"Other cities have survived flight cutbacks by airlines"

Saturday, July 19, 2003

Other cities have survived flight cutbacks by airlines
By Kim Bell and David Bracken
The St. Louis (MO) Post-Dispatch


Foundering airlines, huge reductions in flights, thousands of lost jobs.
Cities across the map have been tested after losing their hub airlines or
seeing a sharp drop in flights.

While no situation mirrors what St. Louis now faces with the cutbacks by
American Airlines, aviation analysts and others say St. Louis' civic and
economic development officials can learn from other cities' experiences.

"Every situation is unique," said Ray Neidl, an airline analyst with
Blaylock & Partners, a New York investment firm. "St. Louis has a good
geographic location. That's why I say, down the road when the economy
improves, I can see American Airlines growing St. Louis again."

Richard C.D. Fleming, who heads the Regional Chamber and Growth Association
here, saw this all before when he was in charge of Denver's chamber in 1994.
Continental scaled back in Denver, reducing its daily flights to 15 from
235.

"The lesson is, there is life after cutbacks by hub carriers," Fleming said.
"But it's by no means automatic. Communities have to be smart and
pragmatic."

The challenge will be great. Airlines face a very different economic
situation than they did just two years ago. Terrorist attacks, war and the
economic downturn have all taken their toll on the airline industry. Even
some of the biggest airlines have found themselves in bankruptcy court or
bleeding cash.

"Today, the airlines are in a much different environment," said Allison
McAfee at the Metropolitan Nashville Airport Authority, where American
Airlines scaled back in 1994. "It's all about survival."

Here's a sampling of how some other cities dealt with major airline cutbacks
in recent years:

Baltimore

US Airways Inc.'s low-fare Metro Jet pulled out of 29 gates at the end of
2001. The airline went from 44 flights a day to zero.

The Maryland Aviation Administration in February 2002 paid $4.3 million to
buy back the 29 gates that the airline had paid for upfront. The
administration paid for the early termination of the lease so it could lease
17 jet gates and 12 commuter gates to other airlines.

"The void has been filled," said Melanie Miller, spokeswoman for Baltimore
Washington International Airport. "Most of the flights (of Metro Jet) were
to Florida as quick, nonstop transportation. AirTran and Southwest have
picked up exactly where Metro Jet left off."

Today, the airport is bustling. Neidl told the Post-Dispatch in a telephone
interview from inside the terminal, "The place is like a beehive, with all
the people and construction going on."

The airport has 678 average daily flights from Baltimore, 156 of them are
Southwest.

Columbus, Ohio

America West had a mini-hub at Port Columbus with 49 flights a day when it
announced this spring it was eliminating all but four. The airline phased in
the cuts over three months.

"They said they weren't making money," said Angie Neal, manager of
communications for the Columbus Regional Airport Authority. "Columbus didn't
fit into their business model."

America West cut 335 of its 400 jobs in Columbus. It kept two daily
departures to its hubs in Phoenix and Las Vegas.

Within a day of the cutbacks, Neal said, other carriers such as Delta and
American stepped forward to pick up some of those flights. Delta, for
example, added 11 daily flights. It was the second-busiest carrier at Port
Columbus, behind America West. Today, however, less than half of America
West's flights are filled, Neal said.

Before the terrorist attacks of Sept. 11, 2001, Port Columbus had 208 daily
flights; now, the airport logs 154 daily departures to 25 cities.

At its peak, America West had among the highest share of passengers using
Port Columbus International Airport, with 18 percent to 23 percent. The
airline's departure "obviously had an impact," she said, "but not like in
other cities where the carrier (that left) had 60 or 80 percent of the
passengers."

Denver

St. Louis' Fleming headed the Greater Denver Chamber of Commerce in 1994
when Continental Airlines gave up on Denver.

Continental said it had $500 million in losses from 1991 to 1993 as it
battled United for power. "It was a fight to the death sort of thing, and
United won," Fleming recalls. "Continental went from 235 flights a day to
something like 15. It was very dramatic."

Continental employed 3,200 people and eliminated all but 600 jobs.

With United in control, Denver became a "fortress hub" with more than 70
percent of the flights United's, and prices went up, Fleming said. Then,
"the little engine that could," an airline called Frontier, made its move.
"The community loved Frontier," Fleming said. "It was the little guy that
provided tremendous service."

Just last week, Denver International Airport and Frontier Airlines agreed to
move ahead with a $300 million expansion that was put on hold after United
Airlines went bankrupt. The airport has pledged to add 16 gates within two
years on Concourse A for Frontier.

United is at odds with the city. The airline has refused to give up any of
its gates, and Frontier needs more space.

Tom Clark, executive vice president of the Denver Metro Chamber of Commerce,
said the airport was serving 33 million passengers a year in 1994 and now
expects to serve about 35 million passengers this year.

"The kind of weirdness or oddity of the airline industry is, if you have a
bunch of customers, airlines will appear," Clark said.

