 desperate straits as some others." But that level of desperation is not far= =20 away. Last week in a filing with the Securities and Exchange Commission,=20 Delta said it no longer can borrow money on an unsecured basis to cover its= =20 losses, which are expected to top $400 million in the first quarter. It=20 also warned that its access to secured financing will run out by year's=20 end, perhaps earlier. If that happens, Delta will be in the same position=20 American is in today. William Buergey, head of Delta's pilots union, the industry's best-paid=20 pilots, says it's virtually certain his members will make concessions.=20 Management hasn't asked for specific cuts yet. Then there's Continental,=20 with the lowest operating and labor costs among the big six carriers.=20 Management has avoided seeking concessions, opting instead to lay off=20 workers as it has downsized its flight schedule. But experts warn that if=20 its larger rivals succeed in lowering labor costs, the No. 5 airline will=20 have no choice. If it doesn't seek concessions, it would lose the cost=20 advantage key to its late-'90s success. CEO Gordon Bethune hinted at such a= =20 move two weeks ago, when he announced 1,200 more layoffs as part of a plan= =20 to trim an additional $500 million from Continental's budget by year's end.= =20 If costs don't come down fast enough or far enough, and if demand doesn't=20 pick up soon, Continental could be the next carrier out on the ledge. It=20 finished 2002 with only $1.3 billion in cash. It's tapped out at the bank.= =20 Its losses are growing, not shrinking as management predicted as recently=20 as January. Washington isn't convinced In Washington, some congressional and administration leaders made it clear= =20 last week as they considered the airlines' request for billions in aid that= =20 they think a few bankruptcies and liquidations might be good for the=20 industry =97 and for consumers. One senior White House official suggested=20 Chapter 11 would be a "healthy" mechanism for shedding excess capacity=20 and eliminating companies whose managers and labor leaders can't meet the= =20 public's demands for lower-cost air services. Senate Finance Committee=20 Chairman Charles Grassley, R-Iowa, worried aloud about "subsidizing=20 featherbedding" by the high-cost carriers. He said government aid could=20 prop big-but-inefficient operators at the expense of more efficient,=20 low-cost carriers increasingly preferred by consumers. Another reason=20 Washington is reluctant to provide the financial support the airlines seek,= =20 Buttrick says, is that there are a few signs that the restructuring already= =20 underway might actually be working. By itself, the initial drop in demand=20 after the war began is not enough to kill the airlines, he says. Jet fuel=20 prices, hovering above $1.20 a gallon in the weeks leading up to the war,=20 have fallen to less than 80 cents a gallon on the spot market since=20 fighting began. "Labor costs are about to tumble" at all the big carriers,= =20 he says. "We don't expect any significant level of government support unless there's= =20 another event of domestic terrorism," Buttrick says. While some of the largest U.S. carriers reported traffic declines of as=20 much as 20% domestically and 40% in some international markets since=20 fighting began, that drop has not been universal. Low-cost carriers have=20 suffered less. Southwest, JetBlue, AirTran and ATA are reporting traffic=20 growth. George Mikelsons, CEO of ATA, the nation's 10th-largest airline,=20 says big carriers are "crying in their beer, and I don't really understand= =20 that. I think most of the rocky road is behind us." Top industry executives= =20 such as American CEO Don Carty think the full-service airlines' predicament= =20 presents a rare opportunity to profoundly change their cost structures and= =20 narrow the gap between what they and their low-cost rivals spend to fly a=20 passenger one mile. "We know that when we go head-to-head" with low-cost carriers, "we win. End= =20 of story. All things being equal, our customers would rather fly with us=20 than with any other airline," he says. When American competes head-on with= =20 Southwest, as it has in the Texas markets for 30 years, "We always have=20 more revenue on board than they do," he said. American officials say they can get 30% more revenue than low-cost carriers= =20 on routes where they compete head-on because some consumers will pay more=20 for American's service features and access to more destinations. The=20 problem: What American spends to fly one passenger a mile is about 50% more= =20 than what Southwest pays. Even if it fills 85% of seats, at today's average= =20 prices =97 which aren't likely to rise much =97 American can't make money.= To=20 varying degrees, the same is true for all of the big, high-cost airlines=20 whenever they compete with low-cost carriers like Southwest, ATA, JetBlue=20 and AirTran. And that's on routes that produce more than 80% of domestic=20 revenue. Carty says American is creating a business model for big, global=20 airlines that will make them competitive with low-cost carriers. "We're=20 going to be the first major airline to make the transition to a 21st=20 century way of doing business," he says, bridging "the divide between=20 affordable fares and premium performance." Leaders at other high-cost=20 carriers don't put it in exactly those terms, but their goal is the same. Is it enough? The question remains: Can American, United, Delta, Northwest, Continental=20 and US Airways get enough savings to survive? American, for all its progress in getting its unions behind cost cuts, may= =20 still fall short. One union leader said over the weekend that even with=20 those concessions, American could need at least $500 million more from=20 labor in the weeks ahead to stay out of Chapter 11. Similarly, some=20 analysts say Delta, Northwest and Continental aren't moving aggressively=20 enough to cut costs of all types. United's restructuring plans, which hinge= =20 on creating a still ill-defined discount-airline subsidiary, have drawn=20 criticism from analysts, labor, creditors and rival airline executives. US= =20 Airways, which entered bankruptcy court in August with labor-savings deals= =20 in hand but had to go back to labor three times for more savings, still=20 isn't a low-cost leader. US Airways, Buttrick observes, "entered bankruptcy= =20 with the highest costs in the industry, and it exits bankruptcy with merely= =20 high costs." Michael Roach, co-founder of industry research and consulting= =20 firm Unisys R2A, says top managers at the big, high-cost carriers "still=20 don't get it." "They still believe there's two markets, a premium market=20 and a mass-travel market, and that they can get enough premium travel to=20 offset their somewhat higher costs," Roach says. That doesn't mean they all= =20 have to discard their massive global route networks built on connecting=20 flights through hubs to copy Southwest's simplified point-to-point=20 operations, Roach says. "But they do need to understand that there are few= =20 individuals and few businesses that are still willing to pay a premium=20 price for a little extra legroom and the kind of meal we all used to make=20 fun of," he says. The people running big airlines "are not stupid guys, and= =20 they're working hard," Roach says. "But the industry they went to work in=20 20 or 30 years ago has changed. They don't want to accept that." *************************************************** The owner of Roger's Trinbago Site/TnTisland.com Roj (Roger James) escape email mailto:ejames@xxxxxxxxx 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.ttsailing.org/ TnT Webdirectory: http://search.co.tt *********************************************************