Recovery not on horizon for airlines



Recovery not on horizon for airlines
CHICAGO (Chicago Tribune) - Without warning, far off on the horizon, hundreds of blue and white teepees seem to sprout from the sand, shimmering in the noonday heat.
But come within a mile, and it becomes clear that the teepees are a mirage. They are the vertical tails of billions of dollars worth of passenger jets owned by the nation's airlines.
Since last year's Sept. 11 terrorist attacks, the desert waste dump at the former George Air Force Base in Victorville, Calif., has been transformed into the world's most expensive storage closet.
This is where foreign and domestic airlines are beaching their idled jets to await their next job--or the crushing machine. Here they receive daily care by several hundred aircraft mechanics checking on their every need.
And here they likely will remain for at least another year as the airline industry convulses, shedding jobs, paring flights and parking aircraft in the wake of the attacks.
The pain cuts across all lines: Since last September, more than 800 giant passenger jets have been grounded at various sites as airlines worldwide have sought to find a balance between flights offered versus demand. About 80,000 airline employees have lost their jobs. Chief executives of three carriers have been replaced, while millions of former passengers have voted with their feet and chosen to drive or take a train.
Although the industry's woes cannot be blamed completely on the terrorist attacks, the timing could not have been worse. The sluggish economy and fierce price competition had cut deeply into the carriers' profitability. The attacks only exacerbated the squeeze. Last year, U.S. airlines lost $7.2 billion, and they are on track to lose $5.2 billion more this year.
No relief in sight
Experts say the malaise could stretch for several years, unlike the downturn that followed the Persian Gulf war in 1991-92. Then, travel began to rebound within six months of the war's end, and by 1995 the airlines had returned to profitability.
Tom Cauthen, an associate partner in the travel and transportation consulting practice at Accenture, said most airlines, which were in the doldrums before the Sept. 11 attacks, will be in a cash-flow scramble for the next nine to 12 months.
Soon after the attacks, Congress stepped in, offering $5 billion in direct aid to the industry. But that cash infusion was not nearly enough. America West Airlines requested, and received, a federal loan guarantee granted under the same bailout program that United Airlines has said it plans to tap. So far, America West is the only carrier to have received approval for the loan guarantee, although about a dozen have applied.
For America West, the guarantee came at a price. Under the deal announced in January, the federal government agreed to repay up to $380 million if America West defaults on its loan. In return, America West had to give the government the option over 10 years to buy one-third of its publicly traded stock at a fixed price--18.7 million shares for $3 each.
Both government programs were launched with the intention of helping the airlines ride out the slump in air travel that deepened after the attacks. About 12 percent fewer flights are being operated now than a year ago, when the nation's 10 largest carriers operated more than 17,600 flights daily.
More cuts are coming. United, American Airlines, Northwest Airlines, Delta Air Lines and Continental Airlines recently announced that they would trim current schedules by at least 9 percent over the next few months, a move that will result in thousands more airline employees being thrown out of work.
To some observers, most of the problems that the airlines are experiencing stem from one simple fact: overcapacity.
There are too many airlines, said airline consultant Tom Hansson, vice president of Booz Allen Hamilton in Los Angeles.
Adds Joseph Schwieterman, an economist and director of the Chaddick Institute for Metropolitan Studies at DePaul University: The airlines are fighting over smaller and smaller pieces of the pie.
Four airlines have filed for bankruptcy. A fifth, United, has threatened to do so if it can't wrest concessions from employees and vendors, conditions it says must be met if it is to have any chance of securing a government-backed loan.
Discounters as models
How airlines deal with these issues is key to their survival. Many observers say they believe that the industry will restructure into a model pioneered by Southwest Airlines. The discount carrier has gained a loyal following by offering low fares made possible by operating fewer and less complex hubs.
Discount airlines are moving up the food chain, and majors are having to take a hard look at how to address the problem, Cauthen said.
Already, major carriers are searching for ways they can change their business and hold on to passengers.
American, for example, is reworking its flight schedule, turning around flights faster to reduce costly ground time.
At a recent speech to a business group in Calgary, Alberta, American Chief Executive Don Carty said the carrier may have lost sight of the need to constantly change during the economic boom of the late 1990s, when its revenues and costs soared.
Our challenge now is to redefine our business model to not only deal with our old rivals, but to prepare our company for long-term success in an environment where newer, lower-cost competition represents a much bigger slice of the marketplace, he said.
United is preparing a new business plan as a component of its application for a $1.8 billion federally guaranteed loan.
Houston-based Continental said it plans to begin charging passengers flying on the cheapest tickets for some things that formerly were included with the price of an economy-fare ticket, such as a full can of soda or water.
In addition, the airline is considering charging a fee if passengers check more than one bag. That's something full-service airlines haven't done since deregulation in 1978.
Still, discounters don't plan to sit idly by while the majors woo potential passengers.
Ft. Lauderdale-based Spirit Airlines says it plans to begin offering economy customers the chance to buy a wider, more comfortable seat for $40 more.
Southwest, the nation's largest discount carrier, this fall will launch its first transcontinental flights in October, a service that had been almost the exclusive domain of airlines such as United and American. It's part of its continuing strategy of providing the options that will lure business travelers away from the majors.
But by the time the industry's restructuring ends, customers and employees may feel the most pain. Passengers will find themselves waiting longer for flights than they have in the past, as carriers change the routes between flights. Pilots and other airline employees will be receiving much smaller paychecks, as airlines seek to renegotiate wage contracts.
Gate agents and ground workers, who handled four or five flights per day in the past, could find themselves handling one flight every hour as well.
Simplifying fleet and hub operations to spread out departures at airline hubs would reduce facility and manpower costs, Schwieterman said.
Changes for frequent fliers
And the frequent-flier programs that now allow a free domestic flight for 25,000 miles and an upgrade for 10,000 miles are certain to be changed.
At the very least, experts say they expect airlines to boost the number of miles required to redeem a free trip to 30,000 miles or perhaps 35,000 miles, the level that was required when the program was introduced by American in the 1980s.
It has turned into a trading-stamp program, said Terry Trippler, an airline consultant in Minneapolis.
Nowadays, virtually no one buys a first-class ticket on domestic flights. Those seats are taken by travelers who have upgraded from coach with their frequent-flier miles. Adding more restrictions to frequent-flier redemptions could lower costs by several percentage points for airlines such as American and United, each of which are carrying millions of miles on their books that customers have earned, analysts say.
Will the changes be enough to restore the industry's health?
For the workers at Victorville, any improvement in the carriers' fortunes would be welcome change. A number of employees who work at the base and a neighboring site are the same mechanics pared by the airlines.
Most people don't realize the attachment the crews have to these planes, said Vern Alexander, director of commercial business development for Avtel Services Inc., which operates one of the country's major FAA-approved maintenance, repair and overhaul stations at the Mojave Airport, about 60 miles from Victorville.
Alexander said that on more than one occasion, pilots have been reduced to tears as they climbed down from jets flown in for what they fear will be the plane's last trip before being reduced to aluminum fodder for the beverage industry.
We'd much rather be repairing planes, he said. But since 9/11, virtually all we are doing is tending to the planes that are stored.
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