Wall Street Journal
November 6, 2001
As Red Ink Soaks Up a Government Bailout,
Airlines Find Their Industry Facing Changes
http://interactive.wsj.com/articles/...7393517400.htm

Thanks for the hotlink. I tried it but found that it was only available to subscribers.

Can you summarize the contents of this piece, as it is not an open link. Also, is it from today's print edition? Thanks.

To summarize...

Airlines are hoping for a miraculous rebound in traffic that would allow them to raise fares and restore profitability. But many industry officials say it is more likely that several carriers will have to shrink either through bankruptcy proceedings or mergers that eliminate redundant back-office and maintenance operations and give them stronger networks and pricing power.

..........

The current crisis has exposed huge failings in several areas, including the hub-and-spoke system used by all carriers except Southwest Airlines. As airlines trim flights, small cuts in the system have an exponential impact on profitability.

..........

The biggest hurdle for airlines is labor costs, which now amount to more than 35% of the expenses at hub-and-spoke airlines. In recent years, unions have enjoyed a run of huge contract victories, exerting pressure with work slowdowns, sick-outs, overtime-refusal campaigns and an occasional strike.

Plato90s that's a good summary.

I wish I could paste the whole article for everyone but I think both WebFlyer and the Journal would frown on that.

I found the following passage interesting:

One worry among labor leaders is that the terms of the loan-guarantee program give preference to applications that demonstrate, among other things, "concessions by creditors, employees or others that will strengthen the financial condition of the company."

Lee notwithstanding, a clause similar to this really got the attention of interested parties in the Chrysler bailout. It probably had more to do with Chrysler's survival than anything else.

A few more interesting paragraphs:

Airlines say that as a practical matter, the money is already spent. AMR booked most of the $900 million in cash it will get from the government in the third quarter, even though it has actually received only half of the money so far. The company still posted net losses of $414 million.

Fred Reid, president and chief operating officer of Atlanta-based Delta, estimates that the industry lost $4.8 billion between Sept. 11 and Oct. 11. "A lot of people don't realize that the $5 billion [in government relief] was basically just enough to stem the immediate losses," he says.

Today, American continues to lose a stunning $10 million to $15 million a day, Mr. Horton says, and Delta continues to lose $8.5 million a day, Mr. Reid says.

Mr. Walsh, the Mercer consultant, advocates a few extreme steps: Reducing or jettisoning the excise tax on airlines; having the government underwrite airline security and insurance expenses; allowing airlines to merge; and starting over on labor's compensation and efficiency.

Mr. Ornstein, the Mesa executive, believes the industry will have to resort to dramatic actions, like eliminating food from flights permanently. In addition, he suggests that carriers may have to train security people on planes to perform some flight-attendant functions to reduce the cost of adding in-flight security. Copyright � 2001 Dow Jones & Company, Inc. All Rights Reserved.


This is a very good article by SCOTT MCCARTNEY, SUSAN CAREY and MARTHA BRANNIGAN.

It should be in today's print version along with an article by the same authors entitled Once-United Airline Industry Squabbles Over $10 Billion in Loan Guarantees



[This message has been edited by blairvanhorn (edited 11-06-2001).]

OK, let's hope this works: Here's the whole article, with the tables at the end.

