Thursday, March 20, 2003

Conflict often spells doom for airlines

Four folded in Gulf War; 2 in Chapter 11 after 9-11

By James Pilcher
The Cincinnati Enquirer

In the months leading up to the Gulf War and in the following two years, six airlines sought bankruptcy protection. Three emerged, albeit much smaller; the other three died.

These airlines underwent financial trouble just before and after the Gulf War. What happened to them:
Dec. 3, 1990 - Continental enters Chapter 11. Emerged April 27, 1993.
Jan. 8, 1991 - Pan Am enters Chapter 11. Liquidated.
Jan. 18, 1991 - Eastern makes its last flight. Liquidated.
March 25, 1991 - Midway enters Chapter 11. Liquidated.
June 27, 1991 - America West enters Chapter 11. Emerged Aug. 25, 1994.
Jan. 31, 1992 - TWA enters Chapter 11. Emerged Nov. 3, 1993.
June 8, 1992 - Markair enters Chapter 11. Liquidated.
Source: Air Transport Association
Another didn't even try - the venerable Eastern Airlines just closed up shop - causing President Clinton to form a commission to study ways to stabilize the industry.

Fast forward 12 years and one major terrorist attack later. Two major carriers have already declared Chapter 11, the largest airline in the world is teetering on the brink of bankruptcy, and the country hadn't even begun open conflict.

With the industry in much worse shape now than before the Gulf War, the worries of the early 1990s pale in comparison to the current anxiety over the future of airlines - especially in areas such as the Tristate, which plays host to Delta Air Lines' second-largest hub.

In fact, some within the industry say that if the impending war lasts a while and there are terrorist actions as an offshoot of the conflict, the airlines could not survive the projected loss of $13 billion for the year.

The industry's main trade group has even stated that if the government doesn't step in, nationalization may be the only way to keep planes flying. Either that, or many cities lose service and most of the hub-and-spoke carriers go under and don't return.

"The nature of the problems we faced back then remain the same," said Gerald L. Baliles, the former governor of Virginia who chaired that commission back in 1993. "It's just that the scope and reach have expanded beyond those boundaries.

"It's deję vu all over again," said Baliles, currently editor of the journal CCH Issues In Aviation Law and Policy.

No airline is immune. The largest, American, is close to asking for Chapter 11 bankruptcy protection. United and US Airways are already in bankruptcy reorganization, and many experts doubt United can emerge. Even low-cost pioneer Southwest has warned it could post its first loss ever this quarter.

Even the dominant local name Delta, the nation's No. 3 carrier, is having its own troubles.

Monday, the airline said it would lose money on its operations during the current quarter. (It had actually made money on operations the previous two quarters, even though it lost $689 million during that period.) Delta's local operation at the Cincinnati/Northern Kentucky International Airport employs about 8,000, including its Erlanger-based regional subsidiary, Comair.

Passenger drop crucial

A big part of the problem for all airlines is a drop in passenger count, with potential travelers staying away in February because of the "orange" terrorism alert issued by the government.

Delta would not disclose the drop in travelers due to the higher alert status, but did say that international travel was down 10 percent for February compared with the same month in 2002. The Air Transport Association, the airlines' trade group, said traffic overall dropped 20 percent because of the alert.

President Bush placed the country on "orange" alert again Monday, only the second time that the second-highest level of the five-tier system has been reached.

"If this were to continue, the industry has no place else to go, because it has no more options to secure capital," said David Swierenga, the Air Transport Association's chief economist. "The industry is seriously looking at running out of cash. We're not saying that nationalization is something we want to do. But it is something we have to put out there as a warning, as the last resort if nothing is done."

Baliles says such talk is "crying wolf," but even he says the airlines are in desperate trouble.

Some, such as Delta, have taken steps to reduce costs and prepare themselves for the inevitable drop in revenue that will accompany a war.

Earlier this year, Delta shifted assets so that it has $2 billion in cash on hand, and bought as much fuel in advance at lower prices as possible, a practice called "hedging."

And the airline has begun preliminary talks with its pilots (its only unionized workgroup) to renegotiate their contract, which currently makes them the highest-paid in the industry.

Yet while other airlines have already begun cutting flights and even notifying employees of potential cuts in pay and headcount, Delta has not yet announced any such moves.

"Nobody really knows what will happen, although none of the scenarios are very positive," Delta chairman and chief executive officer Leo Mullin saidlast month when asked about the impact of a war. "We're doing all we can from a cost perspective, so (passenger) traffic is the main concern. I guess it will boil down to whether it's short and sweet or long and ugly."

All of the airlines have been waging a constant lobbying effort with the government, saying they need immediate tax relief. The airlines are also looking for a relaxation in fees, a relaxation of antitrust rules so that capacity can be reduced quickly in the case of war, and perhaps even another infusion like the $15 billion in cash and loan guarantees Congress gave the industry immediately after the Sept. 11 attacks.

Lobbying may be paying off

There have been signs that the efforts are paying off. Tuesday, Transportation Secretary Norman Mineta said the Bush administration is examining ways of helping the industry, although he did not offer specifics. And several bills that either provide direct aid or reduce fees have been introduced in Congress.

Many experts agree that something needs to be done immediately but add that the industry could survive this impending war even if the cure could be painful.

"We are probably going to see fewer hubs and even perhaps fewer hub-and-spoke carriers," said Jamie Baker, airline analyst for the Wall Street firm JP Morgan/Chase.

And as for that commission led by Baliles? It came up with a series of recommendations, including:

• Allowing airlines access to the international capital markets, opening up the possibility of foreign ownership of domestic airlines.

• Allowing the FAA and the air traffic control system access to the bond markets to remove the process from the politics of the annual budget so that capacity can be expanded as needed.

• Examining the current fee structure and revising it to remove unnecessary burdens on the airlines.

None of these suggestions was followed. Baliles says now would be the time to reconsider such moves.

"It's been called a perfect economic storm," Baliles said. "Quick fixes are generally sought, and they may produce short-term solutions or relief. But now is not the time for the equivalent of Botox injections to smooth out wrinkles.

"The airline industry is too important to be neglected, but focusing just on short-term solutions is further jeopardizing the long-term stability and profitability of the industry."


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