Airlines fear gathering storm
US carriers still reeling from the events of 11 September could be fatally wounded by war in Iraq
NEW YORK (Bloomberg) - The latest opinion polls to hit the streets in America last week showed that 57 per cent of the population support sending US troops to Iraq.
The day after that figure came out, the market value of American Airlines, the world's largest carrier, fell below the psychologically significant market value of $1 billion, and airline stocks in general were reported to have reached their lowest levels for a quarter of a century.
Of course, the two issues are related, even if they do not go all the way to explaining the depth of the crisis in an industry infamous for poor labour relations and complacency among the big players.
Staff on the Wall Street Journal finally moved back into their repaired offices overlooking Ground Zero earlier this month. Downtown traffic jams are bad, suggesting things are getting back to normal in New York. But nothing could be urther from the truth.
Dire warnings came last week from Gordon Bethune, chief executive of Continental Airlines, the carrier ranked five in the US by size but number one for blunt opinions.
In an interview, Bethune said that United Airlines - the world's largest carrier until American bought the remnants of TWA last year - would go under 'war or no war. In the past he has described other airlines as dinosaurs for failing to cut costs and last week he said profit margins in the industry really suck.
He told The Observer that if the US attacked Iraq it could even precipitate the emergency nationalisation of the airline industry. If there is a war, it's all over for our business, he said.
Bethune was speaking from his Hilton suite overlooking Continental's hub at Newark Airport. This has recently been efurbished and expanded at a cost of $3.8bn and renamed Nwark Liberty International Airport in a desperate attempt to promote the fact that it is actually nearer the Statue of Liberty than either of its better-known counterparts - John F. Kennedy and LaGuardia - and has a quicker link to mid-town Manhattan.
But the acres of glass roof and dozens of new x-ray machines will be of no use if the passengers stop showing up.
Last week even New York's famous ex-mayor Rudy Giuliani rolled up at a Continental Airlines bash to beat the drum for business, pointing out that the Big Apple has the lowest rate of crime per capita of any US city with a population exceeding 1 million.
Giuliani said people should be more afraid of drunk drivers than terrorists hijacking planes and turning them into bombs.
But despite the talk, and the obvious threat to business from a war in Iraq, neither Giuliani nor Bethune could ring themselves to oppose a war.
The ex-mayor said events could take a turn for the worse if America waited. Bethune is a personal friend of George Bush Senior, who lives in Houston, Continental's home base. What is good for my airline may not be good for the country, he said.
Jet fuel prices on the spot market have jumped by 30 per cent in the last month and the airline industry knows that the 90,000 jobs it has shed in the last year are not the end. Industry-wide losses approached $10bn last year and are forecast to top $5bn this year.
Bethune said: Continental has around $1.4bn in cash, over $300m in shares in our regional airline spin-off and yet the market says my airline is only worth $440m because the outlook is so shaky.
Continental's routes from London Gatwick to Newark and Houston are among its most profitable. But things were so quiet on board last week that, midway across the Atlantic, many of the flight attendants were able to take a break together and sat in one of the galleys on upturned metal catering boxes, gossiping.
One said: We are glad Gordon is our boss and we want him to stay in charge because his ego is so massive he will not let this airline go down. He thinks he's Jesus Christ.
Continental has gone bankrupt twice before, revived, almost went under a third time, then rebuilt with aggressive targets for punctuality and customer satisfaction, accompanied by staff bonuses for reaching them.
Bethune's aim now is to lose less than the others so that we go on longest. Continental and low-cost arrier Southwest were the only two major US airlines to make a profit last year. This year Continental will probably make round a $600m loss.
British Airways' former partner, US Airways, has already filed for Chapter 11 bankruptcy protection and the pugnacious Bethune is dying for United to go the same way - either so he can buy it or so he can watch the major chunk of the surplus capacity now dogging the industry taken out overnight.
United, naturally, does not agree and Wall Street analysts believe it can probably survive if the unions - who, according to one observer have absolute leverage - accept large pay cuts.
United re-formed as an employee-owned company eight years ago. Sources inside and outside the company say that this has led to over-generous pay rises and a flabby cost structure that was always going to be unsustainable but has now taken the company to the brink.
A senior United captain earns $300,000 a year, compared with $200,000 at Continental. Earlier this year United's pilot union was asking for a 37 per cent pay rise. As things stand they are now negotiating pay cuts, but will not agree to the 20 per cent demanded by management. United needs to cut $2.5bn in costs and win a $1.8bn government loan guarantee to avoid collapse.
Bethune said: Will it go in an orderly manner, like US Airways, or remain complacent like Swissair right up to the moment the guy won't put any kerosene in your jet unless you pay him in cash?
While airline negotiations between unions and management usually rely on a lot of bluff and brinkmanship, financial analysts say the major airlines really are in trouble this time.
One Wall St analyst said: The airlines have been in denial for a long time but now they are not crying wolf; the management are really scared and the unions just don't seem to get it.
He said even forecasters were having trouble predicting the future for the industry in the current climate. Everyone is clueless, it's just so ugly out there.
