"Airlines' fiscal problems leave airport managers uncertain"

Tuesday, September 28, 2004

Airlines' fiscal problems leave airport managers uncertain
By RANDOLPH HEASTER
The Kansas City (MO) Star


The airline industry seems to be in a state of perpetual chaos, most
recently evidenced by the second bankruptcy filing of US Airways.

US Airways isn't alone. United Airlines has been in bankruptcy for nearly
two years, and Delta Air Lines recently announced a restructuring that will
eliminate 7,000 jobs in hopes of staving off a Chapter 11 filing.

Experts advise travelers and industry employees to get used to the
unsettling events, because they're not going away anytime soon.

"These are very, very difficult times," said Darryl Jenkins, visiting
professor at Embry-Riddle Aeronautical University in Daytona Beach, Fla.
"Over the next five to 10 years, there won't be a time when we don't see one
of the major airlines in bankruptcy, and there will be periods when there
are two or more in Chapter 11."

That has airports like Kansas City International Airport in a holding
pattern of sorts. Overall, the traffic numbers at KCI are good, with total
passengers up for the first time since 2000. Furthermore, on Monday, Midwest
Airlines announced it was adding seasonal flights from Kansas City to Fort
Lauderdale, Fla., and New Orleans.

KCI's revenues also are up. For fiscal 2004, which ended April 30, the
Aviation Department's airfield and runway revenues were $10.23 million, up
from $10.21 million the previous year. Total revenues for the Kansas City
Aviation Department were $69.37 million, up from $68.05 million in fiscal
2003.

Although KCI doesn't rely heavily on the carriers currently in trouble,
their cutbacks will have some effect in Kansas City. And it could take some
time before aviation officials can determine the potential for adding
service.

"The industry is in such turmoil right now," said Tom McKenna, the Aviation
Department's marketing director. "These are possibly industry-changing
events."

Veteran business travelers have become used to news of airline bankruptcies
and downsizings, but they notice the effect it has on the leisure travelers
who fly less frequently.

"For the less-experienced, events like this present a psychological
negative," said Rich Nespola, chairman and chief executive of The Management
Network Group, an Overland Park telecommunications consulting firm. "They
think if an airline can't pay for its food, what else can't they afford to
pay for? That in turn makes it more difficult to find seats on the other
surviving carriers."

Double whammy

These events essentially began with the terrorist acts of Sept. 11, 2001,
coupled with the downturn in the economy that caused a huge drop in business
travel.

Before the terrorist attacks and the recession, KCI had reached nearly 12
million passengers, and city leaders were projecting 15 million eventually.

That double-whammy led to the collapse of many carriers, including Vanguard
Airlines in Kansas City. Vanguard, a discount carrier founded in the
mid-1990s, developed a minihub at KCI before shutting down in 2002.

While American Airlines has managed to avoid Chapter 11, its employees had
to agree to substantial pay cuts in order to do so. That concession affected
more than 2,000 employees in Kansas City that became part of American
Airlines when it acquired Trans World Airlines out of bankruptcy.

American, like the other major carriers, is still not out of the woods. The
airline continues to make changes in an effort to return to profitability.
Last week, American announced that it would reduce flights and might charge
for onboard food in the face of rising fuel prices and competition from
discount carriers. American's parent, AMR Corp., squeaked out a profit last
quarter of $6 million, or 3 cents a share. It was the second profit in 15
quarters.US Airways is the second-biggest airline bankruptcy ever, and some
analysts have speculated that it could be the major carrier that ends up
liquidating. US Airways listed liabilities of $8.7 billion and assets of
$8.8 billion, second in size only to United."It's a very crucial time,
especially for US Airways," said Richard Aboulafia, vice president of Teal
Group Corp., an aviation consulting firm. "Things aren't getting better
revenue-wise, oil prices remain high, and they may be prevented from dumping
their pension plans. US Airways could go away. It's avoidable, but it's not
an unlikely scenario."

US Airways has vowed to emerge from Chapter 11 as a stronger, low-cost
competitor. But most of its routes are concentrated on the East Coast, which
raises questions about its future in Kansas City.

The October schedule released by the Kansas City Aviation Department shows
that US Airways will continue three daily departures to Charlotte, N.C., but
is dropping its daily flight to Pittsburgh.

US Airways Express, its regional jet and commuter service, will have 17
daily flights next month. That includes nine daily flights on the commuter
Air Midwest, through which US Airways Express is the sole carrier at three
municipal airports in Kansas.

Before the events of September 2001, US Airways had 15 departures from KCI,
to Charlotte, Philadelphia, Pittsburgh and Washington, D.C. US Airways
Express had 47 flights at that time.

A US Airways spokesman could not be reached regarding how the carrier's
bankruptcy could affect its future operations in Kansas City.

Delta's cutbacks included its decision to "de-hub" in Dallas, meaning the
airline will redeploy its aircraft to its bigger hubs in Atlanta, Cincinnati
and Salt Lake City.

In February, Delta will go from 254 daily flights in Dallas to 21. Five
flights from KCI to Dallas on Delta Connection, the carrier's regional jet
service, will be eliminated by early February, said Anthony Black, a Delta
spokesman.

