"Airlines face new woes as September 11 fades"

Sunday, September 26, 2004

Airlines face new woes as September 11 fades
Discount carriers bury industry's big names
By Joel J. Smith
The Detroit (MI) News


Air travel has rebounded since the September 11 attacks, but the U.S.
airline industry remains mired in a deep slump that could force many major
carriers - if not most - into Chapter 11 bankruptcy over the next five
years, industry experts predict.

The aftermath of the terrorist attacks combined with soaring fuel prices, a
soft economy and the rise of scrappy discount airlines formed a perfect
storm of sorts for the traditional airlines, which have lost a staggering
$27 billion since 2001.

Fighting to survive, airlines are chopping away at costs and seeking
concessions from workers, lenders and suppliers. The biggest winners in the
battle of attrition could be the 650 million travelers who board domestic
flights each year and benefit from record low fares.

Some airlines already are in bankruptcy. US Airways recently filed for its
second Chapter 11 bankruptcy in two years. United Airlines also is in
bankruptcy, and a judge's ruling Friday means the company may have a rough
time winning court approval if it eliminates its pension programs.

Wall Street experts predict Delta Air Lines soon will follow in bankruptcy
court unless the carrier's unions agree to major concessions.

"What we're now seeing is something that is so fundamentally different,
there is no comparison to the past," said Delta Chief Executive Gerald
Grinstein earlier this month as he announced a restructuring of the
Atlanta-based airline Wednesday. "This marketplace is at a very rapid state
of change."

A major shakeout is coming, said Michael E. Levine, a Yale Law School
professor and former senior executive with Northwest Airlines, Continental
Airlines and New York Air.

"While (major airlines) are less likely to liquidate, they all are likely to
go into bankruptcy," he said. "They can use bankruptcy to force concessions
on employees, lenders, airports and vendors."

Northwest Airlines, Detroit Metropolitan Airport's largest carrier, with 576
daily departures, faces stiff headwinds with losses exceeding $1.3 billion
in the past 36 months. The airline already has cut $1.1 billion in operating
expenses but needs more to survive, Northwest officials say.

Northwest is hoping to skirt around bankruptcy by persuading its 39,000
employees to give up nearly $1 billion in annual wages, benefits and work
rule concessions. In 16 months of bargaining, however, Northwest has not won
a dime at the bargaining table.

"Our goal is to avoid Chapter 11 bankruptcy," Doug Steenland, president of
Northwest Airlines, told The Detroit News. "If bankruptcy happens, it's a
lose-lose proposition for everyone. But time will tell if we are
successful."

Northwest's 5,500 pilots claim that Northwest management hasn't demonstrated
a willingness to cut its pay, benefits and pensions to share the same pain
and suffering faced by other workers.

"Unless both sides are willing to give up some things, bankruptcy is
unavoidable," said Will Holman, a spokesman for Northwest's Air Line Pilots
Association in Minneapolis. "Eventually, all stakeholders, including
management, must be part of the solution in the current economic
environment."

Holman said Northwest began asking for $442 million in annual concessions
from pilots but currently has $300 million in givebacks on the table. The
pilots have offered $200 million in cutbacks.

While the two sides remain far apart, Holman is hopeful an agreement can be
reached this fall. Northwest will address cutbacks from its other unions
after an agreement is reached with the pilots.

Whether it's done at the bargaining table or through bankruptcy court, a
successful survival plan for major carriers would change the scope of the
$77 billion airline - a major cog in the U.S. economy.

Gone will be a huge chunk of 570,000 people who work in the airline industry
and earn sizeable salaries and benefits. In its place will be major airlines
that can compete on a cost basis with low-fare carriers that have grabbed
nearly 30 percent of the airline passenger market in just the past 15 years.

Airline workers like George Hellman are worried. The 45-year-old Northwest
mechanic was forced to move three times in the past 15 months just to keep
his job. "This kind of work atmosphere is a couple of steps short of hell,"
said Hellman, who was forced to return to Detroit this week to keep his job
just a week after he moved to Minneapolis.

"Every airline worker spends part of their workday looking over their
shoulder wondering if they'll have a job tomorrow."

Northwest has been struggling since the September 11 terrorist attacks three
years ago. The Egan, Minn.-based carrier has cut 13,000 jobs and scoured its
operations' cost-cutting opportunities.

Yet the red ink continues to flow, mostly because of high operating costs,
significantly above the discount air carriers.

Northwest's operating costs are 20 to 40 percent higher than most low-fare
carriers. In the 2004 second quarter ending June 30, it cost Northwest 10.6
cents per available seat mile to operate. At the same time, it cost
Southwest Airlines 24 percent less, or 8.1 cents per seat mile. The cost per
available seat mile is a standard measurement in the airline industry for
determining just how much it costs a carrier to fly one seat for 1 mile.

So when Northwest matches the fares of discount carriers on routes they
share simply to keep passengers, it loses money. At least 75 percent of
Northwest routes have competition from low-fare carriers.

Four discount-fare carriers - Spirit, Independence, Southwest Airlines and
America West Airlines - operate out of Detroit Metro Airport.

Independence Air, a new start-up with flights from Detroit to Washington,
D.C., came into the Northwest market with a $78 roundtrip fare.

Northwest immediately matched it even though in the past, the fare ranged
from $200 to $400. The flight now is a money loser for the airline.

Northwest did the same when Spirit Airlines began offering discounted fares
to various Florida destinations.

"It's going to get worse," said Darryl Jenkins, professor of airline
management for Embry-Riddle Aeronautical University in Daytona, Fla. "We've
also seen a systematic change in the way people travel and part of that is
they have alternatives. People today are flying whatever they can at the
lowest price."

He said that no matter how the airlines work themselves out of the financial
crisis - even if it's by bankruptcy - there will always be competition and
plenty of flights so "consumers can expect low fares for a long time to
come," he said.

Mary Ellen Ferrell, a Macomb County resident who recently flew to Tampa on
Spirit Airlines, said she loves the competition that brings the ticket
prices down. "It made the trip affordable," she said.

But discount airlines aren't the only cause for the huge losses generated by
the network carriers. They were blindsided by a number of issues. They
include:

   * Rising fuel costs. Just in the past year, fuel prices have climbed 40
percent with not much relief in prices expected through the end of 2005. In
2004, the rising fuel prices are expected to cost airlines $6 billion more
than a year ago and at least $700 million more for just Northwest.

   * A downturn in the economy beginning in early 2001. This saw business
travel fall off, the most lucrative and profitable ticket sold by the
carriers.

   * The September 11 attacks using four commercial airlines for suicide
missions. The public stayed away in droves from the airlines and only now
has air travel returned to pre-September 11 levels.

   * The 2003 outbreak of Sudden Acute Respiratory Syndrome in Asia. The
disease kept American travelers at home. Very profitable Asia routes had to
be grounded or flown with many seats empty. It took months for the flying
public to regain confidence in traveling to Asia again.

Of course, the regional airlines and low-fare carriers don't fly to Asia.
But they had to cope with the economic slump, the terrorist attacks and
increased fuel costs, too.

Yet, the regional and discount airlines have continued to show profits while
the major carriers are buried in red ink.

"This means the legacy carriers no longer are competing with just
themselves," said Levine, the Yale professor.

"They must compete head-to-head with the low-fare carriers or disappear like
the Checker Cab."

Attached Graphics:

Operating profits tailspin.

Profits fall.

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