Share this story
Close X
Switch to Desktop Site

Major US airlines' profits taking a tailspin

It looks as if the US airline industry will lose more money this quarter than at any other time in its history.

During the three months ending March 31, the nation's scheduled airlines will post losses ''about what they were for all of 1981,'' predicts Barry J. Gordon, an analyst with National Aviation & Technology Corporation. Last year's loss was a record $411.1 million.

About these ads

''The airlines probably will have lost $1 billion in the 12 months ending in June,'' says Air Transport Association vice-president William Jackman. The industry's pocketbook is being emptied by the combined effects of a sagging economy, decontrol of the industry, and the air controllers' strike.

Of all the gusts buffeting the airlines, decontrol is the strongest. The Airline Deregulation Act of 1978 allows new airlines to enter the business. And once in, a new line can compete on price since the government no longer approves fares.

Deregulation has transformed the airline business ''from a cost pass-through business in which pricing was based on average industry costs . . . to a commodity business in which relative production costs will determine which carriers (survive),'' according to a new report from Goldman Sachs analyst Michael R. Armellino.

Price competition may finish off one or more trunk airlines, or long-haul airlines, which cannot get their costs down to the level of new carriers with lower labor and overhead expenses.

''I see the trunk airlines in worse shape than I thought possible, and most of the regionals in much better shape,'' says Kidder, Peabody & Co. analyst Alfred H. Norling. ''There may only be room for five or six full-service national airlines,'' rather than the 10 now in business, he says.

Losses on 1981 airline operations were posted by Braniff ($107.5 million), Continental ($43.5 million), Eastern ($50 million), Pan Am ($359.7 million), United ($148.8 million) and Western ($66 milion). Bankruptcy for any of these would ''mean a bigger piece of cake for those that are left,'' says an analyst with a major investment banking house who asked not to be named. In addition to boosting volume for remaining airlines, a bankruptcy would make banks more careful in lending to carriers. The result would be to make it harder for weaker lines to borrow funds, thus trimming ''chronic industry overcapacity,'' says Goldman analyst Armellino.

While some long-haul carriers may disappear, analyst Norling expects ''a proliferation of small airlines operating in local or specialized markets.'' New airlines -- like New York Air, Air Florida, Midway, and People Express -- can design their labor practices and operating procedures to compete in the new environment. Thus they have a significant advantage in making money while charging low fares.

About these ads

For example, American Airlines notes that its planes had to be 60.5 percent full during 1981 to break even. Some regional lines could break even with only 52 percent of their seats occupied, analysts say. And in 1982, Americans break-even factor has deteriorated, says American vice-president David C. Frailey.

One reason for American's uncompetitive break-even position is the restrictive work rules its unions have won, analysts say. American is not allowed to use part-time employees to handle jobs under Transport Worker Union (TWU) jurisdiction. Nor can a full-time worker in one category handle a job in another.

By contrast, People Express Airlines Inc., which was formed in 1981, uses its flight attendants on the ground, taking reservations or handling office chores, as well as in the air.

''We have built in strong efficiencies with the cross utilization of our people in both management and line operations,'' says People's managing officer Harold Pareti.

As a result, People Express now claims its can fly a passenger seat one mile for about 5 cents. TWA's cost per seat mile is about 8.6 cents or 42 percent higher.

In addition to having higher labor costs, the trunk lines also have found themselves saddled with three-engine jets which became less attractive to operate after fuel costs soared 120 percent over a 16-month period in 1979 and 1980. For instance, American spent $80 million more operating three-engine planes in 1981 than it would have spent on a comparable number of two-engine liners.

The fate of the next generation of more fuel efficient planes now appears in doubt. United Airlines last week told Boeing Co. to stop work on 20 Boeing 767 jet aircraft until Congress makes a decsion on changing certain provisions of the tax law.

The airline had orderd 39 of the airplanes, valued at $40 million each, to be delivered between now and 1984. The airline still will accept the first 19 planes which will start rolling off Boeing's assembly line this fall.

But United has given notice it will not accept another 20 planes, worth at least $800 million, if Congress ''repealed or substantially modified'' the ''safe harbor'' portion of the 1981 tax act. The controversial tax law provision allows profitable companies to buy tax credits from companies with excess credits. Airlines have been big sellers of the tax credits to profitable companies.

United's decision follows American Airline's cancellation of $600 million worth of the planes. ''We don't have the earnings to have the borrowing capacity,'' to buy the planes, says American vice president Frailey.

United had been counting on the planes to help trim operating costs. The plane's engines are 35 percent more efficent than those in some older airliners.

Meanwhile, regional airlines -- like Frontier and Piedmont -- and new lines already have fuel-efficient two-engine planes and were able to take over medium-haul business that the trunks found unprofitable and sometimes abandoned.

Still, some trunks have done well in this tough period and some regional have had problems. Delta, which has a reputation as a low-cost trunk, posted profits of $86.5 million last year. Republic, a regional line, has made money but not enough to pay the interest costs involved in acquiring Southern and Hughes Airwest, analyst Norling notes.

And while both the regional lines and new carriers have won business at the trunks' expense, the gains probably will slow in the future. Part of their gains have come as ''the result of a relative shrinkage in capacity on the part of trunks,'' as they retire inefficient planes, notes Donaldson, Lufkin & Jenrette Securities Corporation analyst Eva Holman.

Weeding out inefficient planes is just one step trunk lines have taken to get back in the black. Equally important, concessions are being sought from employees. For example, last week Eastern asked its employees to extend a plan under which they donate 3.5 percent of their wages to Eastern unless the company meets its profit targets.

''Most [trunks] are starting to get wage and productivity concessions . . . I think they are starting to work their way out of their problems,'' argues National Aviation analyst Gordon.

At the same time, the advantage new airlines and efficient regionals have may erode. ''In the long run the cost differentials will narrow,'' says the previously mentioned investment banking analyst, as the employees of new lines gain seniority and seek higher wages.

All segments of the industry need the economy to rebound. ''The airlines desperately need a better economy so they can get their fares up. If they do not improve [the amount they get from passengers], there will be some bankruptcies, '' says Morgan Stanley & Co. analyst Wolfgang H. Demisch.

How the 'big 12' fared in 1981 (Operating results for airlines business only) Revenues Profit/loss (billions (millions of dollars) of dollars) American 3.9 +44.0 Braniff 1.2 -107.5 Continental 1.1 -43.5 Delta 3.6 +86.5 Eastern 3.4 -50.0 Northwest 1.9 +1.8 PanAM 3.5 -359.7 Republic 1.4 +16.5 TWA 3.5 +13.6 UAL 4.5 -148.8 US Air 1.0 +58.5 Western 1.1 -66.0 Source: Eva Holman, Donaldson, Lufkin & Jenrette Securities Corporation

Follow Stories Like This
Get the Monitor stories you care about delivered to your inbox.