The terrorist attacks on America two weeks ago had an unprecedented impact on what already was a beleaguered U.S. commercial aviation system. The first ever national groundstop left carriers with a monumental logistics mess still not fully resolved, while an understandably nervous flying public continues to stay home.
Though both crises will wane in time, and businesspeople again will take to the skies to keep the nation's economy churning, severe damage to the blindsided airline industry prompted immediate pleas to the federal government (see story, page 6).
The psychological shock on Sept. 11 was just the beginning. To balance a massive and ongoing drop in traffic, many U.S. carriers circled their wagons, chopped off a full fifth of their schedules and announced massive employee cuts. Nevertheless, expected industry losses could reach $10 billion this year and spell the demise of several carriers, with or without rapid government intervention.
"The immediate financial blow from these events on the nation's airlines is devastating and will have profound economic effects on aviation and the entire travel and tourism industry for years to come," said Darryl Jenkins, director of the Aviation Institute at George Washington University. "It will not surprise me if we lose some old friends this year, names we have known for a long time."
Jenkins added that 6 percent of the nation's gross domestic product comes directly from travel and tourism. Indeed, ripple effects already have hit hotels (see story, page 1), restaurants, online travel agencies and global distribution systems. In fact, Madrid-based Amadeus, one of the world's leading GDSs, said airline bookings in the days following the attack were down 28 percent worldwide and 74 percent in North America.
Long-term effects are likely for many others businesses, including aircraft manufacturers. Boeing, for example, already announced plans to cut staff in its Commercial Airplanes unit by as many as 30,000. The company said aircraft deliveries will be down this year and reduced by roughly 20 percent next year.
"A failed U.S. airline industry is a serious threat to U.S. businesses, a serious threat to the recovery of the U.S. economy and a serious threat to other countries' economies," according to the Business Travel Coalition, an industry advocacy group that predicted as many as 500,000 layoffs in the travel and tourism sector.
Fighting for the very survival of its members, the deregulated airline industry in a tragic twist of fate appealed to the federal government for a life line. Carrier chief executives, warning of an industrywide cash-crunch epidemic and the possibility for widespread bankruptcies, met with government officials last week to craft a relief plan. Whatever form it takes, the bail-out likely will include a direct, multibillion-dollar cash injection. It also will fundamentally change the relationship between airlines and the federal government.
"If we don't act soon, I'm afraid that it will be even more difficult to resuscitate this key industry in the future," said Sen. John McCain (R-Ariz.), ranking member of the Committee on Commerce, Science and Transportation.
The latest relief proposal at press time called for $8 billion, including $5 billion in direct cash infusions. Several groups called on the federal government also to rescind fuel and ticket taxes, protect American Airlines and United Airlines from liability and provide limited antitrust immunity allowing carriers to discuss scheduling. The National Business Travel Association called on lawmakers to reach into the Airport and Airways Trust Fund, estimated to be worth well over $10 billion. Congressional leaders were hopeful federal relief could be formalized early this week.
Meanwhile, a nationwide revamp of airline and airport security already is underway. The travel process will be more frustrating and apprehensive, and airline operations will be burdened by a bevy of new requirements (see story, page 1). Fully under federal jurisdiction or not, it will be costly.
In the days following the horrific attacks, traffic dropped immediately and incomparably in all segments. Leisure travelers are expected to avoid air travel for at least the next month or two, regardless of bargain Web fares. But corporate travelers, key to airline revenues, could start returning sooner as the national economy limps toward recovery.
"Corporations will have to support preferred suppliers more than any time in the history of the relationship," said NBTA president Kevin Iwamoto. However, businesses and their travel departments, will have to consider many factors in determining how quickly and to what extent they resume corporate travel (see story, page 1).
The Gulf War a decade ago weighed heavily on both travel and the public psyche—forcing out of business American industry icons Eastern Airlines and Pan Am. The largest and longer-lasting impact was seen on international operations, regarded by most as the more likely terrorist target. But today, with terrorism an undeniable specter in the domestic system, the ramifications likely will be much more profound, at least for the balance of 2001.
Anticipating a prolonged period of severely reduced overall demand, most major carriers generally knocked capacity down 20 percent. Industry-leading American and number-two United, both victims of the attacks in losing two aircraft and their crews, were among those taking emergency measures. US Airways, which is the largest operator at still-idle Washington Reagan National, reduced its capacity 23 percent.
Continental Airlines will reduce flying from its hubs by 18 percent, including 20 percent at Newark. Overall, it will discontinue service completely to 10 cities by Oct. 1. Said chairman and CEO Gordon Bethune, "Although these schedule reductions will hurt communities and those who have come to rely on us, we have no choice."
Airlines employee reductions—generally between 15 percent and 20 percent—mirrored capacity cuts. United and American announced the largest cuts, 20,000 each. Much of the traffic fall-off could come in short-haul markets. Though clearly necessary, tighter security likely will slow business passengers at the airport and make day trips undesirable, if not impossible.
Meanwhile, the indefinite shutdown of Reagan Washington National Airport forced Delta to shift shuttle operations to Dulles International Airport. US Airways, which operates the competing Northeast shuttle, already operated flights from Dulles. Officials hope to reopen National, deemed vital by many, but at press time there was no timetable amid concerns about the proximity of flight paths to government installations.