Page One Feature
As Red Ink Soaks Up a Government Bailout,
Airlines Find Their Industry Facing Changes
By SCOTT MCCARTNEY, SUSAN CAREY and MARTHA BRANNIGAN
Staff Reporters of THE WALL STREET JOURNAL
The nine major U.S. airlines have blown through most of Washington's $5 billion cash bailout, and their bleeding continues.
The financial carnage is so bad that the industry could be headed for a major restructuring, with well-capitalized airlines already sizing up faltering carriers or their gates and facilities. Delta Air Lines Chief Executive Leo F. Mullin has suggested that government regulators will now have to lose their aversion to airline mergers. Airlines will have to address long-standing and now worsening problems with labor costs and the shortcomings of the hub-and-spoke system.
"We're losing millions of dollars a day, and I don't see an end in sight," says Tom Horton, chief financial officer at AMR Corp.'s American Airlines. "Costs have probably reached a level, at least in the near term, that is unsupportable."
Including last week's grim results from UAL Corp.'s United Airlines, the industry's third-quarter losses totaled $2.4 billion -- after booking half of the government's $5 billion, less taxes. Without that money, losses would have reached $4.2 billion.
The fourth quarter, historically slow for lucrative business travel, will be worse -- and will easily absorb the remainder of the cash bailout. Losses are forecast to exceed those of the turbulent July-September period, when airlines' operations were normal for most of those three months. What rebound there was in passenger traffic has flattened amid anthrax attacks and warnings of more terrorism, despite lower fares. Revenue plunged 45% in September, and October's drop appears to be even deeper. Cutting costs helps only so much: Eliminating 20% of its flying shaves only 12% of costs at Continental Airlines, for example.
The industry's miserable math is calling into question the future of several companies and of the industry itself. America West Holdings Corp., which is losing as much as $2 million a day, had just $144.5 million in cash at Sept. 30. That won't last through the year at the current burn rate. UAL has suffered more than $1.6 billion in operating losses during the 12 months ended Sept. 30, and burned cash at a rate of $15 million a day in October. Its new chief executive, John Creighton Jr., took over last week after employees and directors lost confidence in Chief Executive Jim Goodwin, who angered unions with his prediction that United would run out of money next year.
Airlines are hoping for a miraculous rebound in traffic that would allow them to raise fares and restore profitability. But many industry officials say it is more likely that several carriers will have to shrink either through bankruptcy proceedings or mergers that eliminate redundant back-office and maintenance operations and give them stronger networks and pricing power.
More consolidation, however, will also lead to greater monopoly control of hubs and far fewer jobs -- and probably to higher fares and fewer choices for consumers. Moving airlines from high-cost to lower-cost structures won't go over well with travelers or politicians, who prefer low fares, attentive service, plenty of seats and lots of high-paying jobs over healthy profits for airlines. In exchange, they have been willing to accept a highly cyclical, low-margin business where some players fail spectacularly in each downturn. In the past six years, the greatest boom in the history of commercial aviation, the U.S. industry eked out a net profit margin of 3.5%. According to Multex.com, a financial-research company, the average net profit margin during the past five years for companies in the Standard & Poor's 500-stock index was 11.5%.
What airlines have found in the aftermath of the Sept. 11 terrorist attacks is that their conventional cost-cutting isn't working this time around. The easy moves have been made: US Airways Group Inc. cut $15 million by negotiating cheaper rates at hotels for its crews. American quit stocking magazines on its planes and cut out caviar for first-class international travelers last month -- a move that will save about $2 million a year. Many carriers quit serving food altogether in coach on most domestic trips in September.
But making substantial, long-term changes in the industry's current structure has proved to be much like the children's game of pick-up sticks -- move one stick and several others are jolted. Cutting one flight from hub-and-spoke systems can remove passengers from connecting flights and lower revenue further. Furloughing pilots under union rules leads to higher training costs as pilots are reassigned to new planes. One cockpit change -- moving from a Boeing 727 captain to a MD-80 captain, for example -- can trigger retraining for as many as six pilots at some airlines.
about 20% of its flights and enjoyed lower fuel costs, operating costs actually rose 9.3% in the third quarter for the nine major carriers, those with at least $1 billion in revenue from scheduled service. Airlines can't -- and don't want to -- close 20% of their gates or mothball 20% of their airplanes because they can't easily get them back when the recovery comes.
