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For airlines, it's still 9/11

Though America just marked the third anniversary of the Sept. 11, 2001, terrorist attacks and most of the economy has more or less recovered, the announcement by US Airways Group that it is filing for bankruptcy is an occasion to remark that for airlines, 9/11 is still a wrench in the works.
A US Airways jet lands at McCarran International Airport in Las Vegas
US Airways is the latest carrier to witness the still-struggling airline industry. The carrier sought bankruptcy protection Sunday for the second time in two years.Ethan Miller / Reuters
/ Source: Forbes

Though America just marked the third anniversary of the Sept. 11, 2001, terrorist attacks and most of the economy has more or less recovered, the announcement by US Airways Group that it is filing for bankruptcy is an occasion to remark that for airlines, 9/11 is still a wrench in the works.

The financial crisis afflicting the airline industry, especially the so-called legacy carriers whose businesses date back to the days before deregulation, is hardly new. It has generated a lot of talk about how the airlines are mired in outdated business practices and work rules and that they have too many unions. US Airways , which is entering bankruptcy for the second time, follows United Airlines, which entered bankruptcy in 2002.

The airlines — except beloved Southwest, of course — have been indicted for sloth, failure to modernize and related charges. But before the case for the prosecution rests, there are a few fundamental facts that should at least be mentioned in the airlines' defense.

The main fact is that airline revenues are still far below their levels before the 9/11 attacks. In the second quarter of 2001, the total operating revenues of U.S. airlines was just under $129 billion, according to the U.S. Bureau of Transportation Statistics. Quarterly revenues fell to as low as $104 billion in the second quarter of 2003.

Revenues have since recovered to just under $120 billion in the first quarter of this year, but they are still $9 billion short of the pre-9/11 mark. The first quarter is also the first since 9/11 in which the airlines as a group have earned an operating profit. They are still losing money on a net basis. But their net losses have dropped from a high of $11.3 billion in the second quarter of 2002 to $1.1 billion in the first quarter of 2004.

Since quarterly airline expenses reached their high-water mark of $127.6 billion in the third quarter of 2001, they have been cut by $8 billion. To be sure, expenses have started to rise again, along with revenues, in the past year. But the industry has made substantial cuts. That still-missing $9 billion in revenue would have covered a lot of ills.

The airline business with its high fixed costs has always been boom and bust. Warren Buffett's famous crack — "If there had been a capitalist down there at Kitty Hawk, he should have shot down Orville and saved us a lot of money." — still holds. But the fact is that before 9/11, the airlines were flying right financially. The industry as a whole had earned a profit five straight years from 1996 to 2000.

The attacks of Sept. 11, 2001, changed a lot of things for a lot of industries (and everything else). But the airlines were affected much more than most. In terms of revenue miles, the U.S. airline industry had enjoyed an increase every year since the dawn of aviation except for rare exceptions. There was a slight drop of less than 1 percent between 1973 and 1975 and there was a small decline of less than 2 percent between 1990 and 1991, coincident with the Gulf War.

But the 8 percent drop between 2000 and 2002 was unprecedented. This trend might have been evaporating on its own, even without 9/11, as the industry shifted to a loss in the second quarter of 2001. In the past year, traffic has picked up, and the airlines have been selling a higher percentage of their seats.

Before Sept. 11, 2001, the airline industry was attempting to consolidate. UAL had been blocked in its attempt to buy US Airways, part of which it was slated to sell to AMR. In a world without 9/11, they might have maintained profitability, even with the union contracts and despite low-cost competition from JetBlue and Southwest (which, incidentally, is as heavily unionized as any of the other carriers, albeit without all the same work rules).

For airlines, their business trajectories changed dramatically three years ago. They might have reacted faster, but it's wrong to say they have not changed in response. The US Airways bankruptcy filing is just the latest reaction in the chain.