Bethune is adamant that employee-ownership is one thing that has led United towards ruin: The inmates have taken over the asylum and broken into the pharmacy, he said.
But he believes the entire industry had failed to address its problems before last September's terrorist attacks and would now pay the price.
In the latest Bloomberg report on the industry, Leo Mullin, chief executive of Delta Air Lines, appeared to agree. The pain is ahead of us, not behind us, he said. Mullin said he felt as though he was in a life-raft, bailing out at one end only to see water pouring in at the other. Delta's share price has sunk 50 per cent in the last six months.
Meanwhile low-cost airlines such as Southwest, and newcomers such as New York-based Jetblue, are forecast to double their business in the next two or three years, stealing much of it from the major carriers. Southwest is the only large airline in the US that is still profitable. It has hired an extra 5,600 workers in the last year and added capacity in a success story echoed by its protégés across the Atlantic, Ryanair and EasyJet.
Now Bethune's plan is to turn Continental into an airline that not only competes with Southwest at the very lowest end of the fare structure and in the international business class market at the other end, but reinvents how airline seats are priced.
He wants to employ computer technology so that in future, only a safe, on-time flight is included in the basic price. Such perks as a meal, frequent flyer points, checking in a second bag, or sitting in a seat with extra legroom next to the emergency exit would all command a price and be added like pizza toppings to the basic fare.
We cannot reduce the industry to the lowest possible point and all become Southwest, but we have to respond to the market, he said. He is contemplating removing galleys in economy class and giving passengers who have paid for a meal a bag of food before they board.
The Wall Street analyst said he risked alienating customers but agreed that radical action was needed to reshape airlines' habits.
Whether the US goes to war with Iraq or not, the industry's problems have been there for years and are not going to go away.
Even as the clouds of conflict loom Bethune said the industry did not deserve sympathy. We have to find solutions, by design or by default. But we have brought most of it on ourselves.
War footing
·US airlines have lost $9.7 billion since 11 September 2001.
· The industry has cut 90,000 jobs and capacity by 20 per cent.
· The US government has bailed out industry with $5bn cash and $10bn loan guarantees so far.
· Traffic fell 31 per cent in September 2001 and is still down 10 per cent.
· Actual fares are down 12 per cent to their lowest level since August 1992.
· Airlines have paid a total of $1.4bn extra for war risk insurance coverage.
· Major carriers expect to spend $250m on bullet-proof cockpit doors for 6,000 planes in the US fleet.
· Low-cost airline Southwest's $11bn market value exceeds all rivals combined and it has the only investment-grade credit rating.
Source: Bloomberg
US carriers still reeling from the events of 11 September could be fatally wounded by war in Iraq
NEW YORK (Bloomberg) - The latest opinion polls to hit the streets in America last week showed that 57 per cent of the population support sending US troops to Iraq.
The day after that figure came out, the market value of American Airlines, the world's largest carrier, fell below the psychologically significant market value of $1 billion, and airline stocks in general were reported to have reached their lowest levels for a quarter of a century.
Of course, the two issues are related, even if they do not go all the way to explaining the depth of the crisis in an industry infamous for poor labour relations and complacency among the big players.
Staff on the Wall Street Journal finally moved back into their repaired offices overlooking Ground Zero earlier this month. Downtown traffic jams are bad, suggesting things are getting back to normal in New York. But nothing could be urther from the truth.
Dire warnings came last week from Gordon Bethune, chief executive of Continental Airlines, the carrier ranked five in the US by size but number one for blunt opinions.
In an interview, Bethune said that United Airlines - the world's largest carrier until American bought the remnants of TWA last year - would go under 'war or no war. In the past he has described other airlines as dinosaurs for failing to cut costs and last week he said profit margins in the industry really suck.
He told The Observer that if the US attacked Iraq it could even precipitate the emergency nationalisation of the airline industry. If there is a war, it's all over for our business, he said.
Bethune was speaking from his Hilton suite overlooking Continental's hub at Newark Airport. This has recently been efurbished and expanded at a cost of $3.8bn and renamed Nwark Liberty International Airport in a desperate attempt to promote the fact that it is actually nearer the Statue of Liberty than either of its better-known counterparts - John F. Kennedy and LaGuardia - and has a quicker link to mid-town Manhattan.
But the acres of glass roof and dozens of new x-ray machines will be of no use if the passengers stop showing up.
Last week even New York's famous ex-mayor Rudy Giuliani rolled up at a Continental Airlines bash to beat the drum for business, pointing out that the Big Apple has the lowest rate of crime per capita of any US city with a population exceeding 1 million.
Giuliani said people should be more afraid of drunk drivers than terrorists hijacking planes and turning them into bombs.
But despite the talk, and the obvious threat to business from a war in Iraq, neither Giuliani nor Bethune could ring themselves to oppose a war.
The ex-mayor said events could take a turn for the worse if America waited. Bethune is a personal friend of George Bush Senior, who lives in Houston, Continental's home base. What is good for my airline may not be good for the country, he said.
