Turbulence still dogging airline industry
Fifteen months after al-Qaeda terrorists used hijacked passenger jets as missiles to bring down the World Trade Centre and to damage the Pentagon, the US airline industry is still reeling.
Last year, the industry lost an estimated US$9 billion and airline executives, signalling to Congress that they need help, have warned that their financial problems probably will worsen if America goes to war with Iraq.
But the fall-out spawned by the events of September 2001 have not been confined to the United States. The reverberations are still being felt by airlines across the hemisphere, including Air Jamaica.
“It is a situation where we have lower demand and a price equilibrium,” said Air Jamaica’s deputy chairman and CEO, Christopher Zacca. “Earnings are down significantly, and in a high-fixed cost business when your revenues are down that spells trouble.”
Indeed. As the airline executives told the Senate Commerce Committee at a hearing on Thursday.
Air travel by Americans dipped sharply after the 9/11 attacks – both internally and going abroad. And it was not only US flag carriers that suffered. Foreign airlines, like Air Jamaica, also took a hit.
Things have improved recently, but the number of people flying last November was down almost 18 per cent from November 2000, according to the US Transportation Department.
Since the attacks, the major airlines have laid off more than 80,000 employees, cut wages for others and reduced the number of flights, but they still expect to lose $9 billion last year. Two have filed for bankruptcy in the last six months – United Airlines and US Airways.
United, which is struggling to stay alive and emerge from Chapter 11 protection as a re-organised carrier, has said it must reduce wages by $2.4 billion a year over the next five years if it is to succeed.
On Wednesday, its flight attendants agreed to temporary nine per cent wage cuts, becoming the fourth of five United unions to agree to the airline’s request for emergency pay cuts. The lone holdout is the Machinists Union, whose leaders refused to put pay reductions to a vote by its 37,000 members.
United’s pilots and two small unions, representing dispatchers and meteorologists, announced Tuesday that their members had approved immediate double-digit cuts.
But it is expected that the shake-out in the US industry is not over yet and that other major carriers could apply for Chapter 11, even only to put themselves on a comparative competitive situation.
“We’ve got most of the airlines broke and the rest of them begging,” South Carolina Senator Ernest Hollings said at Thursday’s committee hearing.
It is not the kind of language that perhaps the US executives – or Zacca – would use, but they could hardly argue with the underlying sentiment.
In fact, war in Iraq could make a bad situation even worse, American Airlines chief executive Don Carty told the commerce committee.
Congress has twice helped the airline industry since the September 11 attacks. In November 2001, President George W Bush signed into law a $15-billion aid package that included $5 billion in cash assistance and a $10-billion loan guarantee programme.
Last year, Congress enacted a law to extend government-issued war-risk insurance and to limit liability against companies for the terrorist attacks, saving airlines an estimated $1 billion.
Carty said airlines need more, but he said they have yet to reach consensus on what Congress can do to help. Northwest Airlines’ chief executive, Richard Anderson, also testified that the airlines need relief.
But the relief already received by the US industry is the kind of cushion that Air Jamaica would have liked to have had.
“Air Jamaica has not had that kind of help,” said the carrier’s chairman and major private shareholder, Gordon “Butch” Stewart. “But notwithstanding, Air Jamaica lost much less than we expected to lose. It is a tribute to the management and staff.”
The airline, which had turnover of $450 million, had projected a loss of up to $140 million for the 2002 financial year after 9/11. The loss, instead was $80 million.
Zacca projects a loss this year of $35 million. However, no one is yet certain how last week’s imposition of a visa requirement for Jamaicans flying to Britain will hurt the airline, although some estimates suggest that it will cost the carrier up to $5 million.
“Our (better-than-expected) performance is based on cost-cutting, improved efficiency and aggressive marketing to build the loads,” said Zacca.
It is the same aggressiveness and a further rationalisation of its fleet – which will reduce operating costs – that the airline expects to follow this year in an effort to further enhance its performance. But while Air Jamaica is having success filling the planes, but with low yields, it is not delivering the revenues to cover all its costs.
“In the present situation in the United States,” explained Stewart, “it is the people who want the bargains who are out there flying, but it is hurting the airlines.”
A strategic carrier like Air Jamaica, he suggested, is particularly vulnerable in such an environment. For instance, while tourism in many Caribbean destinations has been hit hard since 9/11 because of a shortage of airlift, Jamaica’s national carrier has continued to provide the country with ability to bring visitors to the island – even if at discounted rates.
Air Jamaica flies over half of all passengers to Jamaica and closer to 60 per cent of all tourists.
“Without Air Jamaica the country would have lost about $1 billion,” according to Stewart’s calculation. “There might be the argument that if there was no Air Jamaica other airlines would come to Jamaica, but then the question is why have they not gone to the eastern Caribbean? Instead, flights have been cut and airlift is a problem.”
But taking the big, strategic picture *with regard to Jamaica’s tourism comes at a cost – a deficit to the airline, which, just before the 9/11 attacks, believed that it was headed towards a break-even point and on a track to profitability.
Now the scenario has changed.
Zacca insisted that that Air Jamaica’s long-term future is safe, once it gets over some immediate humps.
“We think we have a safe future. but we are going to need help for a few years,” he said. “We have to look for help of some sort. However, the Government (which owns 49 per cent of the airline) is trying to work with us.”
The specific nature of that help has not yet been spelled out, and will become clearer once a board committee and the management finalise work on a budget.
For the US industry, in its worst financial position since deregulation in the late 1970s, part of the issue is the shape with which it will emerge from this crisis.
For instance, Jeffrey Shane, associate deputy secretary of the Transportation Department, in testimony before the Senate committee, noted that while the large US carriers would lose about $10.2 billion, low-fare carriers will report about $700 million in operating profits.
Low-cost airlines will gain a larger share of the US market than ever before, Shane said. Grabbing airlines will control 18.2 per cent of the overall US market by March. Some senators pointed to the low-fare carriers as examples.
Air Jamaica’s Stewart, however, believes that the strong performance of low-fare, no-frills carriers, is a short-term phenomenon.
“Most passengers want a full-service airline,” he said. “Part of the problem facing some US carriers is that they have cut back so heavily on services that they are neither fish nor fowl. They now just pretend to operate full service airlines.”
In any event, Stewart argued, if, in the current environment of lower passenger loads all the carriers operated as low- budget airlines “everybody would soon be in the same boat”.
Shane told the hearing that the timing of a broad-based recovery was difficult to predict because it depended on several factors, including the cost of fuel, possible war with Iraq and maintaining airline security at a high level.
It was”reasonable to expect”, he said, that there would be some consolidation in the US airline industry. But he added that he did not think the industry would consolidate down to a few airlines, as he perceived an emerging trend toward new, smaller airline companies.