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US Airlines Face Slow Recovery - 2001-10-07

Washington's Reagan National Airport opened for business Thursday, October 4 for the first time since the terrorist attacks of September 11. However, it will be a while before U.S. airlines are back to normal.

The airline industry was having problems before September 11 because it is a "cyclical industry" - it rises and falls as the national economy rises and falls.

Slower U.S. economic growth had already begun to slow airline travel.

In addition, Northeastern University economics professor Steven Morrison says airlines have very small profit margins. "The profit per dollar of revenue is maybe five cents in a good year," he said. "So it doesn't take much of a shortfall in demand to turn a profitable year into a loss."

Then came September 11 and the temporary halt to all air travel. Mr. Morrison says because airlines have high fixed costs - for labor, for rent, for the cost of their planes - any disruption can mean staggering losses.

"We had the system shut down for five days no flying at all," he said. "And now airlines are flying 80 percent of their capacity. That is a 20 percent reduction and the planes are half full, so a little math says that's almost a 50 percent reduction in the amount of flying that's going on."

In addition to cutting airline revenues, Lehigh University professor Richard Barsness says, the terrorist attack created additional airline expenses.

"The security measures really cost them in two ways," he said "One, just the extra staffing, but it also hurts the carriers on the cost side in that the airline operations are less efficient, and that reduces the productivity of the airlines."

As a result, Mr. Barsness says, the crisis has pushed many U.S. airlines to the brink of bankruptcy, causing the U.S. Congress to rush in to the rescue with billions of dollars in assistance.

"In the year 2000 approximately 1.8 million passengers flew every day in the United States, so if you disrupt that in a substantial way, it shows up not just in the airlines but in aircraft manufacturers like Boeing and the hotel industry and the cruise industry," he said.

When the airlines are in serious trouble, Richard Barsness says, the U.S. economy is in serious trouble. That's why keeping the airlines solvent is a national priority.