"Airline outlook seen as 'unpleasant'"

Tuesday, April 2, 2002

Airline outlook seen as 'unpleasant' 
Major carriers unlikely to recover before 2003, S&P report says 
By TERRY MAXON
The Dallas (TX) Morning News 


Despite a gradual recovery by airlines, Standard & Poor's Inc. warned
Monday that it sees an "unpleasant long-range scenario" for most U.S.
airlines as they try to come back from a sharp decline in passengers and
revenue. 

S&P airline analyst Jim Corridore, who authored the report, said the
airline industry experienced historic losses last year, "and many
airlines took on large amounts of debt to keep flying. As a result,
debt-to-capital ratios are at unhealthy levels." 

In a statement, Mr. Corridore said that S&P doesn't anticipate that
major airlines will "return to health" before 2003, although he singled
out Southwest Airlines Co. as a profitable exception. 

"There is no room for further financial setbacks in the industry," Mr.
Corridore said, "and in fact some carriers may not survive the year." 

The S&P report speculates that four U.S. airlines - American Airlines
Inc., United Airlines Inc., America West Holdings Corp. and US Airways
Group Inc. - "most likely would have been forced into bankruptcy" last
year if Congress had not approved $5 billion in grants to help out the
industry. 

The inclusion of American came as a surprise to officials at the Fort
Worth-based company, since it is considered to be among the best
financed in the industry. 

"Nothing could be further from the truth, at least as it applies to
American Airlines," said American spokesman Al Becker. 

Although American and other carriers "were plunged into an absolutely
cataclysmic financial crisis," American quickly responded by bolstering
its cash balance and securing credit lines, and still has about $6
billion in aircraft it could borrow against, he said. 

"We were never, never even close to be at a point that we would need to
entertain the notion of bankruptcy. ... This company was never in any
peril of bankruptcy," Mr. Becker said. 

Of the $5 billion in federal grants paid last year, American collected
$724 million for itself, regional carrier American Eagle Airlines Inc.
and TWA Airlines LLC, which it bought last year. 

United received $644 million. US Airways and its family of airlines were
given $264 million. America West, which received a $98 million grant,
later qualified for $380 million in federal loan guarantees, enabling it
to borrow $429 million. 

But the bad news for airlines represents some good news for business
travelers, as many saw lower expenses for airline tickets and lodging. 

Fares drop 

American Express Co. said Monday that the average fares paid by business
travelers in the fourth quarter dropped 6 percent below comparable fares
a year earlier. 
In addition, many travelers saw sharply lower hotel costs in
fourth-quarter 2001, with the average booked rate down nearly 3 percent
from a year earlier. 

The steepest declines came in traditionally strong business markets such
as San Jose, Calif., off 20 percent; Washington, down 18 percent; and
New York, down 16 percent. 

Becoming frugal 

"Companies are gradually returning to more normal levels of travel, but
they're less willing to pay top dollar for the convenience of
last-minute planning," said American Express spokeswoman Pamela Arway,
executive vice president for corporate travel in North America. 
"More companies are mandating or encouraging use of nonrefundable
airfares. Planning in advance for a trip and booking lower fares is
becoming the norm for business travelers," she said. 

Sept. 11 aftermath 

The declines are directly connected to last September's hijackings in
which terrorists crashed four U.S. commercial airplanes. 
The federal government shut down commercial air travel for several days,
and many people decided not to fly in the aftermath. 

Passenger traffic slowly has been rebuilding, but remains far below last
year's levels. The Air Transport Association, a trade group of U.S.
carriers, said February traffic declined 10.7 percent from February
2001. 

As airlines have used fare sales to tempt travelers back, the industry's
revenues have also suffered. 

The trade group said February fares were 13.6 percent below average
fares a year earlier. 

Business travelers 

The S&P report noted how important business travelers are to airlines,
and the reduced numbers of higher-profit business travelers have hurt
carriers. 
It estimates that business travelers represented only about 30 percent
of airline passenger revenues in 2001, down from 34 percent in 2000 and
52 percent in 1981. 

Business travelers traditionally have been willing to keep flying
despite higher fares. 

However, S&P said, companies have grown more cost-conscious -
negotiating lower fares, making employees fly on low-fare carriers or in
coach or simply stay home. 

Offsetting factors 

"We expect business travel to stabilize at the current weak levels in
2002, as most companies have sharply cut travel," S&P said. 
"As the economy improves, people will need to fly more frequently.
However, any increase here could be partly offset by business travelers
whose habitual indifference toward ticket price may have been broken." 

S&P said it expects average fares to increase "modestly" this year, "as
both the industry and the economy improve later in the year, helping to
stimulate demand."


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