When airlines shrink, they "cannot get out of every single dollar of cost," says Doug Steenland, president of Northwest Airlines.
As airlines grapple with organizational issues, security and insurance costs are soaring. Mercer Management Consulting estimates that U.S. carriers' insurance costs rose to $1.9 billion annually from just $615 million before Sept. 11. What's more, the longer ground time required for security procedures is making hub networks less efficient.
"The increased costs are far in excess of any cost savings the airlines have been able to put in place so far," says Peter Walsh, Mercer's airline consultant.
So deep is the travel depression that the nine major U.S. airlines have a combined stock-market value of $21 billion -- about the same as the supermarket chain Safeway Inc. And that includes Southwest Airlines and Alaska Airlines, which are doing better than the pack.
Some of the problems pre-date Sept. 11, including a big run-up in labor costs coupled with a sharp fall in high-fare business travel. Yet since Sept. 11, all the problems have multiplied. "Airline costs are coming out slower than capacity, fewer people are traveling and security requirements are increasing. In this economic climate, the fundamental question for the major carriers is can they generate reasonable profits?" says Greg Brenneman, the former president of Continental. "Unless things change, I think the answer is 'no' for most of them."
The only way out of the death spiral is to fundamentally cut costs to match the level of traffic and the fares passengers are willing to pay. "A big restructuring is coming," says Jonathan Ornstein, a former Continental executive who is chairman and chief executive of Mesa Air Group Inc., a regional carrier. "I don't think the economy is going to bail everyone out this time."
To get through this devastating storm, airlines can draw on a pool of $10 billion in federal loan guarantees, part of the bailout package. Each carrier's application for loan guarantees is subject to scrutiny by a four-person governing board. The loan guarantees, like the cash, are designed to tide airlines through the post-Sept. 11 downturn and keep the industry alive and ready for an eventual economic rebound. The program isn't meant to rescue airlines that were heading toward failure anyway.
The current crisis has exposed huge failings in several areas, including the hub-and-spoke system used by all carriers except Southwest Airlines. As airlines trim flights, small cuts in the system have an exponential impact on profitability.
Taking one poor-performing flight out of a schedule, for example, might mean that 60 fewer passengers come into the hub, and that an average of two fewer passengers connect to 30 flights going out. Since profits often come from the last few passengers on a plane, losing just a few passengers can make a flight unprofitable. Sometimes, airlines can eliminate multiple flights to a city and route most passengers to the few remaining flights. But not always.
"The hub-and-spoke system relies on service to all those points," says David Swierenga, chief economist at the Air Transport Association, the industry's trade group. "You take out cities, you make other routes less profitable."
Reckoning With Labor Costs
The biggest hurdle for airlines is labor costs, which now amount to more than 35% of the expenses at hub-and-spoke airlines. In recent years, unions have enjoyed a run of huge contract victories, exerting pressure with work slowdowns, sick-outs, overtime-refusal campaigns and an occasional strike.
United's pilots, for example, leveraged the company's unpopular and since-aborted effort to buy US Airways into a contract that gave narrow-body jet pilots immediate raises of 21.5% and jumbo-jet pilots raises of 28.5%. Delta's pilots, also represented by the powerful Air Line Pilots Association, signed a contract in May topping the United deal. Before Sept. 11, American had told its pilots it recognized that it would have to match the Delta deal.
From 1990 to 2000, airline labor costs increased 79%, according to the Air Transport Association, while passenger revenue increased 60%. This year, with revenue falling and new contracts just kicking in, that gap has widened sharply.
Labor leaders don't rule out contract concessions in the coming weeks and months, but no one is volunteering.
Capt. Duane Woerth, international ALPA president who spent five years as a Northwest Airlines director, defends the contracts, saying pilots at both United and Delta made concessions in the early 1990s. Averaging over the decade, he says, those pilots earned the equivalent of 3.5% annual raises, a figure that "isn't out of line."
The industry's problems before Sept. 11 -- "an out-of-whack pricing model" that relied on business travelers to produce 80% of the revenue -- remains to be addressed, he says. ALPA wants a better solution than "labor's got to be cheaper."
ALPA hasn't resisted the capacity cuts and furloughs, he says, because they are necessary. But he says the union won't be "stampeded" into agreeing to "long-term, deep concessions" either.
