Sept. 11, catalyst for airlines' crisis
By Ian Campbell
UPI Chief Economics Correspondent
Published 9/7/2003 5:38 PM
(This interview is part of UPI's Special Report on the anniversary of the 2001 terror attacks.)
The terrible events of Sept. 11 are often seen as having destroyed America's airlines. In fact Sept. 11 was no more than a catalyst, bringing forward a crisis that was bound to happen.
The industry's structure, the way it has managed its labor relations and finances and the emergence of fresh competitors were all sources of vulnerability. The restructuring that has now begun is a partial one, incomplete because governments are not moving swiftly enough to allow airlines to be the efficient global businesses they should be.
In recent decades most industries have globalized. Ford and Volkswagen and Toyota compete to sell cars around the globe. Consumers benefit. The airline industry, a vehicle of this process, has stood apart from it. National carriers and reserved national markets have survived, protected by governments.
Then, within national industries, there have been other factors. The major airlines built extensive networks in a prestige industry. In the United States and many other countries, too, the airlines' employees were well paid, unionized and, at times, militant.
Long before Sept. 11, the structures of the airline industry were creaking. According to Marc-David Seidel of the University of British Columbia in Canada, "The large major carriers that existed prior to deregulation (of the U.S. domestic market) in 1978 were founded and built for a regulated environment. They never fully restructured to the new deregulated environment."
Snapping at the heels of the old major airlines have been the newer players such as Southwest and Jet Blue. Operating point to point rather than in a spoke around big city hubs, the new airlines have been able to use their staff more productively and to make profits--something which, even in the 1990s boom years for the U.S. economy, the majors have struggled to do.
The downturn in the U.S. economy since 2000 quickly took its toll on airline finances. According to a report by John Heimlich of the Air Transport Association, U.S. airlines were last in profit in the third quarter of 2000 -- a year before the Sept. 11 tragedy. Since 1999, according to Heimlich's report, airline debt has risen by 75 percent as the airlines struggle to stay afloat.
The U.S. government chose to help them to do so, allocating $15 billion in grants and loan guarantees in the wake of the Sept. 11 attack. This was to help compensate for the closure of airports immediately after the attack, for increased security costs, and for the slow return of passengers to air travel. The Air Transport Association estimates the additional security cost to the industry as a result of Sept. 11 at $4.15 billion. Of this total, $1.5 billion came from a controversial new security tax levied on tickets. The industry's insurance costs rose by 232 percent in 2002 from the previous year to $800 million. Just the need to strengthen cockpit doors as a safety measure cost $310 million.
These burdens were heavy. But given the industry's structural flaws, was it wise for the U.S. government to be so generous in its support? According to Jody Hoffer Gittell of Brandeis University in Massachusetts, the federal money was "corporate welfare rather than being given with requirements." In her view changes in relationships between airlines and their employees were essential. The Bush administration's help for the industry, though understandable given the catastrophic circumstances post-Sept. 11, may only have served to delay necessary change.
Even with the help, the airlines have struggled. The war in Iraq and high oil prices have not helped them. Passenger revenues are running this year below 1995 levels. Layoffs have been essential. According to the Air Transport Association the number of full-time employees has dropped from 623,000 in August 2001 to 521,000 in May 2003. Negotiations between airline management and staff have produced some concessions on the part of the unions.
But the staff of some airlines claim management exploited Sept. 11. According to a forthcoming paper by Hoffer Gittell, "airlines attempted to use clauses in their labor contracts about national emergencies or extraordinary circumstances to avoid making severance payments, including both American Airlines and Northwest Airlines."
For Hoffer Gittell poor relationships between management and unions helps to explain why the airlines are in crisis. She is critical of airlines' readiness to cut jobs in a downturn and of their accounting. Airlines followed Wall Street's advice in indebting themselves and maintaining low cash reserves, she argues. But this has left them with debt problems and an inability to weather a crisis. Only Southwest took a markedly different approach, keeping its debt low and cash reserves high. It has consequently been able to avoid slashing jobs. But of course it is helped too by its size and structure. It is a young competitor, not one of the old majors.
Despite the emergency measures taken by most airlines the sector as a whole "remains mired in its worst crisis ever," according to Reno Bianchi of Citigroup's corporate research team. The bonds of all the major airlines with the exception of Southwest have dropped to junk status. US Airways has passed though bankruptcy proceedings; United has entered them. According to Bianchi, no quick solution is in sight. The airlines "are far from being in a position to pare down the incremental debt incurred over the past two years...massively under-funded pension plans most likely will absorb a significant portion of any eventual excess cash flow." American Airlines and United are his "greatest credit concerns."
What is the route ahead?
Bankruptcies are going to clear some of the excess capacity among the majors. At least one of the big U.S. names is going to disappear. More job losses seem inevitable. Yet this restructuring will be partial and interim.
To improve its service and its competitiveness, cutting both its costs and ticket prices, airlines need to become global players. Seidel points out that "carriers such as Qantas fly from Los Angeles to New York, but are not allowed to pick up new passengers in Los Angeles. If they were allowed to compete, we should see an improvement of service from the U.S. majors."
Crucial, too, is opening up of the lucrative trans-Atlantic routes. Early in June, European Union member states gave the European Commission in Brussels authority to negotiate aviation agreements on their behalf. Previously the United States had negotiated separately with individual European countries. Now there is a chance of more rapid trans-Atlantic regulatory change: the so-called Open Skies.
"Code-sharing" between airlines and alliances such as Sky Team are intimations of the future trans-national mergers that might enable efficiencies of operation and scale in the industry. But many of the U.S. majors are less than keen to see that change, wanting to protect the huge U.S. market from European carriers. And the politicians are moving slowly.
At least a decade on from the Sept. 11 tragedy that threw the industry into crisis, the airlines may still be restructuring painfully. Of that slow-burning crisis, consumers are the victims.
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