"Nation's airline industry showing signs of recovery"

Sunday, September 7, 2003

Signs of recovery
By Hal Mattern
The Arizona Republic


The nation's airline industry, which had its world turned upside down and
inside out by the Sept. 11, 2001, terrorist attacks, only recently has begun
showing signs of recovery. 

A few airlines reported profits in the second quarter, and summer passenger
traffic was stronger than predicted.

Wall Street analysts have upgraded some airline stocks, and they cautiously
are projecting that 2004 could be the year many carriers return to
profitability.
 
But industry officials and analysts also note that major changes have
occurred over the past two years that have dramatically altered the way
Americans travel and airlines operate.

"The industry as we knew it has changed forever," said Douglas Parker,
chairman and chief executive officer of America West Airlines. "(Sept. 11)
vastly accelerated a restructuring in our industry that is still going on."

Even before hijackers crashed airliners into the World Trade Center in New
York and the Pentagon near Washington, D.C., the airline industry was
feeling the effects of a slowing economy and a fall-off in business travel.

It was coming off a period of prosperity that saw technology companies
flourish and the stock market soar. Airfares were sky high, and business
travelers were willing to pay. Some of the nation's largest airlines agreed
to share the wealth by granting huge wage increases for their employees.

When the economy began to sputter in 2000, the airlines saw it as just
another cyclical downturn like the ones they have weathered many times in
the past. 

But the bottom fell out of the industry after the terrorist attacks,
prompting a variety of changes.

The one that has affected passengers the most has been enhanced airport
security. The federal Transportation Security Administration assumed
responsibility for airport security, and it beefed up the screening of both
passengers and their baggage. At many airports, all passengers are required
to remove their shoes before passing through security.

Burden of travel

Critics of the change contend that it has hurt the airline industry by
making travel too much of a burden for many people.

"They have made a dog's breakfast out of airport security," said Michael
Boyd, an airline consultant based in Evergreen, Colo. "All we did was hire a
bureaucracy and teach them how to smile and stop people from carrying nail
clippers. But we haven't done anything to stop terrorism."

Parker of Tempe-based America West agrees that streamlining airport security
should be a priority.

"We're still struggling to find ways to make it more customer-friendly," he
said.

Perhaps the biggest challenge facing airlines is their need to restructure
their costs to boost revenue and compete with the increasingly aggressive
low-fare carriers that have been luring away passengers.

Low-cost, low-fare airlines now account for about 25 percent of the nation's
airline seat capacity.

"There has been a dramatic move to low-fare carriers," said David Stempler,
president of the Air Travelers Association, which focuses on such issues as
safety, security, savings and service. "The larger carriers are in a
continuous battle with the low-cost airlines. It is a battle for the hearts
and minds of passengers, who are driven by price right now."

Most of the larger airlines have tried to whittle down their costs by
drastically reducing their schedules, resulting in more than 600 aircraft
being parked over the past two years. That has triggered massive layoffs and
wage concessions.

Airline concessions

United and US Airways were granted concessions after they filed for Chapter
11 bankruptcy protection, while American persuaded its employees to accept
wage cuts as a way of preventing a bankruptcy filing.

Stempler said the popularity of such low-cost airlines as JetBlue and
Southwest is no different from the domination of the retail market by
Wal-Mart and Target. Such high-end department stores as Nordstrom's, because
of their locations, merchandise and pay scales, cannot transform themselves
into Wal-Marts, he said.

"It's the same with the big airlines, which have pensions and high wages,"
Stempler said. "They can't spin around on a dime."

America West, the nation's eighth-largest airline, nearly did just that. The
carrier, which after Sept. 11 was considered the airline most likely to file
for bankruptcy, was granted a federal loan guarantee that allowed it to
secure $429 million in private financing.

It has since managed to reinvent itself as a low-cost, low-fare carrier.

"That near-death experienced forced us to rethink our entire business
model," Parker said. "That resulted in our fare restructuring."

America West implemented a simpler fare structure in March 2002 that
eliminated Saturday night stay requirements and relaxed advance-purchase
rules, effectively lowering fares for last-minute business travelers.

AmWest's profit

Parker credits that change with helping the airline achieve a small
second-quarter profit this year, its first in more than two years. He also
has projected a profit for the third quarter, and some analysts predict it
will be profitable in 2004.

America West also was the first major airline to experiment with on-board
food sales after Sept. 11, and it has streamlined its boarding procedure to
speed up departures. The airline has improved its operations and pays
bonuses to employees when it ranks among the industry's top three carriers
in on-time performance and customer satisfaction.

"We are taking risks that we probably wouldn't have (before Sept. 11),"
Parker said. "We decided that if we ever were going to take risks, the time
to do it is now. As a result, I think we have been doing all the right
things."

He said America West is just about back to where it was pre-Sept. 11, except
that its balance sheet is a little weaker because its debt is larger. He
said he expects the airline to grow next year.

Eye on future

"We are thinking less about surviving and more about the future of the
airline," Parker said.

While America West might be an exception to the current industry malaise,
Stempler said he expects the larger airlines to eventually rebound. He said
their extensive route structures, full service and frequent-flier programs
will continue to make them attractive to travelers.

"I've heard all the gloom and doom in past downturns about the end of the
majors and the end of business travel, but everything always comes back," he
said. 

"It's different now because they have the low-cost competition, but I still
don't believe all the gloom and doom. There will be consolidation, and the
low-cost carriers may tighten the noose around them, but I think
full-service airlines will come back."

Post-9/11 

Airline industry events since Sept. 11, 2001:

   . Industry giants United Airlines and US Airways filed for bankruptcy
protection, while American, the world's largest, teetered on the brink.

   . The industry as a whole lost an estimated $20 billion.

   . Low-fare airlines began stealing cost-conscious travelers from the big
carriers, forcing the majors to slash wages, eliminate flights and lay off
thousands of workers.

   . Armed sky marshals were stationed on some flights, and pilots started
training to carry guns in the cockpit.

   . At the nation's airports, the lines grew longer at security
checkpoints, planes got fuller, and on-board food service all but vanished.


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