Kansas City

Kansas City International Airport is no stranger to retreating airlines. In
1982, Braniff Airlines filed for bankruptcy and, overnight, halted all
flights. In 1991, another of the airport's hub carriers, Eastern Airlines,
went bankrupt.

"We took two real body blows in a row, and the only way we recovered was to
broaden our base of carriers," said Jerry Fogel, the former chairman of the
aviation committee for the Greater Kansas City Chamber of Commerce.

Fogel said it took a concerted effort on the part of the business community
and the city to convince carriers that Kansas City remained a viable market.
Like Nashville, Kansas City replaced many of the eliminated flights by
attracting low-cost airlines such as Southwest and Frontier to the city.

Consumers have actually benefited from the city losing its hub status, a
phenomenon which Fogel referred to as the "Southwest Effect." The term
refers to when an airport attracts more competitors, causing fares to
decrease because one airline no longer has a monopoly.

Fogel said that while it is unlikely St. Louis will be able to recover all
the flights it is losing, other carriers will step in to fill the void.

"Companies like Delta and United aren't going to stand by and let
underserved markets exist," he said.

Aviation consultant Michael Boyd of the Boyd Group in Evergreen, Colo., said
Kansas City is "a poster child" for lost hub status. "Kansas City has
rebounded. It's not a connecting hub, but it still has nonstop service to
major destinations."

Nashville

In 1994, American announced that it gradually would begin scaling back its
presence at Nashville International Airport. McAfee, the spokeswoman for the
Metropolitan Nashville Airport Authority, said American went from serving 7
million passengers a year in 1994 to just 700,000 today.

McAfee said American's retreat resulted in minimal financial loss for the
airport because long-term agreements required the airline to continue to pay
for gates and office space. The airport only lost the landing fees from the
eliminated flights.

Nashville has been able to recover largely thanks to Southwest Airlines,
which was in the midst of a growth phase when American scaled back. Since
1994, Southwest has expanded its service in Nashville from 200,000
passengers a day to 4.5 million in 2001.

"Southwest helped create Nashville as an origin and destination airport
instead of a hub airport," McAfee said.

Of the 8 million passengers that used the Nashville airport last year, just
2 million of those passengers were simply passing through, on their way to
another destination, she said.

Lambert faces big job wooing other airlines

Some stark realities face St. Louis as it scrambles to replace the 210
flights that American Airlines plans to cut here Nov. 1.

Basically, "nobody is looking to open a new hub," said Jon Ash, managing
director of Global Aviation Associates, an industry consulting firm based in
Washington.

And even just persuading other airlines to add flights at Lambert Field in a
down economy will be a challenge, industry experts say.
That means as airlines focus on their own survival, more cities could face
the same type of economic pain, said Kevin Mitchell, chairman of the
Business Travel Coalition.

"I think when we look back in five years, (St. Louis) is going to be phase
one," he said.

The U.S. airline industry hasn't been profitable since 2000, when it netted
$2.5 billion. Since then, it has lost more than $20 billion, including $11.3
billion last year.

The Air Transport Association, the industry's lobbying group, predicts the
nation's airlines will lose another $7 billion this year, said John
Heimlich, an economist for the group.

Big financial backers "are not interested in lending airlines any money
until they prove they can make money - without the government subsidiaries,"
said Sean Egan, of Egan-Jones Rating Co., a credit-rating firm in Wynnewood,
Pa.

Some airlines other than low-cost carriers Southwest Airlines and JetBlue
Airways could post profits next year, Heimlich said. However, the industry
is expected to lose more than $2 billion in 2004. Barring any more shocks,
such as more terrorism, war or another outbreak of severe acute respiratory
syndrome, the industry could post a modest profit in 2005, Heimlich said.
But it will only happen after more restructuring.

Still, industry experts don't expect airlines to give up on hubs. They are
the best way major carriers have of serving small communities that can't
afford direct service between some cities, Ash said.

American, United Airlines and other big carriers will remain under pressure
from Southwest Airlines and low-cost upstarts, such as JetBlue, AirTran
Airlines and Frontier Airlines, Mitchell said.

The giants likely will discover that their costs per mile are still too high
to compete with those smaller rivals, he said. "I think it's going to be
more capacity cuts and more give-backs from the unions," he said.

There are still more seats in the market than demand warrants, experts say.
The airlines are tackling the issue by targeting some of the inherent
inefficiencies of having many planes enter and leave a hub within a short
time frame, said John Mazor, spokesman for the Air Line Pilots Association.
That forces employees to work frantically for a few hours, then wait a few
more hours until the next round flights come in.

American is experimenting with a format designed to spread the work out over
the course of the day. But it means longer waits for travelers, a strategy
that some airlines haven't been quick to embrace.

So, like American, some other airlines are looking closely at dropping
flights to cities with little or no profits and cutting back on the
frequency of flights, experts said.

They'll also cut costs by using their own smaller planes, in some cases with
fewer crew members, or by relying on regional airlines that can provide
similar service, also for less money.

