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Terror plot reverberates through economy

News of an alleged 9/11-style plot to blow up multiple airplanes is already being measured for its potential economic impact.  By's John W. Schoen.
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News of an alleged 9/11-style plot to blow up multiple airplanes is already being measured for its potential economic impact. Just as the attacks in London, Madrid and Mumbai targeted rail systems, transportation underpins virtually every economic activity — from shuttling people to business meetings to delivering manufactured goods from China.

Though the initial reverberations of Thursday’s alleged plot seem muted, analysts say it will be weeks or months before it is known whether fears about air travel once again send the industry into a tailspin — and create a potential drag on the overall economy.

New of the plot comes at the height of the tourist season — just as the beleaguered airline industry is getting back on its feet. In the short term, the industry faces the loss of revenues from tickets refunded to stranded travelers and possible cancellations of future bookings.

“It's like a major snowstorm or the power outage on the Northeast a couple of years ago,” said airline analyst Ray Neidl with Caylon Securities. “Planes will be out of position, as will crews. There will be some inconvenience and costs associated with that, but that's something that can be made up fairly quickly.”

What is less clear is how the potential for another 9/11-scale attack, along with major new delays in security screenings, weighs on travelers’ decisions to keep flying. Oil and jet fuel prices fell on financial markets Thursday as traders bet the attacks would keep some passengers from flying, cutting demand.

But after five years of losses and a relentless rise in fuel prices, the airline industry seems to have finally hit on a successful strategy of flying fewer flights and packing each plane to the limits. United Airlines, which emerged from bankruptcy protection in February, recently reported its first profit in six years.

Even if airlines sell fewer tickets, the industry seems to be refining a way of coping with such a downturn: Put fewer planes in the sky.

“The supply in the industry is quite tight, and as long as the economy is still growing, if we step back and think about those issues, the underpinnings of the industry are actually still pretty solid,” said David Strine, an airline analyst at Bear Stearns.

But fewer passengers and planes in the sky likely will mean canceled bookings at hotels and other vacation destinations like theme parks. After news of the alleged plot, investors sold off shares of big chains like Hilton Hotels, Starwood Hotels & Resorts Worldwide, and Marriott International.

The U.S. economy also faces headwinds that have nothing to do with terrorism. After a five-year housing boom, home sales have plummeted, along with the growth of jobs devoted to the housing industry. Acknowledging that slowdown and the general economic cooling, the Federal Reserve Wednesday ended a two-year streak of 17 straight interest rate increases.

The economy also is strained by massive post-Sept. 11 costs that continue — whether or not a given terror plot succeeds, according to Mark Skousen, an economist and editor with  Forecasts & Strategies, a newsletter.

“The war on terror is supposed to last decades,” he said.  “And we're seeing this cost pile on to the economy. Our defense spending is over $400 billion a year. It's approaching 4 percent of our economy. A lot of that is going into intelligence, but more than that the war in Iraq and so forth, and when you add on all of that additional work, you can see why our economy is struggling.”

Still, some economists say that, by itself, the news of another thwarted attack will do little economic harm.

“The economy has performed quite well in the face of these ongoing threats and risks,” said . Conrad DeQuadros, an economist with Bear Stearns.  “So I think providing this does not materialize into an actual terrorist attack, I don't believe we'll see any measurable impact on the U.S. economy.”

And consumer sentiment is very different that it was on Sept. 12, 2001, say analysts. Since then, massive terror attacks in Madrid, London and Mumbai have demonstrated a resilience in public sentiment that may tend to minimize the impact of the latest threat.

"My guess is that world travelers have become somewhat accustomed to situations like this,” said Neidl. “And I'm guessing right now, it won't have a major effect on travel patterns.”