One worry among labor leaders is that the terms of the loan-guarantee program give preference to applications that demonstrate, among other things, "concessions by creditors, employees or others that will strengthen the financial condition of the company."
Patricia Friend, international president of the Association of Flight Attendants, says union members don't feel compelled to vote for lower wages. Labor relations deteriorated over the years when carriers were making billions in profits -- now "squandered," she says. "Management has a lot to overcome to persuade the employees that 'we're in this together,' " she says. The mood among members is more "I'll take my chances," she adds.
Several carriers, including American, Northwest, Delta, Continental and US Airways, invoked force majeure contract provisions with the most recent furloughs, allowing them options to cut costs quicker in an emergency, such as furloughing employees without notice or cutting fleets and pilot ranks below contractual minimums. But those moves may be temporary and may ultimately harm labor relations even more.
"This is not the kind of atmosphere in which companies can expect workers to react kindly to concessions," says Rick Bank, director of the Center for Collective Bargaining of the AFL-CIO. "Airlines spared no effort to get money for themselves, but didn't doing anything about pushing legislation for labor, a huge betrayal" to those who lost jobs, Mr. Bank says. Workers feel that "this, too, shall pass," he says.
But will it?
The Air Transportation Safety and System Stabilization Act was rushed through Congress following the attacks to provide a lifeline to the imploding industry. The bill offered $5 billion in cash to cover airline losses resulting from the terrorist attacks. Next year, government accountants will compare airlines' actual losses in the third and fourth quarters to what airlines and Wall Street analysts before Sept. 11 forecast those losses would be. The accounting would determine whether the airlines needed all of the cash bailout or should repay any portion that wasn't used as intended.
UBS Warburg analyst Samuel Buttrick had expected pretax losses for the third and fourth quarters to total $2 billion for the industry. Now, losses may be four times as great. Mr. Buttrick estimates attack-related, pretax losses for the major airlines at between $5.5 billion and $6.6 billion, while the nine majors' share of bailout money amounts to $4.3 billion pretax. "The government is making up 75% of the incremental loss," Mr. Buttrick says.
Money Already Spent
Airlines say that as a practical matter, the money is already spent. AMR booked most of the $900 million in cash it will get from the government in the third quarter, even though it has actually received only half of the money so far. The company still posted net losses of $414 million.
Fred Reid, president and chief operating officer of Atlanta-based Delta, estimates that the industry lost $4.8 billion between Sept. 11 and Oct. 11. "A lot of people don't realize that the $5 billion [in government relief] was basically just enough to stem the immediate losses," he says.
Today, American continues to lose a stunning $10 million to $15 million a day, Mr. Horton says, and Delta continues to lose $8.5 million a day, Mr. Reid says.
Mr. Walsh, the Mercer consultant, advocates a few extreme steps: Reducing or jettisoning the excise tax on airlines; having the government underwrite airline security and insurance expenses; allowing airlines to merge; and starting over on labor's compensation and efficiency.
Mr. Ornstein, the Mesa executive, believes the industry will have to resort to dramatic actions, like eliminating food from flights permanently. In addition, he suggests that carriers may have to train security people on planes to perform some flight-attendant functions to reduce the cost of adding in-flight security.
Many executives say a long-term rebound depends on the economy's health, the return of passengers and the raising of basic fares so that business travelers will again spend on the high-fare tickets so crucial to airlines. "You can't cut your way to profitability," says Mr. Swierenga.
Costs are so high and so hard to reduce that airlines have struggled to make money this year.Revenue didn't come close to covering expenses for airlines in third quarter, in millions Revenue OperatingExpenses (1) PretaxGovernmentCash
American $4,816 $6,183 $809
United $4,107 $6,132 $391
Delta $3,398 $3,820 $171
Northwest $2,594 $2,749 $249
Continental $2,223 $2,379 $243
US Airways $1,989 $3,070 $331
Southwest $1,335 $1,242 $169
America West $491 $590 $60
Alaska Air $583 $571 $29
Total $21,537 $26,736 $2,452
Net earnings/loss for U.S. scheduled airlines, in billions Percentage of seats airlines need to fill to break even (1) Excludes government cash, which at most carriers was booked under operating expenses, not revenue, because it was money offsetting expenses, not income earned by an airline's business.(2) Nine U.S. majors only for first nine months(3) Excluding TWA Airlines operationsSources: Fitch Inc.; Air Transport Association, company reports

