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Will US Airline Industry Recover? - 2003-04-02

In the past 18 months, the U.S. airline industry has suffered a series of crippling blows: the loss of free-spending, high-tech business fliers during an economic downturn; the September 11 terrorist attacks; the war in Iraq; and an epidemic in Asia.

Some analysts say the airlines are fighting for their lives. Others argue it's just another round in a continuous cycle.

Economic woes, terrorism, war and disease have plunged the world's aviation industry into crisis. Many of the airlines in the United States are teetering on the edge of bankruptcy, as they face a 30 percent drop in passenger bookings, rising fuel prices and drawn-out labor talks.

American Airlines, the world's largest carrier, narrowly avoided bankruptcy at the end of March by securing more than $1 billion in union concessions. But the company says it still needs to cut operating costs by $4 billion to keep flying.

United Airlines, the nation's second largest carrier, has been struggling since it signed a costly contract with its pilots' union nearly three years ago. It was under federal bankruptcy protection and is still trying to cut costs. U.S. Airways has just emerged from bankruptcy, but there are doubts concerning its long-term survival.

Steve Lott, of Aviation Daily, an industry publication, says the airlines can't take much more bad news and stay in business.

"Many airlines would have hoped at this point more than 18 months after the September 11 attacks that the economy would have rebounded and people would have been traveling again," he said. "But the economy never rebounded, business travelers never came back, or at least they never came back and were willing to pay high fares for their flights. To use another analogy, the airlines were already drowning and the war with Iraq pushed them further under water."

Mr. Lott says that even Delta and Northwest, which have strong balance sheets, have been forced to cut back flights due to the mysterious respiratory epidemic in Asia. United and Northwest are the two U.S. airlines with the most service to the Asia-Pacific region.

"If the war wasn't enough, here comes another problem down the road," he said. "Someone asked me recently when the locusts [the worst is] are coming. It's really terrible for the airlines to keep getting punched on both sides of their face. It's one thing after another."

John Kasarda, a professor at the University of North Carolina who's been following the aviation industry for 15 years, says many of the industry's wounds are self-inflicted. He says that wages in the 1990s skyrocketed to well beyond that of comparable professions and those costs were passed on to the traveler.

"The airline industry is an unforgiving business," Professor Kasarda said. "It seems to be the exception where the major airlines make money versus longer periods when they tend to lose money. It must be recalled that in the last 40 years or so there have been more than 100 airlines that have moved into bankruptcy and have disappeared. This is not a new phenomenon."

Professor Kasarda says the airline industry is extremely vulnerable to the ups and downs of economic cycles. And the sharp decline in higher-priced business travel made an already tough situation worse.

Professor Kasarda says the true shakeout in the industry is yet to come. He believes that airlines will reduce both the number of routes and flights some as much as 20 percent and that wages will come down to be more in line with other industries.

"I fully expect the industry to recover very, very strongly in the next two to three years, though it may not be till 2005," he said. "Recovery will occur in a manner that there will be more people flying and more cargo being carried than ever before.

"We're going to see fewer airlines, fewer flights on individual airlines and we're going to see the size of the aircraft shrink," he continued. "You'll see more and more regional jets the 50 to 70 passenger jets these tend to be a little more cramped, but more efficient to operate. The passenger will see fewer services and more cramped airlines. That's the process of restructuring."

Professor Kasarda says, however, that if his predictions are correct, many of the patterns that drove the airline industry during its growth period in the late 1990s will inevitably reappear and so the cycle begins once again.