"Airline troubles not like those of the past"

Monday, December 9, 2002

Airline troubles not like those of the past 
As United's situation illustrates, solutions look harder to come by By
ERIC TORBENSON The Dallas (TX) Morning News


Major airlines are in bankruptcy, the battered industry has dim
prospects for recovery, and President Bush wants to wallop Iraq. 

The picture fits the early 1990s. And it will be matched on Monday, when
United Airlines parent UAL Corp. is expected to join US Airways in
bankruptcy court. 

The difference today, experts say, is that the industry isn't dealing
with the usual cyclical wounds that heal along with the economy. 
 
In the early '90s, Continental Airlines, TWA and America West were in
bankruptcy, and the industry was drowning in a glut of airplane seats.
Eastern Air Lines and Pan Am World Airways, which had already been in
trouble, disappeared in 1991, helping bring industry capacity back in
line. 

This time around, the industry's woes are different and more pronounced.


"It's the worst revenue environment I've ever seen," said Darryl
Jenkins, head of the Aviation Institute at George Washington University.


Capacity not the issue 

While there were simply too many airlines in the early 1990s, today's
ticket-pricing situation makes a solution less clear-cut. 

"There is not a capacity problem today," said Phil Roberts, vice
president of Unisys R2A Transportation Consultants, which studies
airline costs. "If there was, the implication would be that you could
cut capacity and make money. Planes are full; but the network carriers
aren't making any money." 

For fliers, the news of bankruptcies and huge losses seems like a
paradox; flights they're on are as full as they've ever been. In 1992,
airlines filled 65 percent of their seats with paying customers. This
summer, some carriers ran record load factors near 85 percent. 

Understanding how airlines sell seats now compared with a decade ago
shows the trouble major carriers face, said Mr. Roberts and other
experts: 

   . Business fliers aren't paying full freight anymore. 

Corporate travelers lined airlines' pockets for much of the late '90s,
paying almost anything to fly on short notice. No longer; average
business airfares were down 12 percent this year compared with last, and
that more than anything has crippled airline profits. 

The briefcase-carrying passenger paid an average of four to six times as
much as the sunscreen-toting vacationer for a seat on the same flight. 

Corporate travel managers put their foot down, searched for cheaper
fares and cut overall travel. Major carriers' profits withered. 

"If you lose just 1 or 2 percent of that high-yielding traffic, your
profits are gone," Mr. Jenkins said. 

   . Low-fare carriers are dictating prices. 

The carriers selling the largest number of cheap seats are, in fact,
major carriers such as United and Fort Worth-based American Airlines.
That's because they're matching fares on hundreds of major routes set by
Dallas-based Southwest Airlines, AirTran Airways and others, Mr. Roberts
said. 

Back in the early 1990s, American had far more power to set prices and
faced substantially fewer low-fare combatants. That allowed it to try a
program called Value Pricing in spring 1992, which cut down the number
of types of airfares. Today, a similar system is being forced onto
American by Southwest and others, said analyst Jamie Baker of J.P.
Morgan. 

Along those lines, Mr. Roberts rejects talk of airfares rising because
of UAL's bankruptcy. Low-fare carriers are adding capacity at a rate
twice as fast as larger network carriers; they'll continue to set the
floor on prices, he said, not bankrupt US Airways and United. 

"There's just less and less places for the big guys to hide," Mr.
Roberts said. 

   . The Internet has stolen carriers' pricing power. 

The Web ticket booking sites carriers spent millions to develop saved
them money on travel agent commissions, but they also cannibalized their
revenue. 

Buying a ticket used to be guesswork; now, from corporate executives
needing a cheap way across the country to grandmothers shopping for
their once-a-year holiday trip, travelers have what analysts call
"perfect information" to find the best deal. The result for major
carriers: Thin profit margins have become thick losses. 

Time is money 

All these factors have combined to wreck the assumptions that go into
running an airline with big hub cities. 

One of the big ideas behind hubs was the thought that passengers will
pay more for quick connections. That's why airlines built costly hubs
that featured "banks" of flights that kept connecting times at a bare
minimum. 

American reversed that course this fall at its Chicago and Dallas/Fort
Worth hubs, running a continuous stream of flights that puts less
emphasis on quick connections. Continental and Delta Air Lines have done
the same at their large hubs. 

Both business and leisure fliers are fixated on price, regardless of how
long it takes them to get somewhere. And that means crummy revenues for
the foreseeable future for major airlines. 

The government panel that rejected United's application for a $1.8
billion loan guarantee last week told the carrier it was too optimistic
in its revenue projections, as few believe business fliers will ever
again fork over as much to fly as they did during 1999-2000. 

Old habits die quickly 

The industry recovered slowly in the 1990s, in part as the bankrupt
airlines lowered their costs and reorganized. Continental Airlines had
to go through bankruptcy a second time to straighten itself out, though
it has since done well. TWA survived but ended up being bought out of a
third bankruptcy in 2001 by American. 

An improving economy helped the industry slowly turn profitable in the
mid-1990s, then make record profits in the latter part of the decade. 

But for the major network carriers, all their profits combined for the
1990s were wiped out in the last two years. Total losses for 2001-02
will top $14 billion. 

The problem with today's recovery, experts say, is that no matter how
much the economy improves, consumers aren't likely to revert to old ways
when buying airline tickets. Faced with that, majors like American are
in a frantic rush to cut costs to match the lowered revenues. 

Still, some experts say that those cost-slashing efforts, plus the
bankruptcies, should bring the industry back into balance. 

"I'm an optimist by nature, and I think there's a real possibility that
United and US Airways are going to reorganize themselves and become
lean, mean, profitable machines," Mr. Roberts said. "I think the
industry is going to find a way."


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