Airline woes still deepening
US Airways is industry's first major post-9/11 bankruptcy. Is United next?
America's major airlines are facing their toughest financial test in a decade, if not ever.
But for the flying public, the airlines' troubles may signal a new era in the skies that could be less complicated by modifying such things as the frustrating fare structure and the rules for Saturday-night stays. Yet it could also make smaller cities less accessible.
The nation's still-sputtering economy and fierce competition from upstart, low-cost carriers are prompting the changes. But so far, the much-anticipated summer travel season has failed to produce the big gains in passengers and revenues the major airlines had counted on to jump-start their recovery. Many of the big-spending business travelers they depend on for profits remain grounded.
As a result, the airlines are continuing to run heavily in the red, losing $5 billion in the first half of this year alone. Over the weekend, US Airways became the first major carrier to file for bankruptcy since Sept. 11. United Airlines, which is losing just under $1 million a day, could be next to face Chapter 11 proceedings despite the company's continued insistence that it will not opt for such protection from creditors. The situation is similar to the early 1990s, when major carriers Pan Am and Eastern Airlines went out of business. Others like Continental went into Chapter 11 but then emerged stronger.
"In the early 1990s, those that didn't go into bankruptcy escaped it by a hair," says David Swierenga of the Air Transport Association, the major carriers' lobbying arm. "We're already in similar, very tough times that threaten bankruptcy for many of the airlines."
Many analysts contend that a shakeout is long overdue for the major carriers, which let their costs skyrocket in the '90s. For instance, United, in a bid to win approval from its pilots for a proposed merger with US Airways, gave them a record-breaking, industry-leading wage hike in 2000. That set the bar for pilots at other airlines, who also negotiated big salary increases. When the Justice Department nixed the merger, United was left with increased labor costs.
Then the recession hit hard in 2001. Even before Sept. 11, the major airlines were struggling financially, because business passengers, who pay five times as much as leisure travelers, stayed away. After the terrorists struck, shutting down the nation's aviation system for the first time in history, that already bad situation deteriorated rapidly.
The airline's usual economic woes associated with recessions were compounded by terror fears that kept some passengers grounded, and by a new "hassle factor" due to the increased security. Congress stepped in with $5 billion in grants and another $10 billion in loan guarantees. Even so, the major carriers lost a record $7 billion dollars last year.
For the past several months, United, US Airways, and other carriers have been negotiating wage and benefit concessions from their employees, with some limited success. Last week, US Airways won $465 million in wage cuts from its pilots. Still, that wasn't enough to fend off the Chapter 11 filing.
But the carriers' problems have the potential to create friendlier skies for many consumers although not all.
Most of the majors which are known as network airlines because of their hub-and-spoke route system are eyeing the setups of lower-cost airlines like Southwest, which operates a far more efficient point-to-point system. Southwest, which also has a far simpler, consumer-friendly fare structure, is the only major airline to make money last year.
Airline executives are studying ways to incorporate some of Southwest's efficiencies. If that happens, it could become it easier and cheaper to fly between major US cities, but harder to make connections and get to smaller places.
In the hub-and-spoke system, banks of airplanes roll into a hub, passengers get off and make connections, then banks of planes leave. It's designed to ensure that the most people can make their connecting flights in the least amount of time. But it means that airplanes sit on the ground for about an hour. When a Southwest plane lands, it usually stays only 20 to 30 minutes on the ground. It's thus far more efficient.
If the major carriers try to mimic Southwest's systems, passengers on direct flights between big cities could see more service. But if they have to make a connection which about 40 percent of passengers do they could wait three hours or more.
While such a change could generate some revenues by increasing efficiency, analysts like Clint Oster think it could end up alienating the airlines' best customers: the big-spending business traveler. "Business travelers are not going to tolerate multiple-hour layovers," says Mr. Oster, a transportation economist at Indiana University at Bloomington.
They're also not going to pay the high fares again that propped up airline revenues during the '90s, he says. That means the network carriers are going to have to bring down the dramatic differential between what business and leisure travelers pay.
Some airlines have already experimented with doing away with the Saturday-night stay requirement. They're also watching Europe closely, where major airlines are offering some sharply discounted walk-up fares, like the ones available at a low-cost carrier. Both moves will cost the airlines money.
As a result, the major network airlines have no choice but to get their costs down, analysts say. But no worker wants to give back hard-won raises. And most unions blame the airlines' current woes on bad management decisions in the '90s.
For instance at United, while pilots have agreed to a $520 million wage cut over three years, flight attendants, who make about $32,000 a year, have so far refused. United has asked for $90 million in wage cuts over three years.
"What does that buy, one month? It won't address the fundamental problem if they are facing bankruptcy," says Greg Davidowitch, executive council president of the Association of Flight Attendants. "We could come to work for free, and it wouldn't change their fortunes."