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Airlines Face Long-Term Retrenchment

News analysis: The industry is slashing costs to survive, something it badly needed to do even before the hijackings.


Like most everything in America, the airline industry won't be the same for a long time--if ever--after the terrorist attacks that used four U.S. jetliners as deadly missiles.

Within days, the airline business was pushed to the brink of financial ruin. To survive, the industry in a single stroke is erasing one-fifth of its operations, which overall move 650 million people a year and generate $106 billion in passenger revenues.

But the dramatic turn of events goes far beyond money. Consumers went from complaining about surging business fares, flight delays and congestion--and demanding Congress pass a "passenger bill of rights"--to simply worrying about staying alive in the air.

Now many passengers are too afraid or anxious to fly, or fret about the hassles at the ticket counter because of new security rules at the airports. So jets are taking off half empty, and the airlines are slashing their schedules to survive.

As harsh as it sounds, the terrorists unwittingly solved a big problem for the airlines by forcing them to retrench, perhaps permanently. Even before Sept. 11, the industry was in serious trouble because of the weak economy and badly needed to cut costs, some analysts said.

"This forced them to act when they would have been reluctant to otherwise," said Barbara Beyer, president of Avmark Inc., a consulting firm in Arlington, Va. "There were too many employees and too much capacity in the system."

Even so, the airlines are in disarray. They're losing more than $200 million a day as a group, and are staring at perhaps $7 billion in combined losses for the year. Their stocks are in tatters, their credit ratings are being lowered and their insurance premiums are rising. Lenders shut off their borrowing ability, and the industry threatened to seek bankruptcy protection unless it got the federal bailout that includes $5 billion of direct, immediate cash.

In the meantime, their operations are being cut 20% or more and one, Continental Airlines Inc., abandoned service to 10 cities. It's not expected to be the last to drop routes. And as they eliminate 20% of their schedules, they have to strip out at least 20% of their costs--so nearly 80,000 airline jobs have been cut and at least 30,000 more are expected to be eliminated.

'Long-Term Downward Shift'

Airline fares also are suddenly in flux. Should the airlines raise fares because they're bleeding cash? Or should they heavily discount fares to fill their planes? And with all of the other confusion, what even is the proper fare on a given route that would turn a profit?

That question, along with the airlines' long-term woes, will not disappear with the federal bailout. So it's very possible that the airline industry will stay in its shrunken form--and perhaps contract even more--over at least the next year or two.

There are "severe operating and financial burdens for United and the rest of the airline industry despite the possibility of any initiative on the part of Congress to provide some form of relief," Moody's Investors Service said last week as it lowered the credit ratings for United, a unit of UAL Corp., and other carriers.

No one knows when the public will return to the skies in numbers even close to what they were before Sept. 11, when an average plane took off 70% or more filled. The issue gets even murkier if the United States retaliates against the terrorism, adding to consumers' skittishness about flying.

The industry "is facing a long-term downward shift in passenger traffic," said Mark Oline, an analyst with credit-rating firm Fitch Inc. in Chicago.

Also, it's unknown whether the carriers ever again will have the route networks they flew before the attacks. The carriers would restore flights only if the travel demand were there. But that's likely to be years away.

Consider: When the airlines went into their last major slump a decade ago, it started with fears of flying related to the Persian Gulf War and with a drop in demand because of the U.S. economic recession. But the airlines kept losing money for four years and ultimately suffered a combined $13 billion in losses until returning to the black in 1995.

This time, the airlines' schedule cuts mean consumers probably will see less-frequent service between cities rather than a wholesale elimination of service to small and mid-size destinations. Congress is leaning on the carriers to maintain service to less-populated regions in exchange for federal support.

But there's also widespread speculation that in a year or two, there will be fewer airlines. The weakest carriers probably will have to seek merger partners--bailout or not--and U.S. antitrust regulators are expected to be less resistant to buyouts.

"I don't think they have any choice" but to let mergers go through, said Beyer of Avmark. She noted that AMR Corp., the parent of American Airlines, recently got approval to buy Trans World Airlines in large part because TWA was about to go bankrupt.

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