"A Brief Recovery and Now This"

Friday, August 11, 2006

A Brief Recovery and Now This 
By MICHELINE MAYNARD
The New York (NY) Times


This was to be the summer the airlines were going to put 9/11 and its
aftershocks firmly behind them. 

A police officer with a dog enters an American Airlines plane in Glasgow.
Because of schedule disruptions, most airlines are allowing travelers to
rebook missed flights.
 
And it seemed to be working: fares were up, planes were full - albeit to
passengers' discomfort - and the airlines were making money again. The
industry just reported surprisingly strong second-quarter profit of $1.6
billion, its best showing in six years, after losing $40 billion since the
2001 terrorist attacks.

Now this.

The foiled terrorist plot in London that aimed at American carriers throws
into doubt whether the airline industry will be able to continue its nascent
recovery. Aviation experts said yesterday that it was too early to tell the
lasting effects of the new threat, but they say the industry is unlikely to
escape completely unscathed.

If travelers take fewer trips - out of fear, or an unwillingness to endure
the frustrations of tighter security - then the airlines could see an end to
what has been a very short flight to prosperity. Oil prices dropped modestly
yesterday, but their recent climb has also pressured airline finances. 

The best the industry can hope for is that new security measures take effect
with minimal fuss from passengers, and that travelers keep flying, meaning
the crisis will pass with little damage beyond rattled nerves and a raft of
canceled flights late in the summer travel season. 

"The challenge is to deal with this latest concern without tangling up the
industry and still convincing people they're safe," said Jan K. Brueckner, a
professor of economics at the University of California, Irvine.

Shares of airline stocks either held steady or fell minimally yesterday. 

Some airlines are permitting travelers booked on flights to or from Britain
to make changes on what would otherwise be nonrefundable tickets. 

Many are allowing passengers who have booked London flights over the next
several weeks to rebook without penalty. 

United and American are giving customers with reservations from today
through Sept. 1, the option of rescheduling without penalty; British Airways
was making a similar accommodation for passengers booked anytime before Dec.
1. 

Airlines are also waiving restrictions like blackout dates and minimum-stay
requirements to accommodate customers with disrupted travel plans. 

Mike Boyd, president of the Boyd Group, an aviation consulting and research
firm, said the cost of rebooking and reimbursing passengers would be a
problem for airlines like American, Continental and United that have
numerous London routes. 

For some airlines, the costs threaten to tip the scales from profit to loss,
he said. "It's a burden on the airlines,'' Mr. Boyd added. "This could put
them below the line, and we don't need that right now."

Travel agents and airlines reported few cancellations yesterday, however.
American, the nation's largest carrier, said that a small number of
passengers had canceled flights. 

Altour, a travel agency based in New York, said only 3 of its 50 to 60
clients who were scheduled to fly to London yesterday had postponed their
trips. "People are waiting a little for the dust to settle," said Alexandre
Chemla, the agency's chief executive. He said his business yesterday was "as
normal as any other day."

Air travel, however, was not. Even in a summer marred by frequent delays,
yesterday's backups were notable, especially at airports with large amounts
of international traffic.

At Newark Liberty International, only 29 percent of flights had taken off on
time by late afternoon, according to Flight Stats, an aviation statistics
firm based in Portland, Ore. At Kennedy International, only 36 percent of
flights left on time, compared with 73 percent on Wednesday. At O'Hare
International in Chicago, only 42 percent of flights had departed on time by
midafternoon.

Industrywide, airlines reported that 41 percent to 62 percent of flights had
departed on time as of 5 p.m. yesterday, according to Flight Stats. The
normal rate is typically 80 percent or higher. 

Hundreds of flights were canceled across Europe yesterday.

The new security restrictions were likely to hurt airport retailers, which
have built a business lately on selling water, snacks and meals for
passengers to bring on board. While food will still be allowed, travelers
will have to rely on the airlines for beverages, one of the last free
offerings by some of the major carriers. 

Business could turn worse for duty-free shops, which specialize in sales of
liquor and other luxury goods.

Michael Payne, executive director of the International Association of
Airport Duty Free Stores, a trade association, said airports in the New York
area, Miami and Chicago stopped selling liquor and perfume yesterday after
the new security requirements were issued. 

Mr. Payne said it was still unclear if liquid products purchased at
duty-free stores behind the security checkpoints would be allowed as
carry-on items on flights. Duty-free stores were awaiting word from the
Transportation Security Administration on how the new guidelines would
affect them. "It's still very much an evolving story for us,'' he said.

If travelers start avoiding the skies - staying at home or taking to the
road instead - airlines may use two weapons to lure them back, namely fare
cuts and offers of extra frequent-flier miles. They have used both before in
times of financial difficulties and security concerns, like the period after
the September 2001 attacks and after filing for bankruptcy, as six major
airlines have done this decade.

"Anything that is discouraging to travel, all other things being equal, will
put downward pressure on fares," said Bob Harrell, an industry consultant
with Harrell Associates in New York.

Fare cuts would clearly hurt the industry's thin profits. They represent a
new concern to add to a list that includes fuel prices and a softening
economy. "Security was not the foremost concern they had at this point,"
said Philip A. Baggaley, an airline industry analyst at Standard & Poor's.

The discovery of the threat would have been far worse for the airlines if it
had occurred earlier in the summer. The peak season for travel at home and
abroad is nearly over. Summer family vacations in many parts of the country
end by mid-August because children must go back to school.

But the fact that the threat involved American carriers serving London is
particularly bad news for the big airlines, given the emphasis they have
placed this year on international service. Over all, airlines carried 34.9
million passengers on international flights from the United States in the
first five months of 2006, compared with 33 million in the period last year.

Delta Air Lines, in fact, had made new international routes a linchpin of
its efforts to restructure after filing for Chapter 11 bankruptcy last year.
And flights between Heathrow Airport, outside London, and the United States
are critical to United Airlines, which finally emerged from a lengthy stay
in bankruptcy this year.

American Airlines, one of the other carriers allowed to serve Heathrow under
an international treaty, has been trumpeting its profitability and its
having avoided slipping into court-ordered restructuring. Those airlines are
in danger of being hurt the most if post-threat international travel slips.

The impact on travelers' psyches is uncertain. Mr. Chemla at Altour said he
believed that fliers had become inured to security threats. "Unfortunately,
people are getting used to this kind of situation, so they don't panic as in
the past," he said.

Professor Brueckner said the only situation similar to the London threat was
the 2001 incident involving Richard Reid, known as the "shoe bomber'' who
stuffed explosives in his sneakers and tried to light them aboard a flight
over the Atlantic.

Mr. Reid did board a plane; in the London case, the authorities say the plot
was foiled before any suspected participants set off on flights. Still, Mr.
Reid's attempt, in the end, did not cause passengers much disruption,
Professor Brueckner said.

"What did the shoe bomber lead to? People taking off their shoes and having
shoes looked at in security lines." He continued: "Maybe the carriers will
be fine, maybe this will last for a week."

Anthony Sabino, a professor of law and business at St. John's University in
Queens, said travelers have "learned to live'' with the prospect of
terrorism. 

He predicted that demand for trans-Atlantic travel would rebound quickly
from this week's disruptions. "Expect some frayed tempers but no serious
dropoff in bookings,'' he said. He added, "People will not flock to cruise
ships to cross the Atlantic.''

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