Jet fuel prices on the spot market have jumped by 30 per cent in the last month and the airline industry knows that the 90,000 jobs it has shed in the last year are not the end. Industry-wide losses approached $10bn last year and are forecast to top $5bn this year.
Bethune said: Continental has around $1.4bn in cash, over $300m in shares in our regional airline spin-off and yet the market says my airline is only worth $440m because the outlook is so shaky.
Continental's routes from London Gatwick to Newark and Houston are among its most profitable. But things were so quiet on board last week that, midway across the Atlantic, many of the flight attendants were able to take a break together and sat in one of the galleys on upturned metal catering boxes, gossiping.
One said: We are glad Gordon is our boss and we want him to stay in charge because his ego is so massive he will not let this airline go down. He thinks he's Jesus Christ.
Continental has gone bankrupt twice before, revived, almost went under a third time, then rebuilt with aggressive targets for punctuality and customer satisfaction, accompanied by staff bonuses for reaching them.
Bethune's aim now is to lose less than the others so that we go on longest. Continental and low-cost arrier Southwest were the only two major US airlines to make a profit last year. This year Continental will probably make round a $600m loss.
British Airways' former partner, US Airways, has already filed for Chapter 11 bankruptcy protection and the pugnacious Bethune is dying for United to go the same way - either so he can buy it or so he can watch the major chunk of the surplus capacity now dogging the industry taken out overnight.
United, naturally, does not agree and Wall Street analysts believe it can probably survive if the unions - who, according to one observer have absolute leverage - accept large pay cuts.
United re-formed as an employee-owned company eight years ago. Sources inside and outside the company say that this has led to over-generous pay rises and a flabby cost structure that was always going to be unsustainable but has now taken the company to the brink.
A senior United captain earns $300,000 a year, compared with $200,000 at Continental. Earlier this year United's pilot union was asking for a 37 per cent pay rise. As things stand they are now negotiating pay cuts, but will not agree to the 20 per cent demanded by management. United needs to cut $2.5bn in costs and win a $1.8bn government loan guarantee to avoid collapse.
Bethune said: Will it go in an orderly manner, like US Airways, or remain complacent like Swissair right up to the moment the guy won't put any kerosene in your jet unless you pay him in cash?
While airline negotiations between unions and management usually rely on a lot of bluff and brinkmanship, financial analysts say the major airlines really are in trouble this time.
One Wall St analyst said: The airlines have been in denial for a long time but now they are not crying wolf; the management are really scared and the unions just don't seem to get it.
He said even forecasters were having trouble predicting the future for the industry in the current climate. Everyone is clueless, it's just so ugly out there.
Bethune is adamant that employee-ownership is one thing that has led United towards ruin: The inmates have taken over the asylum and broken into the pharmacy, he said.
But he believes the entire industry had failed to address its problems before last September's terrorist attacks and would now pay the price.
In the latest Bloomberg report on the industry, Leo Mullin, chief executive of Delta Air Lines, appeared to agree. The pain is ahead of us, not behind us, he said. Mullin said he felt as though he was in a life-raft, bailing out at one end only to see water pouring in at the other. Delta's share price has sunk 50 per cent in the last six months.
Meanwhile low-cost airlines such as Southwest, and newcomers such as New York-based Jetblue, are forecast to double their business in the next two or three years, stealing much of it from the major carriers. Southwest is the only large airline in the US that is still profitable. It has hired an extra 5,600 workers in the last year and added capacity in a success story echoed by its protégés across the Atlantic, Ryanair and EasyJet.
Now Bethune's plan is to turn Continental into an airline that not only competes with Southwest at the very lowest end of the fare structure and in the international business class market at the other end, but reinvents how airline seats are priced.
He wants to employ computer technology so that in future, only a safe, on-time flight is included in the basic price. Such perks as a meal, frequent flyer points, checking in a second bag, or sitting in a seat with extra legroom next to the emergency exit would all command a price and be added like pizza toppings to the basic fare.
We cannot reduce the industry to the lowest possible point and all become Southwest, but we have to respond to the market, he said. He is contemplating removing galleys in economy class and giving passengers who have paid for a meal a bag of food before they board.
The Wall Street analyst said he risked alienating customers but agreed that radical action was needed to reshape airlines' habits.
Whether the US goes to war with Iraq or not, the industry's problems have been there for years and are not going to go away.
Even as the clouds of conflict loom Bethune said the industry did not deserve sympathy. We have to find solutions, by design or by default. But we have brought most of it on ourselves.
War footing
·US airlines have lost $9.7 billion since 11 September 2001.
· The industry has cut 90,000 jobs and capacity by 20 per cent.
· The US government has bailed out industry with $5bn cash and $10bn loan guarantees so far.
· Traffic fell 31 per cent in September 2001 and is still down 10 per cent.
· Actual fares are down 12 per cent to their lowest level since August 1992.
· Airlines have paid a total of $1.4bn extra for war risk insurance coverage.
· Major carriers expect to spend $250m on bullet-proof cockpit doors for 6,000 planes in the US fleet.
· Low-cost airline Southwest's $11bn market value exceeds all rivals combined and it has the only investment-grade credit rating.
Source: Bloomberg
