This article from NYTimes.com has been sent to you by psa188@xxxxxxxxx /-------------------- advertisement -----------------------\ IN AMERICA - NOMINATED FOR 6 INDEPENDENT SPIRIT AWARDS IN AMERICA has audiences across the country moved by its emotional power. This Holiday season, share the experience of this extraordinary film with everyone you are thankful to have in your life. Ebert & Roeper give IN AMERICA "Two Thumbs Way Up!" Watch the trailer at: http://www.foxsearchlight.com/inamerica \----------------------------------------------------------/ Going Commercial: Airline Economics: Fasten Your Seat Belt December 9, 2003 By EDWARD WONG SOME years ago, in a speech to business students at the University of North Carolina at Chapel Hill, Warren Buffett lamented one of his rare failures as a superstar investor - money apparently squandered on US Airways and the sorry industry of commercial aviation. "Despite putting in billions and billions of dollars, the net return to owners from being in the entire airline industry, if you owned it all, and if you put up all this money, is less than zero," he said. And speaking of that first flight at Kitty Hawk, he added: "If there had been a capitalist down there, the guy should have shot down Wilbur! I mean, you know, one small step for mankind, and one huge step backwards for capitalism!" Mr. Buffett was not exaggerating the pathetic nature of the industry's financial returns. From the start of commercial aviation in the United States through 2002, the major domestic airlines as a whole have suffered a net loss of $1.4 billion, according to the Air Transport Association, the industry's main trade group in this country. The industry actually made annual net profits from 1996 to 2000, but lost them in the worst downturn in its history. That slump, which began with the economy's plummet in the spring of 2001 and accelerated after the Sept. 11, 2001, terrorist attacks, is only now showing signs of ending. The downturn led to a bankruptcy filing in August 2002 by US Airways and another one four months later by United Airlines, the largest ever such filing in aviation history. The poor economy has crystallized the problems that have made the industry synonymous with failed big business. Executives and experts point to several factors hampering the industry: high fixed costs, especially with labor; poor management decisions; a balance sheet that relies on high-spending business travelers, and therefore a healthy economy, for profits; and a glut of seats, possibly because there are too many companies. "The business is cyclical and moves with the violent economic swings," said Raymond E. Neidl, an analyst at Blaylock & Partners, an investment bank, and a co-author of "Airline Odyssey: The Airline Industry's Turbulent Flight into the Future." "The airline industry is highly capital-intensive. It requires a highly dedicated, skilled work force that demands high wages. It's like trying to ride a bull, managing the airline business." That wild ride did not begin until several decades after the Wright brothers made their fateful flight at Kitty Hawk. Mass commercial aviation in the United States was born when companies running mail routes started carrying paying passengers to earn supplemental income. Passengers quickly became the main source of revenue, setting off the creation of globe-straddling airlines during what many regard as the golden age of commercial aviation. No one of that era was a greater visionary than Juan Trippe, who in 1927 took charge of Pan American Airways' single mail route between Key West, Fla., and Havana. Eight years later, the airline started its famous China Clipper service and opened routes to Japan, Singapore and Australia. It eventually linked the United States with 85 countries and became the dominant force in commercial aviation. Though air travel seemed a romantic and thriving business in the post-World War II era - symbolized by passengers dressing up to fly and being served dinner on china by white-gloved attendants - economists say that now-defunct airlines like Pan Am, Eastern Air Lines and Braniff Airways operated with huge inefficiencies before the industry was deregulated in 1978. Until then, those flaws remained in the system because the government fixed fares to cover the airlines' high operating costs, economists say. By the end of 1978, the industry had made $5.45 billion in cumulative historical profits, a number that had grown almost every year since the beginning of commercial aviation. But between 1978 and now, the industry has gone into the red, mostly because of difficulties in shedding those earlier inefficiencies. For example, the foundations for work rules and wage scales in today's labor contracts - much of the industry is unionized - were laid before deregulation. Many industry experts say the contracts are overly generous, given that the industry is deregulated, though unions argue that their skilled employees deserve such wages. Analysts estimate that labor costs make up about 40 percent of operating expenses. IN the last couple of years, the biggest airlines have been trying to renegotiate contracts to squeeze more productivity out of workers. Bankruptcy laws gave United Airlines and US Airways the leverage they needed to negotiate changes, and American Airlines, the world's largest airline, persuaded its unions to accept $1.8 billion in annual labor concessions after the bankrupt airlines set a precedent. But many experts say such efforts may be short-lived, because these unions historically negotiate wage increases once the economy improves. Unions, though, criticize management for the failure of airlines to make money. One example they bring up is the pricing model that traditional airlines use. These airlines rely on a complex computerized system called "yield management," which aims to maximize the amount of money each airline gets from each passenger. This system results in dozens of air fares with widely varying restrictions existing for a single route, and sky-high last-minute fares often bought by business travelers. The airlines depend on the small number of travelers who are buying those last-minute fares to turn a profit for them. But during this last economic downturn, many businesses shunned such tickets and told employees to stop traveling or buy cheaper seats, whether on traditional airlines or low-cost carriers like Southwest Airlines and JetBlue Airways. Clifford Winston, an economist at the Brookings Institution who studies the industry, said that the airlines need a fare system that "does not make them vulnerable to the vicissitudes of a particular group of travelers, like business travelers," he said. Some executives say one big problem is overcapacity. There are simply too many airlines operating too many hubs and flying too many planes, they contend. Many experts say the airlines throw planes on a route to grab market share from rivals. Robert L. Crandall, the former chief executive of American, said that airlines added planes because growth spreads fixed costs over more passenger miles. "If everybody is growing to keep their costs down, then there's constantly a great deal of capacity in the market," Mr. Crandall said. "So long as there's lots of capacity, people have an incentive to cut prices." There is no easy solution. Some experts say that as airlines die out, overall capacity will drop. Others argue that the federal government should be more flexible in allowing consolidation or coordination of prices and routes among partner airlines. One part of the industry that may not be shrinking too soon is the low-cost airlines. They are generally modeled after Southwest, which has been profitable every year for the last three decades. These newer airlines picked up quickly on a lesson that their bigger rivals ignored for decades. "The customer considers one airline to be exactly the same as another airline," Mr. Crandall said. "The customer always chooses the lowest price." http://www.nytimes.com/2003/12/09/science/sciencespecial2/09WONG.html?ex=1071977962&ei=1&en=31e5bdb348832085 --------------------------------- Get Home Delivery of The New York Times Newspaper. Imagine reading The New York Times any time & anywhere you like! Leisurely catch up on events & expand your horizons. Enjoy now for 50% off Home Delivery! Click here: http://www.nytimes.com/ads/nytcirc/index.html 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@xxxxxxxxxxx or visit our online media kit at http://www.nytimes.com/adinfo For general information about NYTimes.com, write to help@xxxxxxxxxxxx Copyright 2003 The New York Times Company