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Businesses brace for prolonged war

What are the prospects for companies with the most to lose if the war drags on longer than initially hoped for? By John W. Schoen.
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As the U.S.-led troops in Iraq enter the more difficult — and unpredictable — phase of the war, initial optimism about a speedy conclusion is fading. So are the prospects for companies with the most to lose if the war drags on longer than initially hoped for.

THE BIGGEST IMPACT, by far, is being felt by the airline industry, already running on fumes since the Sept. 11 attacks severely curtailed air travel. Since then, the industry has posted combined losses of $18 billion and — even before the war in Iraq started — was expected to lose another $6.3 billion this year, according to the Air Transport Association. Aside from a drop in travel, a doubling of fuel prices has wiped out profits. That’s left the industry with cash reserves “nearly exhausted” and the ability to borrow “virtually nonexistent,” said the ATA.

A prolonged war could push the industry even closer to the brink. Some 21 percent of U.S. companies have banned international travel and 33 percent said they’d consider a ban if the war widens, according to a recent survey by the Business Travel Coalition. As a result, airlines last week made steep cuts in scheduled flights, especially on high-profit international routes.

The biggest U.S. air carriers have said they could face losses of up to $4 billion a quarter from a prolonged war with Iraq, and the White House has been discussing providing aid for the industry in its wartime spending request.

But if the 1991 Gulf War is any guide, some carriers will almost certainly be forced out of business by a prolonged war. Last time around, it took the airlines four years to recover from a war lasting fewer than 50 days — after losing over $13 billion, eliminating 25,000 jobs and watching seven large and medium-sized airlines file for bankruptcy, four of which were liquidated, according to the ATA.

Merrill Lynch analyst Michael Linenberg said in a recent research note that Delta and Northwest have the strongest cash supplies to weather a prolonged war. Smaller, regional airlines are also faring relatively well because their costs are much lower than the major carriers


U.S. chain store sales decreased during the third week of March as mild weather failed to offset the beginning of the war in Iraq, a report said Tuesday.

Sales at major U.S. chain stores fell 1.1 percent in the week ended March 22 compared with the same week a year ago, the report said.

Sales declined 1.3 percent in the three weeks ended March 22, compared with the previous month, Instinet Research said in its weekly Redbook report. This year Easter falls later than last year, postponing peak demand for spring clothing until April.

“The week’s modest improvement was mainly due to springtime weather and sales promotions, but the rise was too small to lift the month’s average,” the report said. “The ‘CNN Effect’ kept consumers at home watching TV.”

The Redbook Average is compiled from a sample of general merchandise retailers representing about 9,000 stores. Same-store sales measure revenue at stores open at least a year.

On Monday, Federated Department Stores Inc., the parent of Macy’s and Bloomingdales said same-store sales fell below its March expectations for a drop of 3 percent to 4 percent since the start of the war on Thursday. The company said it was “hard to predict the impact of the war on the month as a whole or on future months.”

Spokesmen at Sears, Roebuck and Co. and J.C. Penney Co. Inc. said Friday they also started seeing sales start to slow last week.


With air travel down, hotel operators are also hurting. Despite a healthy turnout by college students on spring break this month, the industry is seeing already deep cuts in travel widen further — especially among business travelers.

On Monday, Starwood Hotels & Resorts Worldwide Inc. said it was abandoning its latest profit forecast because of a steep drop in business from the Iraq conflict. Starwood said it won’t provide a new forecast until the impact of the war is better known. The company operates the Four Points, Sheraton, St. Regis, Westin, and W Hotels chains.

But analysts said the war was only partly responsible for the travel slowdown.

“We need corporate earnings to pick up and see business travel increase before you see any significant improvement in earnings of these companies,” said Rod Petrik, lodging analyst at Legg Mason.

A prolonged war could weigh even further on consumer confidence, already burdened by a weak economy and rising unemployment. Analysts expect that, as with the 1991 Gulf War, discounters will fare better than department stores, with consumers stocking up on food and emergency items. Sales of big-ticket items, like cars and appliances, are expected to suffer.

According to a Roper ASW survey of 1,000 people polled a few weeks ago, six out of 10 said that the war would have some negative impact on their spending, particularly among women. Ed Keller, chief executive of the New York-based consumer research firm, said the war is “just one more piece of external events that’s making people more nervous. People are nervous about their jobs.”

With consumers glued to war coverage, cable television ratings and traffic the news Web sites surged. Some 70 million Americans watched Wednesday night as the war began. But that bigger-than-normal audience didn’t immediately help media companies’ bottom lines — an estimated $100 million worth of ads were dumped in the first two days of wall-to-wall wall coverage.

Even movie studios, who might expect to see bigger audiences looking to escape the barrage of war coverage, reported a drop in traffic over the weekend. As Hollywood celebrated its biggest stars Sunday night with a fresh round of Academy Awards, box office tallies for the weekend showed a 29 percent drop in attendance compared the same weekend last year.

Business spending — said by economists to be critical to a hoped-for economic recovery later this year — may also be held back by a prolonged war. A Merrill Lynch survey of 100 technology executives in the U.S. and Europe released Monday found that some 17 percent said the war would prompt them to slow their spending plans on new computers and related gear. But only 10 percent said that, even if the war ended quickly, they would boost technology spending from current levels.

Many analysts expect the war’s drag in consumer spending to reverse once the military conflict has ended. But that much depends, not only on how long the war in Iraq grinds on, but on whether fresh attacks on the home front further rattle consumers and company executives.

“That’s one of the big issues that’s not stated, but is entering into the decision-making process,” said Ned Riley, chief investment strategist at State Street Global Advisors, “Coordinated terrorist activity in different parts throughout the country would stop consumers spending and stop businesses from doing what they’re doing.”

The Associated Press and Reuters contributed to this report.