The New Flight Plan
The nation's airlines miraculously survived their post-9/11 tailspin. Too bad that wasn't their only problem
If you've taken a commercial flight lately, you might think that the U.S. airline industry is sputtering back to life. Over the summer, airplanes were the fullest they've been since 1970. Revenues were up too, rising 8.1 percent in July from a year earlier. And airline investors, starved for good news, have sent stock prices soaring from March lows; American's beleaguered shares rose 9 percent in one day last week when Merrill Lynch praised the carrier's efforts to cut costs by $4 billion and improved its earnings forecast.
But this is an industry that excels at disappointing, and two years after the September 11 terror attacks the airlines may be in more precarious shape than ever. To reach profitability, the airlines have slashed pay, furloughed workers, cut service, and grounded hundreds of aircraft. Yet for the third year running, every major carrier except Southwest will lose money in 2003, with combined losses approaching $7 billion. And revenues will still need to grow by a hefty 10 percent, according to Credit Suisse First Boston, for the industry just to break even. "We thought two years ago that everything would be normal by now," says Continental CEO Gordon Bethune. "Unless business improves, some of the [big carriers] won't be here."
The September 11 catastrophe was obviously an unprecedented shock to the airline industry. But it now appears that many airlines misconstrued the resulting plunge in business as an anomaly whose effects would eventually dissipate. They cut capacity and trimmed costs but quickly reversed those moves when the economy showed signs of a rebound in mid-2002. That false start sent many airlines deeper into the red.
United Airlines' bankruptcy filing last December began a new round of shock therapy. United was able to force once-unthinkable pay cuts on pilots and other workers, while the threat of a similar fate at American persuaded its employees to give up some pay and benefits this spring. The carriers finally got serious about reducing supply, too. Nearly 600 aircraft--about 15 percent of the U.S. fleet--are parked in desert holding pens, their engines shrink-wrapped to keep out blowing sand. Overall, the total supply of seats in the air this year will be about 6 percent lower than in 1999.
Slimming down. If this were a typical industry downturn, those moves might suffice until demand bounced back and the airlines fattened up again. But the market for air travel is changing in ways few airlines anticipated. "September 11 permanently resized the U.S. airline industry," says analyst Sam Buttrick of UBS. As a percentage of GDP, airline revenue has fallen 20 percent to 30 percent from levels of the past 25 years. And instead of bouncing back during an economic recovery--as airline executives clearly hope will happen--revenues may remain depressed. Long security lines and other inconveniences make air travel slower, and videoconferencing and webcasting are becoming sound alternatives for business travelers--the airlines' cash cows. "The value proposition for business travel is declining," says Buttrick.
In many industries, tough times produce consolidation, when big, strong companies absorb smaller, weaker ones. But the airlines are a persistent exception to textbook economics. There are no big, strong companies, excluding Southwest, which would rather fly passengers in hot-air balloons than absorb a troubled competitor. And while some mergers might make strategic sense, antitrust regulators are notoriously suspicious of airline deals, such as the United-US Airways merger they scuttled in 2001.
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