IE 11 is not supported. For an optimal experience visit our site on another browser.

War would magnify airlines’ woes

With war approaching again and with air carriers already in crisis, the impact on airlines could be severe enough to permanently ground some and force others into restructuring. But those steps may already be inevitable, even without war.
The Air Transport Association said Tuesday that an Iraq war could cause U.S. airlines to lose $10.7 billion this year and may result in 70,000 airlines jobs being cut.
The Air Transport Association said Tuesday that an Iraq war could cause U.S. airlines to lose $10.7 billion this year and may result in 70,000 airlines jobs being cut.
/ Source:

War keeps Americans at home. During the Persian Gulf war, for instance, trans-Atlantic flights alone saw more than 40 percent fewer passengers. With war in Iraq approaching again and air carriers already in crisis, the impact on airlines could be severe enough to permanently ground some and force others to restructure. But those steps may already be inevitable — with or without war.

The 1991 gulf war cost U.S airlines $13 billion and forced seven American carriers into bankruptcy, according to industry estimates, with the battle spurring a four-year process of recovery. Two major carriers, Pan Am and Eastern, disappeared completely.

War fears are especially devastating to airlines because their most profitable customers — international travelers, especially those flying for business — are also the most likely to postpone their travel until they’re not worried about safety. And with rumblings that another Iraq war could be just weeks away, passengers are scrambling to change plans.

Many carriers have already announced policies to let fliers change their tickets. United, for instance, will let passengers postpone international travel until the end of the year; American is offering a one-time ticket change for all travel within two months of a war or a red-level homeland security alert.

On the other hand, security fears have been brewing since the Sept. 11, 2001 terror attacks, with a year-and-a-half for the new reality to sink in. Traffic numbers have begun to rebound and have been growing steadily since last fall, even with security on travelers’ minds and the prospect of war brewing for months.

“People are going to be, certainly, nervous about flying,” says Douglas Wilson, senior aviation economist for transportation consultants Edwards and Kelcey. “But let’s also recall that this is really not news, that people have known this is coming up for a long time and they behaved accordingly.”

Dire outlook
U.S. airlines released their own grim war projections Tuesday in a report from the Air Transport Association, which represents major airlines.

It offered four scenarios of the possible war impact on the industry. The most likely projection sees a loss of $10.7 billion this year, over 60 percent more than the already steep losses forecast without war. That translates to 2,200 fewer flights a day and 70,000 jobs cut. Their worst-case forecast sees $13 billion lost, 3,800 fewer flights and nearly 100,000 jobs slashed.

War jitters have also brought soaring jet fuel prices — currently up 108 percent from a year ago — and poured even more red into an already crimson balance sheet.

U.S. airlines have cut some 100,000 jobs since Sept. 11 and they lost nearly $10 billion last year. They attribute over $4 billion of that loss to security and fees mandated by the government.

Nor have the effects been limited to these shores. British Airways announced last month it was trimming back its service to the Persian Gulf region and requiring its crews to stop overnight in Cyprus rather than Saudi Arabia and other destinations. It already warned that an Iraq war might rub out its profits and it has cut 13,000 jobs since the Sept. 11 attacks.

Help from Capitol Hill?
One of the airlines’ immediate solutions has been to plead to Congress for help, arguing that the extra $4 billion a year security burden amounts to an unfunded mandate. But the economics don’t quite jibe. Industry losses last year were an estimated $9.5 billion, so even without the extra burden the hemmorhaging would have been profound.

Nor has the government gotten its own costs covered. Airlines were supposed to help pay for the security duties taken over by the Transportation Security Administration. But federal fees levied on airlines — and usually passed on to passengers — have failed to raise more than half the $750 million estimated to be airlines’ approximate security costs in the year before the Sept. 11 attacks.

That was in addition to $15 billion in aid Congress approved right after Sept. 11. The aid package helped preserve U.S. air travel, but in the eyes of many industry watchers it merely delayed inevitable bloodletting. Given the estimated $100 billion it would cost the United States to fight an Iraq war, and significant federal deficit spending, odds of another shot in the arm from the government are long and growing longer. “Something of that magnitude again would be difficult,” one congressional aide told

Forced into change
The war, then, could prove a catalyst for the industry’s restructuring, something that’s already well under way: United is working its way through Chapter 11 and American is haggling with its unions to try and avoid its own turn through bankruptcy court.

“It will not be pleasant and a lot of people will be hurt, but those who survive will be stronger,” says Darryl Jenkins, director of George Washington University’s Aviation Institute. “We will probably lose a major airline, but so be it. We have too much capacity, they’re not efficient and this is what happens.”

For those who will survive, the options are generally drastic and not without risk. While it might seem obvious to reduce capacity — by trimming the number of flights — past history weighs against a major airline being able to emerge from the ashes as a smaller, leaner operation.

“It’s very difficult to shrink an airline into profitability,” says Richard Bittenbender, aviation analyst for Moody’s Investors Service. “Eastern tried to do that, TWA tried to do that, Pan Am tried to do that.”

The other option — to use cash and debt to cover short-term losses from war — might work for a healthy corporation, but not for an industry already in such deep pain. Though some carriers still have cash on hand, the markets would look askance at using that money to cover losses without steeply cutting costs first.

Plus, that scenario assumes any war would be brief and would be followed by a rebounding economy strong enough to return air travel to the peak levels it saw during the late-90s boom. “Most U.S. airlines have borrowed heavily in the last couple years,” Bittenbender points out. “Their ability to continue to borrow is highly limited.”

The only other option, then, is for the airlines to try some radical overhauls. Labor concessions and plans for low-fare subsidiaries are a start, but a truly successful effort might require massive changes across every airline division and the overall industry.

That could mean big changes to service levels and fewer competing flight options for travelers. “We want to maintain competition — but how much do we need, and what’s a realistic level of choice?” asks Wilson, drawing a consumer analogy. “How many grocery stores can you choose from?”

Staying close to home
None of which to say Americans will refuse to leave the house if war breaks out. While longer trips and vacations overseas may be hit, many travelers will likely look for closer destinations. The added stress of wartime could even prompt extra domestic visits to friends and relatives.

At discount travel Web site Hotwire, for example, international airfare bookings are off 25 percent. But that has been offset by a 25 percent growth in what they call “drive market” hotels, which are within driving distance of customers’ homes.

“They may alter the ways they travel and the places they go,” says Hotwire spokeswoman Amy Bohutinsky. “If there were some sort of event to disrupt air travel — meaning planes are grounded, that sort of thing — people don’t want to be too far from home.”