With a war in the Middle East looming, the troubled airline industry is bracing for more turbulence by seeking relief measures from Congress, providing flexibility to travelers, carefully reviewing corporate contracts and mulling service reductions should passenger traffic further deteriorate.
Continental, Delta, British Airways, Virgin Atlantic, United and US Airways each announced new policies to permit ticket changes without traditional fees during the next few weeks of uncertainty, or, said US Airways, and later seconded by United, "in the event of military action and/or a Homeland Security Department issuance of a 'code red' alert."
Many U.S. corporations have indicated they would curtail traffic if the Middle East conflict escalates. Carriers already are reporting weaker bookings for March. Specifically, Continental Airlines, in a letter to investors last week, said its year-over-year transatlantic load factor for March will be down 15 points.
"Transatlantic bookings are looking weak in March, mainly due to concerns about a conflict with Iraq," the carrier said. "April forward bookings are currently showing some softness as well. March and April forward bookings for the Pacific region are also weak."
Passenger traffic on transatlantic routes would be subjected to the steepest decline—as it was during the Gulf War in 1991 when traffic initially was halved—but flights across the ocean would not be the only air service casualties. Continental's Gordon Bethune, for one, suggested war would force U.S. carriers to abandon certain smaller domestic markets unless Congress permitted schedule coordination
(see story here).Eclipse Advisors, a travel procurement firm under the Rosenbluth International umbrella, said carriers may pass along fuel costs to consumers by levying fresh fuel surcharges—in addition to the $10 each way surcharge recently implemented on leisure and discount fares—and that airport security will be pushed up another notch. Security and fuel costs, according to Eclipse, "may be offset by fare sales designed to stimulate demand and create cash flows for the airlines."
Eclipse, in its most recent newsletter, suggested airlines will not cancel corporate contracts underperforming in the near term due to force majeure clauses, a desire to maintain relationships and the need to gain marketshare. "On the other hand, increased pressure on the cost side of the business may sway the carriers to pull or renegotiate persistently unprofitable contracts."
As such, the company suggested that travel managers focus most on supporting carriers crucial to their programs without ignoring nonpreferred airlines. "It is inevitable that the carriers and their route networks will change," Eclipse cautioned. "You may need them in the future."
Considering the precarious situation at United and US Airways—the latter trying to emerge from bankruptcy by month's end—as well as the deteriorating financial condition of American Airlines, analysts are split over what a war would mean for specific airlines and the industry at large. Most agreed, of course, that the longer the conflict, the worse off many players will be.
The best case scenario—which ironically could bode poorly for weaker carriers expecting to lean on Congress—is a very short or altogether averted war that wouldn't severely reduce traffic or keep fuel costs elevated for too long. If war is avoided and industry revenues begin to recover, J.P. Morgan credit analyst Mark Streeter predicted, "the long-term health of the airline industry will remain very tenuous as unit costs are simply too high, and management would lose their current momentum with labor on wage concessions."
The worst case, a prolonged conflict, likely would force Congress to act.
In pressing for aid, carrier executives won't ask for cash handouts, but instead will seek tax abatement, compensation for security-related costs, limited antitrust immunity to discuss scheduling, a release of strategic petroleum reserves to stabilize fuel prices and/or a second opportunity for carriers to apply for government-backed loans.
"If financial relief is not as much as needed or it takes too long to be implemented, we could certainly be looking at the ripple effect of multiple bankruptcies throughout the industry," said Deutsche Bank Securities analysts in assessing the ramifications of a longer war. "If this were to occur, while cost restructuring would be likely, Washington would be pressed to at least revisit the possibility of re-regulation of the industry."