"Airlines can stay afloat on their own during this war"

Tuesday, April 1, 2003

Opinion
Airlines can stay afloat on their own during this war
By Christopher Elliott
USA Today


Well before the first shots were fired in Iraq, the Air Transport
Association (ATA) issued a dire warning about the coming conflict. James
May, the trade group's president, projected $10.7 billion in likely industry
losses, a reduction of 2,200 daily flights and the elimination of 70,000
additional airline jobs in the United States. "There is serious risk of
chaotic industry bankruptcies and liquidations," the ATA reported.

Just this week, American Airlines narrowly avoided an immediate bankruptcy
filing, but will lay off 20% of its pilots. United Airlines, already in
bankruptcy, seeks $2.56 billion in annual labor savings through 2008. US
Airways emerged from Chapter 11 protection on Monday, but a 20% drop in its
bookings during the war's first week tempered that good news.

"We'll have to manage our business based upon what happens in the Middle
East," US Airways spokesman David Castelveter said.

Aid for airlines

So it is no surprise that congressional Republicans are pulling together a
package of roughly $2.8 billion to offset the airlines' security and
insurance costs. That's on top of the $5 billion in aid and $10 billion in
loan guarantees related to 9/11 that the airlines already have pocketed. And
there's talk of even more money on the way.

Lawmakers should consider these requests carefully. Is this conflict really
going to cripple the airline business? Not necessarily. If the war's bitter
effects serve to make the airlines more efficient and competitive, the
results will be healthier companies and better-served travelers. Consider:

A military conflict is a good excuse for more airlines to seek bankruptcy
protection. A Chapter 11 filing makes it easier for a carrier to void
impractical or unaffordable union contracts, thereby reducing its expenses
and helping it return to profitability. Airline Web columnist Charles Leocha
calls this "competitive bankruptcy."

Even without formal restructuring, war permits airlines to invoke a
so-called force majeure clause that allows them to temporarily operate
outside their negotiated labor agreements, offsetting the losses resulting
from reduced bookings. Northwest Airlines invoked the clause last month as
it announced 4,900 more layoffs, and US Airways' chief executive David
Siegel told The New York Times Sunday that the airline industry as a whole
"is absolutely in a force majeure situation." Such short-term relief might
help some airlines pull through without further assistance from taxpayers.

Being down-and-out can give the airline industry a morale boost from a
sympathetic public. After 9/11, some travelers thought it was their
patriotic duty to travel by plane; many did. In the months after the
terrorist attacks, business as measured by revenue passenger miles
rebounded. The year ended with only a 6% loss; in 2002, the loss was 2.3%.
It isn't unreasonable to expect a concerned public to rally around this
beleaguered business again.

The hardships of war will reshape the industry for the better. "The airline
industry was long overdue for economic reforms in light of its high cost of
operations and built-in inefficiencies," says Michael Pisani, who teaches
international business at Central Michigan University.

Among the desperately needed changes: reducing bloated wages, cutting
operating expenses and maximizing capacity by flying more full aircraft to
high-demand destinations.

Let them go it alone

The war in Iraq promises to accelerate this restructuring process; a bailout
now would arrest it. Left alone, the airlines that emerge from this
difficult stretch will be more able to serve Americans' transportation
needs.

The notion that war is good for business isn't new. It has been proved time
and again, including after World War II, during which the entire economy was
lifted out of the Great Depression by the war's stimulus to spending.

More government money might help the airlines in the short term. But down
the road, that aid would leave the United States with a weak, inefficient
and uncompetitive airline industry.

That would be the real disaster.

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