Here is a link to the article that is publicly available:

http://www.msnbc.com/news/653368.asp?0dm=C1CUB

wigstheone, Thanks. I couldn't find that.

Finally, a cogent look at this industry. We have witnessed an absurd display of corporate irresponsibility from all parties: management, unions, customers and government. As I have noted in the past, this is equal to the fiasco which hit the Savings and Loan industry 20 years ago. You cannot continue to sell your product at less than it costs you to provide it. That's an imutable of business logic, but relying solely on irrational marketplace dictates and a Little Orphan Annie view that "the sun will come out tomorrow" and save the day...

Thank you for highlighting this article. [However, since we now have the MSNBC link, perhaps the actual cut and paste can be edited out as it violates copyright and the regs of FlyerTalk.

The situation is no different up here. It was ably demonstrated when CP went under two years ago, and yet our government likes to believe Canada can sustain two healthy competitive national carriers. To the point of giving AC's competitors loan guarantees, while letting AC spin further into crash mode.

I expect that by this time next year, we will have seen the merging of UA and US, AA and AmericanWest and one other, and NW with CO and/or DL, whichever does not end up a part of AA. SW and AS will survive as they have nicely secured a niche in which to survive.

Shareholder, I'm not sure what you're saying. Since deregulation, almost 25 years ago, the airlines have enjoyed an unprecedented era of profitablity -- provided good jobs, and cheap tickets. I don't know what more anyone could have demanded. You could hardly expect the government to solve a problem that didn't exist. Remember Bob Crandell? He told us that the airlines using new sophisiticated management tehcniques were no longer a cyclical industry -- that their stocks deserved higher valuations. Many beleived him.

I don't see how the S and L debacle has any parallels with airlines. A misguided attempt to deregulate the S and L's invited actual criminality. There is no criminality in the airline industry. 911 is just unprecedented, no one could have predicted it.

Revenues have dried up in an unprecedented way. There is no way for the industry to downside quick enough without incuring significant losses.

Canada has a population a little larger than 10% of the US. We certainly can support more than one nation wide carrier.

What is the FlyerTalk policy on cutting and pasting entire copyrighted articles? Could the moderators clarify?

shareholder, I'm curious, help me out here. I can see irresponsibility from management, unions, and the government. but how have the customers been irresponsible?

are they irresponsible by using the power of the free market to demand lower fares, even if it meant that the airlines are selling seats at a loss? or are they irresponsible by purchasing greatly inflated full Y fares, and continuing to travel as the airlines jacked those fares higher and higher?

if it's the former, then am i "irresponsible" when i buy a sweater on sale at the Eddie Bauer Outlet, and pay 40% of the price that i saw it for in my local mall? if it's the latter, was i "irresponsible" by not refusing to buy that last minute ticket and closing a sale? i just don't see how i as a consumer have been irresponsible since i have no control over the actions of the airline.

i've said it before, and i'll say it again, the airline business model is fatally flawed. the model relies on business passengers subsidizing the fares of leisure passengers. only the airlines with a low cost structure, which allows them to make money on all passengers, will survive.

while southwest does not make money on every passenger they carry, i'm willing to bet that they make money on a higher percentage of customers than any of the so called majors. but none of the majors want to realize that important fact.

airline management at the majors reminds me of the crew of that EAL1011 that crashed in the everglades in the 70's. the crew was so focused on the gear indicator light, that they forgot to watch the altitude. now we see airline management watching the cash flow indicator, hoping to see it swing towards positive. but they don't seem to see the ground rushing up at them. PULL UP! PULL UP! PULL UP!

The world according to the airlines including Southwest is divided into two spheres. The business side and the leisure side. Of course, the two are not mutually exclusive, but for purposes of analysis, the universe is always thus segregated.

The business side is charged more because it demands more. Business demands flexibility. They demand a system that caters to their every whim. When the ordained miss judges the length of a meeting, he expects to get on a whatever flight he chooses. A system like this is expensive. It requires a considerable amount of inherent overcapacity.

Just as it's impossible to say which is the more important hand, it's impossible to say which is the most important traveler. Certainly in normal times the businessman contributes overwhelmingly to revenues, but the leisure traveler is important too. Remember that the airline business in a bit peculiar. There is nothing more perishable than an airplane seat. If you can get mom, pop, and the kids to get on board it's all gravy. The rub is, the family makes intricate calculations, for example, 4 X $199/ticket vs. 20 miles/gallon and on and on. Who is subsidizing whom?

WebFly is a momument to the business traveler an endless discussion of how to circle the square. That is, how to ride in luxury without the boss finding out. Southwest wisely doesn't aspire to that.

Vic - I think your point is correct, but it doesn't follow that the airlines should either overprice that system, or underprice the mom/pop combo. Every succesful business model I have seen has always made money (even a little bit) on each segment or component of the business. The ones that fail in the long run are the ones that depend on a single stream (say business fares) and sell the other parts (say mom/pop) at cost plus $1 or some other similar but unprofitable figure.

As an average business flyer, I don't expect to call today for a flight to the west coast and pay $300 r/t for a middle of the week fare, but asking me to pay 4 to 5 times that leads me to make other decisions such as staying over a Saturday night (I'd love to see proof that this actually makes a difference for the airlines), buying back to back tickets, driving to a different airport with cheaper fares on a discount carrier, not flying, etc. Somewhere between those two numbers is a figure that should cover the airlines costs and would allow me to purchase the ticket in a straightforward manner, knowing that next time I bought the same ticket, it would be about the same cost.