In the latter case, an airline may increase the number of flights between
cities and still save money, because it will save on labor costs. For
example, the highest-paid pilots at regional carriers make as much as
$100,000. But by comparison, salaries are in the $200,000 range for the
highest-paid captains flying the largest planes owned by the major airlines,
Mazor said.

New approach to flying

Travelers may not like the changes the industry's restructuring will bring.
But it's their pursuit of lower fares that is driving the cuts, experts say.

As a result, they'll have to make their share of concessions, too, Mitchell
said.

American's schedule changes in November will force business and leisure
customers to alter their approach to flying. For example, the reduction in
nonstop service will force some fliers to make connections through
American's other hubs, especially those in Chicago and Dallas-Fort Worth.

The elimination of service to regional destinations, such as Kansas City,
will cause other travelers to forsake flying and take to the roads instead,
said Marlene Kowalsky, owner of St. Clair Travel Service in O'Fallon, Ill.

American is ending its nonstop service from St. Louis to New York's John F.
Kennedy International Airport, an important international gateway.

After Nov. 1, Delta will be the only carrier offering nonstop service from
St. Louis to Kennedy. One of its regional airline partners, Comair Holdings
Inc., operates one flight a day on the route, using a small regional jet.

American's reduced schedule means that travelers who need to reach Kennedy
Airport to connect with foreign carriers will have to take two flights just
to reach New York.

"With every connection, you're adding time and you're adding risk of
cancellations and missed connections," Kowalsky said.

The reduction in service from St. Louis will mean that planes on many routes
will be fuller, and waiting areas will be more packed, Mitchell said. Seats
on choice flights may be scarcer - as well as pricier, he said.

"The popular 8 a.m. flight that you used to count on getting is now sold out
two weeks in advance," Mitchell said.

The scarcity of seats on the most convenient flights will mean some business
travelers will have to fly to their destinations the night before meetings
or appointments - or stay overnight afterward, Mitchell said.

As the big airlines continue to cut costs and simplify their operations, and
as the smaller carriers add flights and amenities, the distinctions between
the two classes of carriers will become less clear, Mitchell said.

Customer service will again become a key selling point, he predicted.

"I think it's going to become a battleground for the entire industry,"
Mitchell said.

Travelers are growing weary of the seemingly endless challenges and
complications, Kowalsky said.

"It was 9-11, it was the economy, it was the war and now it's the security
hassle," she said.

Even though the economy is gradually improving, demand remains fickle,
Kowalsky said. "Every time we think there's going to be a comeback, it's
very short-lived."

Repackaging St. Louis

Given the industry's ongoing restructuring and the possibility that American
could cancel even more flights at Lambert, St. Louis should focus on getting
as many airlines as possible to add flights here if the city expects to fill
its gates, Ash said.

"St. Louis just needs to be sure it optimizes itself as a spoke from other
hubs," he said. "If American goes, nobody is going to pick it up. It's a way
to get rid of capacity."

Southwest Airlines Chairman Herb Kelleher said Friday that his airline had a
strong interest in adding flights at Lambert in response to American's cuts.
Southwest, the second-biggest airline at Lambert, has been trimming flights
in St. Louis.

Meanwhile, Leonard L. Griggs Jr., Lambert's director, said Friday that
Northwest Airlines has plans to add a flight each from Lambert to Detroit
and Minneapolis.

Ash said JetBlue and AirTran ought to be targets. "And there are others.
This restructuring opens up opportunities for United out of Denver. It's an
opportunity for them to create an aggressive business development (plan).
They've got a vacuum to fill."

St. Louis Mayor Francis Slay said Friday that an aggressive marketing
campaign is in the works, headed by a task force that includes
representatives from businesses in the region. Economic development leaders
also will consult with industry analysts about what airlines the city should
pursue to get the best mix of service to meet the region's goals.

Slay said American haven't given the city any guarantees.

"I can't tell you what is going to happen in the future, (or) if this is
just the beginning of a complete pullout," he said. "But we have to be
prepared for it. ... It's incumbent on us not to rely on American and what
they say they are going to do. St. Louis needs to take the lead and decide
our own future."

Griggs said he'll start meeting with American representatives this week
about consolidating the operations the airline plans to keep at Lambert,
perhaps on one concourse. Those discussions will help officials here
determine what they can market to other airlines.

2002 passenger volume at busiest U.S. airports

(global ranking in parentheses)
Atlanta — 76.9 million (1)
Chicago — 66.5 million (2)
Los Angeles — 56.2 million (5)
Dallas-Fort Worth — 52.8 million (6)
Denver — 35.6 million (10)
Phoenix — 35.5 million (11)
Las Vegas — 35.0 million (12)
Houston — 33.9 million (13)
Minneapolis-St. Paul — 32.6 million (16)
Detroit — 32.4 million (17)
San Francisco — 31.4 million (19)
Miami — 30.1 million (20)
Newark — 29.0 million (23)
New York (Kennedy) — 28.9 million (25)
Seattle — 26.7 (27)
Orlando — 26.6 (28)
St. Louis — 25.6 (30)

Source: Airports Council International

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