Business Analysis: US airline industry in tailspin to disaster

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The Independent Online

As America prepares to mark the human loss from the terrorist attacks on 11 September 2001, the impact of that devastating day is still also being felt in one of the country's largest industries: its airlines.

In the week when the third anniversary of the attacks falls, Delta, the third-biggest carrier, and US Airways, the number six in the industry, have warned that they are in danger of running out of cash. They have said swingeing job losses and pay cuts are the only way to save the airlines from filing for Chapter 11 bankruptcy protection.

While the airlines' problems have been compounded by the rocketing cost of oil, the story of distress in the sector has become all too familiar in recent years, with most in the American aviation industry pointing to the events of 9/11 as the catalyst for difficulties they are still trying to deal with today.

In the aftermath of the terrorist atrocities, airlines have to deal with a combination of the global economic slowdown as well as problems specific to their industry. Customer numbers plummeted as people feared follow-up hijackings of planes, while insurers hiked aviation premiums.

The impact over the past three years has been sector-wide losses of $23bn (£13bn), the US department of transport said. The losses plunged the country's second-biggest carrier, United Airlines, into bankruptcy within a year of the 11 September destruction. If US Airways has to file for Chapter 11 - possibly as early as this week - it will be the second time the company has run out of money.

To turn around the airlines will require dramatic and unpopular action, experts have warned. Indeed, unless they were to embrace radical restructuring, the long-established carriers face a "death spiral" which might see their brands survive, but not their current ownership, according to Vaughn Cordle, an analyst at the Washington-based think-tank Airline Forecasts. He said: "There has been a confluence of industry-wide issues and micro-economic issues which are conspiring to force companies either to restructure or face liquidation."

While British and other airlines around the world have suffered in the past few years, in part thanks to 11 September, most major players have identified the challenges and are implementing wide-ranging programmes to deal with them. In contrast, many industry experts believe their US equivalents have been slower to acknowledge the extent of their problems, in part because of the financial aid America's Congress put in place to help airlines in the immediate aftermath of 11 September.

The distribution of $1.5bn of federal aid - one of the largest ever government bail-outs - was made to a group of airlines to cope with the short-term impact of the events. That provided a prop to many players in need of drastic pruning, critics of the plan say.

Peter Fitzgerald, a Republican from Illinois and the only Senator to battle the political tide and vote against the bail-out, said in a recent report: "There are no barriers to enter the airline industry. There shouldn't be barriers to exit. We have funnelled lots of money to the airlines but even with record traffic they are still financially unviable and riven with debt. The government took extreme measures to restore the health of airlines and it hasn't worked." Those problems, analysts have said, were the huge operational costs that airlines incurred during the economic boom of the 1980s and 1990s, when increasing numbers of people made flying their preferred method of travel, especially in business, where margins are fattest.

Reflecting the lack of pressure on costs, the sector was able to pay its pilots not only hefty salaries, but also to grant them generous pension plans.

It is a different story now. Mr Cordle has just completed an analysis showing that, despite the fact that passenger numbers have climbed back above the pre-11 September levels, airlines' yields are falling. "The mixture of business to leisure travel is worse as there are plenty of travel substitutes for companies now such as video-teleconferencing. There is also more transparency for consumers on travel costs due to the internet, which is destroying the legacy carriers' ability to charge a premium. Low-cost operatorsnow make up 28 per cent of the market and are the price makers," Mr Cordle said.

Airlines have been hampered in their attempts to fight the increased competition because they are first trying to cut their historic costs. Pension liabilities alone are estimated at $30bn and are one of the main battlegrounds between airlines and the unions. Delta, which on Wednesday unveiled a turnaround programme that includes slashing 7,000 jobs, or 12 per cent of its workforce, is also trying to push through $1bn of cost savings by cutting wages and benefits. US Airways is attempting to cut its salary and pension bill and United warned last month that it would probably replace its pension plans with less generous benefits in an effort to emerge from bankruptcy.

The proposals come on top of the retrenchment already implemented and, analysts believe, the major players are at last doing enough to see their losses narrow considerably next year (see chart). So the oil price spike to $48 to $50 a barrel is particularly unwelcome. According to the International Air Travel Association, crude prices need to average $33 a barrel this year for the global airline industry to break even.

For most of America's aviation industry, breaking into the black seems a distant goal. But to get there at all, they know they have to convince employees as well as investors that their businesses must be radically restructured so that they can compete in the modern battle of the skies.