Many travelers already have flocked to car rental companies, trains and other ground transportation alternatives in markets where shorter flights can be avoided. That, according to BTC "effectively ruins the economics of short-haul flights."
Heightened security also means slower turnaround times for aircraft, a particularly unfortunate development for the likes of Southwest Airlines, a champion of operational efficiency. "If we add 15 minutes to each turn, you lose two turns a day," Aviation Institute's Jenkins said. "That means you lose 20 percent of asset utilization, which will make unit costs go up drastically."
Looking ahead, it is impossible to accurately predict fare levels for both the next few months and throughout 2002. Jenkins, and many others, expect deeply discounted fare sales in the short term aimed at stimulating demand. Onetravel.com airline expert Terry Trippler, however, does not foresee much movement on fares. "It would be pretty tacky for carriers to get a bail out from Congress and then have a fare sale war," he said. "What we may see more than fare cutting is the lifting of restrictions, such as Saturday night stays."
John Heilner, vice president of Management Alternatives in Princeton, N.J., also doesn't see any elasticity in lowering business or leisure fares. "There is the qualitative factor of fear and security, and you won't get people to fly who are afraid," he said.
Exacerbating revenue pressure, but urgently aiding affected passengers, carriers temporarily relaxed restrictions, waived cancellation and change fees and provided more flexible refund options. In the immediate term, individual carrier losses were estimated in the tens of millions each day, and hundreds of millions industrywide.
On the first day of trading after the attacks, major airline stocks plunged between 20 percent and 65 percent, eliminating $10 billion in market capitalization and contributing significantly to the largest one-day point drop on Wall Street in history. Though stocks have begun a slight rebound, record full-year losses are expected for a thin-margin industry faced with unparalleled pressure. UBS Warburg analyst Sam Buttrick said the demand impact will continue through early 2002, and that the industry will take a $3 billion hit. "We're now forecasting a 50+ percent revenue decline for the full month of September and a 22 percent decline in fourth quarter revenue," he said. That, of course, compounds pre-existing economic challenges that alone would have caused billions in industry losses this year.
Raleigh/Durham-based Midway Airlines, teetering on the edge of a shutdown before the attacks, was one of the first carriers to call it quits. But other carriers, including some of the nation's largest, warned of possible bankruptcies. Should such fears be realized, one possible outcome is industry consolidation. Indeed, widespread speculation has those carriers that withstand the pressures absorbing those that cannot. "We'll probably see more leniency when it comes to mergers," said NBTA's Iwamoto, who also is the global air and car supplier manager at Hewlett-Packard.
Whatever the airline environment looks like in the months ahead, corporate travel managers will have to adapt and contract in the most appropriate way to meet corporate needs. "I assume that corporate deals, which were becoming very good, will have to continue to be very good simply to get businesspeople on planes," Jenkins predicted.
Trippler agreed: "The fourth quarter will be tough for carriers, but after the first of the year they will have to offer good deals for corporate customers."
Even so, many industry watchers and travel buyers expect falling traffic and higher security costs to pressure fares upward in the long term. "Corporate travel costs will be higher next year. Because of the confluence of circumstances, there is no way to avoid it," Iwamoto said. "If I know the ticket tax or part of the added costs go to security, I won't complain. But carriers need to realize that everyone needs to shoulder the burden of higher costs, not just business travelers. I don't know if airlines can continue to price the way they have."
Bill Patient, travel buyer at Atofina Chemicals, said there will be a renewed push for videoconferencing and other travel alternatives. He already has heard "rumblings" about corporate contracts. "Because of the extreme and adverse change in the business environment, airlines can renegotiate contract terms if they want to," he said. "My concern is that they will do that, but there is no predicting what will happen and we will have to react to what the airlines tell us."
Smaller and low-fare carriers, meanwhile, also took drastic action to stay in the skies while the government mulled bail-out options, but none at press time had suffered the same fate as Midway. Many announced schedule reductions and employee layoffs similar to those at major carriers. Others renegotiated labor contracts and slashed executive pay. Mesa Airlines said it would deploy inflight security personnel "as soon as practicable."
"The situation is even more precarious for most low-fare carriers, which are less able to absorb losses," BTC's Mitchell said. "If we lose the low-fare segment of the industry to terrorism, it is highly unlikely it will ever be replaced as the capitalization requirements and market entry risks will have increased by an order of magnitude."
The negative consequences rapidly extended overseas. Barred for days from flying into the United States, and possibly subject to even more intense security procedures moving forward, most larger foreign airlines altered schedules and took other measures as they watched stock prices fall. Air Canada, which derives half of its revenue from flights to the United States, will reduce its transborder schedule by 20 percent. The carrier said the three-day service disruption after the attacks cost it around $100 million.
Lufthansa temporarily suspended certain transatlantic flights and KLM now expects a full-year operating loss. Virgin Atlantic, anticipating "significantly less traffic across the North Atlantic for some time," said it will ground five 747-200s beginning in October. Many other carriers—Air France and British Airways among them—cut schedules and staff.
It is too early to determine how other issues will be affected, notably Open Skies and airline alliance negotiations ongoing between the United States and Europe. But barring further domestic security breaches, the immediate economic and psychological effects, here and abroad, gradually will fade.
Trippler, perhaps more optimistic than most, does not think there will be additional airline shutdowns. "If federal assistance is provided, the airlines will find a way to pull it together."