Black said, however, that the restructuring would also lead to Delta
Connection's adding service to Salt Lake City from KCI. The regional jet
service will go from four to five flights daily, and Delta Connection will
use bigger 70-seat regional jets on that route instead of the 50-seaters
currently in use.

Black said it was too early to tell whether Delta's operational cutbacks
would affect its Kansas City work force, which numbers about 275.

As for Dallas service, American Airlines continues to have 11 daily
departures, or 1,400 seats, from KCI, said McKenna of the Aviation
Department.

Discounters deliver

Low-cost carrier Southwest Airlines operates the most flights at KCI, but
the airline said last month that it would scale back in Kansas City.

Southwest, which has 70 flights a day out of Kansas City, will reduce its
schedule to 61 daily departures at the end of October. Four flights to
Chicago will be cut, and Southwest will reduce service from Kansas City to
Oklahoma City, Los Angeles and St. Louis. The sole flight Southwest had to
Manchester, N.H., also will be eliminated.

Southwest entered the Philadelphia market in May and said it had been its
most successful market opening ever. Other cities also face reductions as
the airline shifts more resources to Philadelphia.

Analysts say Southwest is boosting its Philadelphia presence quickly in
response to the troubles of US Airways.

But should local officials be concerned by Southwest's decision to cut back
in Kansas City? Southwest, which has about 325 employees in Kansas City,
said the flight cuts would not affect its local staff and were not
necessarily permanent.

"The word 'permanent' does not exist in the airline industry," said Brandy
King, a Southwest spokeswoman in Dallas. "We are re-allocating those flights
to the places with the highest customer demand. If we see the demand rise in
a particular city, we'll evaluate it and consider adding service."

King pointed out that not all the re-allocated flights would go to
Philadelphia. Other routes where Southwest is adding service include
Houston-Orlando, Fla., and Chicago-Tampa, Fla., and Baltimore-Nashville.

According to one industry observer, Southwest's actions reflect more on the
battle with US Airways in Philadelphia than disappointment with traffic in
Kansas City.

"This is a drop-everything-and-get-the-aircraft-to-Philadelphia situation,"
said Kathy Sudeikis, a vice president with All About Travel in Mission. "I
think they're looking for immediate aircraft to move there instead of
waiting for new orders. They know we're a good market in Kansas City."

Southwest is the biggest and most successful low-cost carrier, but others
are growing with their own low-cost models, such as JetBlue Airways,
Frontier Airlines, AirTran Airways and Spirit Airlines. Their emergence has
been good for customers in the markets they serve, and one industry expert
thinks they may eventually dominate domestic service, with the major
airlines focusing on international service.

"The low-cost carriers not only have the lowest fares, but now they have the
best service," said Terry Trippler, consumer advocate for www.sidestep.com,
a travel Web site. "Southwest is expanding as fast as they can get new
aircraft, and so is JetBlue. We're seeing a major shift. I thought the
legacy carriers would have more resilience."

The low-cost airlines are small enough that they can shift their resources
to meet demand quickly, Trippler said. For example, Frontier Airlines
initially expanded in Kansas City by adding two flights to Los Angeles.
After a few months, the carrier went to one flight.

"They can move their planes quickly to where the demand is," Trippler said.
"That's the advantage the smaller, low-cost airlines have. The legacy
carriers are interested in market share. What they lose on a passenger in
pricing, they try to make up for in volume."

But longtime business travelers like Nespola, the telecommunications
consultant, understand the problems the major carriers face.

"The low-cost carriers aren't ubiquitous in the flights they offer like the
majors," he said. "They just cherry-pick the most profitable routes. The
difficulties for airlines like Delta and US Airways are that they're saddled
with an old cost structure in a market that has outside forces."

Still, no one predicts that all the major airlines are headed for
extinction. While some speculate that one legacy carrier may eventually face
liquidation, the airlines are simply too big, and regulators have not been
willing to allow any of them to shut down.

But while the airlines struggle and continue to reduce flights, Kansas City
has been able to find smaller discount carriers willing to fill the gaps.
AirTran has three daily flights from Kansas City to Atlanta, Delta's home
turf.

Kansas City officials made an effort last year to get Frontier to expand in
Kansas City. In addition to its five flights to its Denver headquarters,
Frontier added a flight to Los Angeles and established maintenance
operations in Kansas City.

With Frontier's service complementing United's Denver flights and with
Southwest offering flights to the Northeast, Kansas City is in better
position than many other cities, said Jerry Fogel, vice chairman of
Kessinger/Hunter & Co.

"We've got some back-filling capability that we didn't have three or four
years ago," said Fogel, who is a member and past chairman of the aviation
committee of the Greater Kansas City Chamber of Commerce. "Kansas City is
not completely secure in the air service it has, but it's a heck of a lot
better off right now than Pittsburgh."

Passenger traffic is up in 2004, Fogel said, and that's a positive
development that needs to continue.

"The real strength of Kansas City is the number of passengers it can
generate," he said. "We must continue building a good business environment,
drawing conventions and new businesses. If we get out of the woods, Kansas
City is a market airlines will want to serve, whether they're low-cost or
legacy carriers."


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