"Airline Security Costs May Rise After Plot; Travel May Hold Up"

Friday, August 11, 2006

Airline Security Costs May Rise After Plot; Travel May Hold Up 
Bloomberg News


Airlines may see security costs rise following the discovery of terrorists'
plans to blow up planes over the Atlantic, though any decline in passenger
traffic may be temporary. 

Carriers including British Airways Plc and AMR Corp.'s American Airlines may
be forced to pay for an increase in baggage screeners or machines to detect
explosives. The plot, though thwarted, caused heightened security alerts
that delayed travel at major airports, adding immediately to airlines'
costs. 

In addition to equipment, airlines will also have to pay for delays caused
by new security rules and for handling requests to reschedule travel, said
Alan Sbarra, a San Francisco aviation consultant. While the industry has
reduced expenses by switching to Internet bookings and other do-it-yourself
practices, ``in a situation like this, you can't self serve,'' he said.
``Airlines are in a situation where a lot of hands-on work is needed.'' 

Because the plot was foiled, any slowdown in passenger travel is likely to
be short-lived, said Jon Ash, president of InterVistas-GA2, a
Washington-based consulting firm. 

``My suspicion is that we won't see a substantial impact on traffic,'' he
said. ``People are becoming more accustomed to security issues and the
threats. They've largely decided to get on with their lives.'' 

Liquid Explosives 

U.K. authorities yesterday arrested 24 people for plotting to blow up
airliners bound from London to the U.S. using liquid explosives. Airline
shares fell after the news, though U.S. airlines rebounded. 

Among European airlines, British Airways closed down 5.1 percent, Deutsche
Lufthansa AG fell 2.9 percent and Air France- KLM Group dropped 3 percent.
American finished the day unchanged after being off as much as 5.1 percent,
while UAL Corp.'s United closed down 1.3 percent after slipping as much as
8.1 percent. 

Investors in U.S. carriers are more concerned about increases in jet-fuel
prices, uncertainty over fighting in the Middle East and the potential for
an economic slowdown than they are about terrorism, Daniel McKenzie, a
CreditSuisse analyst, said in a report. 

``Terrorism is a risk we highlight as a general industry risk, but not one
that has historically caused investors to run for the hills,'' he said. 

Ray Neidl, a senior analyst with Calyon Securities USA Inc. in New York,
said security costs ``have been skyrocketing since 9/11. The airlines have
been trying to absorb that. That's why it took them so long to return to
profitability.'' 

Better Times 

An increase in travel demand and a drop in available seats have allowed
airlines to raise fares and offset some of the impact of higher fuel costs,
helping the U.S. industry post its first profitable quarter in six years in
the second quarter. 

That momentum should continue, Philip Baggaley, a Standard & Poor's analyst
in New York, said in an interview. ``So long as there aren't further adverse
developments like an actual attack or evidence of a wider plot that's not
contained, I wouldn't see this as significant enough to derail their
financial improvement,'' he said. 

British Airways could suffer the greatest immediate impact from ``lost
revenue and added costs'' for security at London's Heathrow airport,
Baggaley said. 

U.S. airlines have lost more than $40 billion since 2000. Four of the
biggest carriers, including United, were forced into bankruptcy by increases
in jet-fuel prices, the expansion of low-cost carriers that held down fares,
and a decline in travel prompted in part by Sept. 11. The cost of jet fuel
has jumped 75 percent in the past two years. 

Highest Profit 

AMR had its highest profit in six years in the second quarter, and net
income at Southwest Airlines Co., the biggest U.S. discount carrier, more
than doubled. United this year has recorded quarterly profits for the first
time since 2000. 

Even with the potential for higher costs, Moody's Investors Service didn't
change its credit ratings on airlines or its outlook for the industry. Most
carriers, in the short term, can withstand any reductions in revenue and
increased costs related to the threats, said Gregory Clifton, a senior
analyst with Moody's in New York, in a report yesterday. 

James Corridore, an equity analyst with Standard & Poor's in New York,
predicted ``strong earnings this year and earnings growth next year.''
Still, Corridore reduced his recommendation on AMR and Continental Airlines
Inc. shares to ``hold'' from ``strong buy'' and ``buy,'' respectively. He
said he couldn't advise new investors to make aggressive purchase of the
shares because of the added threat. 

Locked In 

While the renewed threat may discourage some travelers from booking flights,
many are locked into near-term vacations or trips planned before the start
of most U.S. schools next month, said David Stempler, president of Potomac,
Maryland-based Air Travelers Association, a consumer group. 

American, based in Fort Worth, Texas, said it had a ``virtually
insignificant'' number of changes or cancellations yesterday. American,
United, Delta Air Lines Inc., and US Airways Group Inc. waived fees to
change tickets for travel between the U.S. and U.K. through Sept. 1. Some
eliminated fees for extra checked baggage.

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