Crisis!
THE US airline industry, in a precipitous slide since the terror attacks on the United States 18 months ago, has warned that war with Iraq will deepen their crisis and could even force the American Government to nationalise firms in the face of “chaotic bankruptcies”.
The report issued Tuesday by the Air Transport Association (ATA), the umbrella body for US airlines, has raised new concerns about Air Jamaica, which, too, has suffered significantly since the September 11, 2001 attacks when terrorists used hijacked commercial aircraft to bomb the World Trade Centre and the Pentagon.
“In the face of the crisis all bets are off,” said Air Jamaica’s CEO, Chris Zacca, whose company lost US$80 million in 2002. “We have to take measures to further cut costs even as we drive revenues. The environment is very difficult.”
The ATA, in a statement on the report about the industry’s crisis, noted that since the 9/11 attacks, which made Americans shy of flying, airlines have lost $18 billion. And even without open hostilities in Iraq, 2003 losses of $6.7 billion are projected. Not only are the airlines, including Air Jamaica, being hit by less traffic and lower yields, but higher price for fuel as war jitters in the Middle East push up the price of oil. In February, for instance, fuel prices for US carriers reached US$1.20 per gallon, up 108 per cent over the previous year.
Additionally, airline cash reserves are nearly exhausted and the ability to borrow is virtually non-existent, the report noted.
The ATA said that a major contributing factor to the present economic state of the airlines is the vast increase in government-imposed costs. Since 9/11, taxes, fees and unfunded mandates have added $4 billion annually to the industry.
“The economic risks go far beyond the airline industry — the stakes for the entire US economy are extremely high,” said ATA President and CEO James C May. “Airlines have supported decisions taken by the US Government in the past, and we do so now. Yet, we know from the first Gulf War that there will be serious economic consequences for the airline industry.”
May warned that “without government action, the outlook for the airline industry is bleak”.
In fact, the crisis could be so severe, the report said, that it could spell “bankruptcies and liquidations”.
“The prospect of a forced nationalisation of the industry is not unrealistic,” it added.
Since the second half of last year, at least two US carriers — United Airlines and US Airways — have filed Chapter 11 bankruptcies and American Airlines is believed to be on the verge of such a decision.
Given what happened during the first Gulf War at the start of the last decade, the problem could only worsen, the ATA report said.
Said the ATA: “Going into the first Gulf War, the airline industry was strong economically, reporting net profits from 1984 through 1989 of $3.9 billion. At that time, airlines also had adequate cash reserves and access to capital markets.
“Following the war, however, traffic plummeted, causing the industry to shrink significantly. It took the airlines four years to recover from a war lasting fewer than 50 days. In the end, the airline industry lost over $13 billion, eliminated 25,000 jobs and seven large and medium-sized airlines were forced into bankruptcy — four of which liquidated.”
The recovery that was subsequently staged by the industry has been wiped out since 9/11.
“To try to meet the economic reality of the past two years, carriers are cutting tens of billions of dollars in expenses, have laid off 100,000 employees and have taken several hundred aircraft out of service,” May said. “The nation’s air carriers will continue to do all we can, but we fear that the consequences of this war will be severe.”
The report outlines four scenarios for possible impact on the airline industry. The most likely scenario projects 2003 airline losses of $10.7 billion (an increase of $4 billion over the “base line” case), the loss of 2,200 daily flights and 70,000 additional jobs. The most severe scenario delineates losses of $13 billion, a reduction of 3,800 daily flights and the elimination of 98,000 additional jobs.
It said that massive economic damage to commercial aviation also will severely impact the overall US economy. Multi-billion-dollar losses mean air service cuts to many smaller and medium-sized communities and more unemployment throughout the economy. The tourism and hospitality industries stand to lose almost four jobs for every airline employee forced into the unemployment line.
Similar arguments apply to Air Jamaica and the broader Jamaican economy, which is heavily dependent on tourism.
Air Jamaica, which is 45 per cent owned by the Jamaican Government, transports 55 per cent of all airline passengers to Jamaica and carries about 62 per cent of the island’s US tourist traffic.
It is Air Jamaica’s maintenance of airlift, when foreign carriers have slashed flights or pulled out all together, that has allowed the Jamaican tourist industry to maintain momentum when other regional destinations have nose-dived. In fact, tourist arrivals to Jamaica have grown during the current winter, but have been mostly soft elsewhere in the Caribbean.
However, Air Jamaica, although it has cut costs by tightening its operations and renegotiating leases, will still lose US$35 million this year.
Air Jamaica officials have consistently argued that the airline’s fundamental strategy is to try to grow income while containing costs. It will nonetheless have to raise cash to help deal with immediate problems.
“The airline’s future is secured once we get over the humps,” Zacca said yesterday. “But it is right now a very difficult ride. Not only for Air Jamaica, but the entire airline industry, worldwide.”