Ranging from country-specific warnings to bans on all non-essential travel, corporate security policies issued in light of the war in Iraq are exacerbating chronic airline problems at a critical juncture for industry restructuring.
Much of the ailing U.S. commercial aviation sector is on the brink of disaster, with a UAL Corp. liquidation and an AMR Corp. bankruptcy as possibilities by the summer. Uncertainty around the war, global terrorism, economic recovery and further corporate travel restrictions triggered last week will accelerate deteriorating airline revenue and traffic trends, but it is unclear to what degree and for how long.
Several travel managers told BTN their companies have not yet restricted travel but stand ready to do so should events warrant, while others said all non-essential travel has been grounded, at least for the moment. Many are relying on the federal government for guidance.
"We are following the State Department. Right now it still is just a caution, but if that changes we will follow whatever recommendation is provided," said Cindy Heston, corporate travel manager worldwide at Thomson Multimedia in Indianapolis. "For us, most travel already is business-critical," which she roughly defined as any travel that will further the future of the company, including certain sales and operations-related trips.
Parker Hannifin in Mayfield Heights, Ohio, two weeks ago limited international travel to "absolutely essential travel only," and recommended travelers overseas to avoid U.S. and British carriers, according to global travel manager Judy Weber. "We have extended the policy to domestic travel, but not in such strong terms, for the next 30 days," she said. "We are telling travelers to stay home if they can. Decisions come down to the general manager or the group president level."
Gerry Felice, procurement manager with oversight for travel for Future Electronics in Pointe-Claire, Quebec, said his company is accommodating travelers that are uncomfortable flying on a U.S. airline. "We have not put any restrictions on travel as of yet, but I have received several cancellations for travel next week," he said.
Obviously, travel to the Middle East has been discouraged for some time, but one travel manager said his company is warning against travel to Spain, the United Kingdom and parts of southeast Asia "because the potential for terrorism is greater in those countries."
Any restrictions on corporate travel will further depress business traffic. According to the most likely scenario described by the Air Transport Association in a report prepared for Congress, airline traffic overall will decline 15 percent during one quarter of "active war activity" and full-year 2003 traffic will fall back 8 percent. By the end of the year, the group said, traffic levels could be "no higher than those experienced in 1997."
ATA said the result would be 2,200 fewer daily flights, 70,000 additional job cuts and a 4 percent drop in airfares, which could attract some travelers but further decimate airline revenues. As such, the industry would lose an additional $4 billion, pushing total red ink for 2003 well above $10 billion and resulting in "sequential airline bankruptcies."
ATA based this scenario in part on actual advance booking information following the Feb. 7 issuance of the Code Orange terror alert.
UBS Warburg analyst Sam Buttrick late last month told BTN that his forecast of revenue declining 2 percent to 2.5 percent was based on there being a three- to four-month "war effect," without any meaningful retaliation.
TRX CEO Trip Davis said he expected to see a minimum revenue hit to the industry of 5 percent, while other travel industry executives said they expected revenue to decline by at least 10 percent.
Alan Sbarra, a consultant with Unisys R2A Transportation and Management Consulting, said ATA's numbers appear a bit overstated but nonetheless expects dramatic industry changes. "War is grossly accelerating trends that are already there," he said. "All these big carriers have to restructure but the window of opportunity may be too short for that to occur before liquidation."
With US Airways preparing to emerge from bankruptcy next week, United Airlines appears as the most likely major candidate for liquidation. In bankruptcy court papers filed last week, the airline acknowledged liquidation as "a distinct possibility" without proposed labor cost reductions.
In the filing, United said it already is in a war scenario. Like some of its peers, the carrier said, "Within the past week alone, international bookings have dropped precipitously throughout the industry," and, in United's case, are down almost 40 percent against year-ago levels.
Meanwhile, Sbarra said war likely will accelerate a bankruptcy filing at American Airlines parent AMR Corp. "American is the bellwether of what happens with all major network carriers."
The immediate impact of the war began even before U.S. forces last week began advancing toward Baghdad. Several airlines reported weak forward bookings and have begun to adjust capacity and service levels
(see story).Airline executives, industry leaders and government officials last week stepped up talk on federal aid for airlines. In its report, ATA summed up the industry position: "While the airlines must be expected to deal with normal forces in a free market, the government must recognize and respond to the extraordinary, non-market forces that have produced the crisis in this industry."
Sen. John McCain (R-Ariz.), chairman of the Committee on Commerce, Science, and Transportation, and Sen. Trent Lott (R-Miss.), chairman of the aviation subcommittee, wrote to President Bush, asking if the White House will propose airline industry relief. "Unfortunately, the airlines appear to be facing their most dire financial challenges yet," the senators wrote.
One piece of proposed legislation, introduced last week by Rep. Peter DeFazio (D-Ore.), ranking member on the House aviation subcommittee, and Rep. Jim Oberstar (D-Minn.), ranking member on the House Transportation and Infrastructure Committee, would extend war risk insurance through 2007, revive the federal loan guarantee program to specifically allow carriers to buy fuel, authorize the release of fuel from strategic petroleum reserves and "provide the opportunity for airlines to be reimbursed for lost business due to a war with Iraq and some security improvement costs."
The Aviation Industry Stabilization Bill of 2003, however, does not include tax abatement proposals nor limited antitrust immunity that would allow carriers to coordinate service and schedules to smaller communities. That idea also was raised, and ultimately rejected, in the immediate aftermath of the 2001 terrorist attacks
(BTN, Sept. 24, 2001).Deutsche Bank Securities analyst Susan Donofrio does not expect the bill to pass, saying that "the reopening of the loan guarantee program is likely to be the sticking point."
Many questions debated after Sept. 11, 2001, asking if and how the federal government should intervene, again have surfaced. "Ideally, you want an aid package that would address the short-term situation of Iraq, but let market forces take over when that ends," said Unisys' Sbarra. "I don't know how you do that or how much aid you can give these carriers to solve their problems. Any handouts, for some, would only postpone the inevitable."