Could Iraq war hurt US Airways?
Principal backer says he's committed to airline's survival
TED REED
Staff Writer
The last time the United States waged war with Iraq, a major airline shut down the next day.
In January 1991, Eastern Airlines was operating under bankruptcy court protection, just as US Airways and United Airlines are today. The threat of a Mideast war had pushed oil prices to $31 a barrel. Faced with rising costs and plunging ridership, the carrier shut down Jan. 18, 1991.
If America again goes to war with Iraq, could more airlines face a similar fate?
Experts are divided, not just about the future of US Airways, Charlotte's dominant carrier, but also about the fates of United and others.
Analyst Ray Neidl of Blaylock & Partners LP in New York said US Airways is well-positioned to survive a war because it has dramatically lowered its cost structure during five months in bankruptcy court.
In fact, Neidl said, "I think everybody will survive (the war) because I don't think it will be a long war, if it happens."
Lehman Brothers airline analyst Gary Chase said the airline industry could even benefit from a war. In 1991, he noted, fuel prices spiked preceding Operation Desert Storm but fell when it ended. And removing uncertainty about a war could trigger economic expansion, he said.
Others see a dire future for the industry.
On Tuesday, the chief of Northwest Airlines predicted that at least one major carrier will disappear. "I believe there will be fewer major airlines three years from now," Northwest Chief Executive Richard Anderson told Wall Street analysts at a transportation conference.
Anderson didn't specify which carrier he thought would fail. But he said: "When you think about how much capacity is in the marketplace, and how many hubs there are, and how many airplanes there are flying, and the lack of profitability in the industry, it seems only logical that, on an economic basis, there need to be fewer."
Arlington, Va.-based aviation consultant Mort Beyer said US Airways and United "are in a fragile position (where) almost anything that happens is going to hurt them."
While analysts are divided, US Airways' principal financial backer says he's committed to the survival of the airline, which employs about 7,000 in Charlotte.
"We don't run from fights," said David Bronner, chief executive officer of Retirement Systems of Alabama, which is US Airways' principal partner in bankruptcy court and principal owner if it emerges.
"We knew six months ago that a war would be a high probability," Bronner said in an interview. "We knew this would be bumpy and rough. We knew this would take a total commitment from the family of US Airways ... to come up with a plan.
"Now we are at the closing end of it, and we aren't going to abandon anything like that. If there is anyone who deserves to survive, these guys do."
US Airways workers have given up $1 billion annually in concessions. They also committed to take additional 5 percent pay cuts in the event of a war or terrorist attack.
No other airline has such an arrangement.
Alabama's pension fund will provide $200 million more during bankruptcy and $240 million when the case concludes.
United's bankruptcy filing is more problematic, experts say. So far, the airline has met resistance from workers, lessors and vendors in getting concessions and implementing a new business plan.
Bronner speculated that United has a 50-50 chance of surviving a war. He said that if United were to sell assets, he would consider backing the purchase of some "if it would be beneficial to US Airways." Neidl suggested that United's Washington Dulles hub and some gates at Chicago O'Hare might have value for US Airways.
Consultant Beyer said the airline industry is worse off than it was in January 1991, when war broke out and Eastern folded.
The industry had lost a then-record $4 billion the previous year. Its main problem was too many airplane seats, which led weaker airlines such as Eastern to regularly offer deep discounts. Other airlines were forced to match the fares.
Eastern sought bankruptcy court protection in 1989 to keep operating after a bitter strike. Continental Airlines, a sister airline, filed for bankruptcy court protection in 1990, and Pan American World Airways filed in January 1991. The weak airlines accounted for the bulk of the industry losses.
Today there are fewer hub carriers. Travel has already fallen steeply because of an economic slowdown and the Sept. 11 terrorist attacks. The threat of war means fuel prices have risen to about $34 a barrel. And losses have set records: $7.7 billion in 2001, and $7.4 billion in 2002.
"We're starting out so far behind the eight-ball," Beyer said. "There are more unfavorable potentials out there than there were in 1991. Most airlines weren't in real difficulty last time."
To be sure, today's bankruptcy filings differ from Eastern's, which resulted from a three-union strike against then-owner Frank Lorenzo, whose Texas Air Corp. had purchased the airline.
Lorenzo struggled for months to operate with strikebreakers, until the court took the airline from him and turned it over to trustee Martin Shugrue. By then Eastern was too troubled for Shugrue to save it.
In contrast, US Airways has systematically cut costs, pressuring employees to join in the effort, and expects to emerge from bankruptcy court protection March 31 with lower operating cost than any of the five larger hub carriers.
The 5 percent employee pay cuts, which could last for up to 18 months, provide an additional cushion. The reduction means the airline possibly "would be able to buffer against any shocks from war or acts of terrorism," Chief Executive David Siegel told transportation analysts Tuesday.
He said the airline could impose the reduction more than once. Reductions would cease after 18 months or when the company makes its first profit. Afterward, the airline would gradually return the money.
Additionally, in the event of a war or terrorist attack, the airline could further reduce the size of its fleet, Siegel said. He said "force majeure" laws would provide the airline with the right to reduce below the minimum of 279 jets mandated in its employee contracts.
A war would also mean US Airways would participate in the Civil Reserve Air Fleet program, which entitles the military to lease planes from commercial carriers to transport troops and goods.
The program, instituted by the Eisenhower administration in 1959, was first used in 1990. The Air Force has contracted to use US Airways' 10 wide-body Boeing 767 jets, and has practiced reconfiguring the cabins so that they can serve as medical transports