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Last Updated:  Thursday, 27 March, 2003, 15:26 GMT
US airlines fly towards extinction

By James Arnold
BBC News Online business reporter

United Airlines check-in
A 15% rarer sight since the war
It's not clear precisely what an "extinction-level event" is, but it doesn't sound pretty.

This lexicon-mangling term was used this week by Frank Reid, president of number-three US airline Delta, to explain why his firm is cutting 12% of its services.

Delta is only one of a string of US airlines to have made apocalyptic noises since the crisis in Iraq.

Most have slashed their schedules, some have cut yet more jobs; one, Hawaiian Airlines, has already joined United and US Airways in bankruptcy.

More look certain to follow.

Fear of flying

US airlines face three main problems.

AMERICA'S AIRLINE WOES
$18bn losses since September 11
$10.7bn in additional losses expected this year
70,000 jobs may be lost, on top of 100,000 since September 11
US airline shares worth a combined $3.2bn; total debt is $100bn
Bookings down by as much as 40% since war
Six main airlines have cut costs by a combined $10bn; seek another $10bn
First, Iraq seems to be taking a much bigger chunk out of air travel than anyone thought possible.

According to the Air Transport Association (ATA), which represents US carriers, domestic bookings have fallen by 20% since war broke out, and Atlantic travel is down by 40%.

The ATA is predicting a 15% drop industry-wide for the next three months.

This is much worse than either of the two recent bouts of turbulence: the previous Gulf War sent carriers into bankruptcy, but was localised in impact, while the post-September 11 slump was relatively short-lived.

Spend, spend, spend

Second, costs are not falling as fast as airlines hoped.

Traffic
Jet fuel - which accounts for 10-12% of airline expenses - more than doubled in price after September 11, costing US airlines more than $11bn, according to ATA calculations.

Persuading staff to accept the sort of sweeping pay and benefit cuts the industry wanted after September 11 has not proved easy.

Tax, security and insurance costs have risen sharply, and can hardly be passed on to travellers, airlines complain.

In all, operating expenses of US carriers are only 5% lower than they were in 2000, despite the far more drastic slump in revenues.

Overdrawn

Third, sources of finance are drying up.

The generous state assistance promised to airlines after September 11 has come through patchily - United Airlines was pitched into bankruptcy last year after the government withheld a $1.8bn loan.

Tokyo airport
Those were the days
The markets are even more niggardly.

Airline debt is trading at a fraction of face value: bonds in AMR, parent company of American Airlines, are worth 17 cents in the dollar; Delta and Continental, both seen as more robust carriers, have dropped below 50 cents.

And as the mountain of surplus aircraft rises, another main source of financing - effectively, mortgaging the airline's fleet, has all-but disappeared.

Flying into the red

Even without a war in Iraq, airlines were expecting a dismal set of results this year, as airfares plumb their lowest level since 1987.

Now, the International Air Transport Association (IATA) predicts the industry will lose $10bn this year; the ATA reckons US carriers alone will lose more than that.

Airline shares
Some airlines are in particularly desperate straits.

United, which was hoping to use bankruptcy as a means of getting its house in order, lost $367m in February alone, and said it saw no prospect of getting back into profit.

Currently burning through $10m in cash a day, United has enough left in the bank to last until summer.

American, the world's biggest airline, has so far remained barely solvent - but share and bond investors are treating its bankruptcy as a foregone conclusion.

And US Airways, already in administration and so relatively immune to the full blast of market forces, has announced it is cutting schedules once again.

Europe's exception

Now, the bad news is starting to creep across the Atlantic.

British Airways this week said it was cutting 4% of its seats, and accelerated its job-cut programme.

Airline performance
Air France has reduced capital expenditure, cut routes by 7% and postponed the delivery of seven new planes.

But few expect a cataclysm on the US scale.

European carriers took their medicine early, suffering worse after September 11 than their US rivals, mainly because bail-out cash was harder to come by.

A handful - notably Swissair and Belgium's Sabena - went into liquidation, and others have already drastically pruned their schedules.

Nor do European travellers seem to be as nervous as their US counterparts; traffic between Europe and Asia, and even toward the Middle East, is holding up well.

Out with the begging bowl

Back in the US, meanwhile, calls for a fresh bail-out are getting louder.

United Airlines planes
Flying on empty
The Department of Transportation, which has been unashamedly interventionist since September 11, has said it is standing by to help - a promise that has raised the vague prospect of nationalisation for the most troubled carriers.

At the same time, a Senate committee has started work on an aid programme, and says it will have a draft proposal ready next week.

The airlines' ostentatious display of agony has been carefully tuned into an extensive list of demands.

Carriers would like compensation for their losses - some $4bn at least - plus a package of tax cuts and the removal of annoying pieces of regulation.

"If this were a hurricane, the federal government would have declared a state of emergency," says ATA president James May.

"This war is an extraordinary, non-market condition."

Could do better

Mr May will probably be disappointed.

While senators have made polite noises, few seem prepared to countenance the sort of open-handed generosity the airlines would like.

According to preliminary reports, the furthest aid would go is a combination of help with security and insurance costs, and a few tax breaks - a package that could total as little as $1.5bn.

Lawmakers are not thrilled at the relaxed way airlines have set about reform after September 11, with some arguing that management could have done much more to persuade staff of the need for cost cuts.

Internal opposition has, it must be admitted, been stiff.

This week, unions have attempted to block unpaid leave for some 3,500 United Airlines staff.

More seriously, they are going to court to prevent United rewriting employment contracts - something the firm's bankruptcy agreement allows it to do.

Windfall

If there is a faint glimmer of hope for the industry, it lies in the oil market.

Jet fuel prices
Jet fuel prices have fallen by one-third since the beginning of March, dragged down by the notion that Iraqi oil will soon start flowing freely.

If oil prices hold at their current low levels, the effect will be equivalent to a multi-billion-dollar cash injection for the sector - at least for those airlines that have not used the financial markets to hedge themselves against fluctuations in fuel prices.

Trouble is, it will also allow airlines to postpone once again dealing with the chronic over-capacity - in particular, overly generous employment contracts - that make them so vulnerable to any downturn.

For US carriers at least, the "extinction-level event" will come, sooner or later.


SEE ALSO:
United losing $13m a day
26 Mar 03  |  Business
War forces airline cutbacks
26 Mar 03  |  Business
Continental cuts 1,200 jobs
20 Mar 03  |  Business
No pay deal for United Airlines
14 Mar 03  |  Business


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