Airlines fly leaner in stormy economy

With the red ink flowing, what's a carrier to do? Cut costs, it appears, but that approach may backfire.

©Associated Press
August 14, 2002

Goaded by the fear of bankruptcy as losses mount, the nation's airlines are overhauling their businesses with a new sense of urgency.

But what's good for the industry is not necessarily good for consumers. Airlines appear focused on cutting costs rather than boosting revenue, which would require more consumer-friendly actions.

The recent wave of restructuring by American Airlines and US Airways, which recently filed for bankruptcy protection, comes as the economy sputters on and the industry's biggest players continue to rack up millions of dollars in losses every day.

Seeking to stem some of those losses, American Airlines said Tuesday that it would cut 7,000 jobs, retire planes and trim more flights as it tries to slim down and compete better with low-cost carriers. The moves are expected to save $1.1-billion a year.

In the first half of 2002, the nine largest airlines lost a combined $3.8-billion, and the forecast for the remainder of the year is equally grim.

"The clock is running," said Michael E. Levine, a business professor at Yale University and a former airline executive. "I think everyone in the industry was first praying for rain, that things would have gotten better by now."

The reality is that the air travel industry is in the middle of an 18-month-long funk, a downturn that was exacerbated by the events of Sept. 11.

The biggest problem has been the loss of revenue from traditionally high-paying business travelers, who are buying cheaper tickets and limiting the number of trips they take until the economy rebounds. Security-related hassles at airports since Sept. 11 have been another turnoff. Domestic passenger traffic remains 8 percent below what it was a year ago.

The biggest carriers have lured leisure passengers with cheaper fares, but that isn't a workable strategy because their costs of doing business are much higher than successful discount airlines such as Southwest and JetBlue.

US Airways

With debts mounting and revenue shrinking, US Airways had little choice but to reorganize itself under the protection of bankruptcy court, a move already made by Midway Airlines and Vanguard Airlines. US Airways was essentially thrust into Chapter 11 on Sunday after the federal government refused it a $900-million loan guarantee.

US Airways hopes to emerge from bankruptcy court a healthier, if smaller, airline with fewer labor troubles and a better cash position. At that point, the government has signaled it would support the Arlington, Va., carrier's loans.

American Airlines

American Airlines, on the other hand, has enough cash to avoid Chapter 11 and is trying to tackle the problem by trimming the size of its work force and fleet. The airline, based in Fort Worth, Texas, is also trying to make its hub-and-spoke network more efficient.

Beginning in November, American will reschedule its huge Dallas-Fort Worth hub to remove the peaks and valleys and plan a continuous flow of jets, something American has already experimented with in Chicago with cost-saving results.

Instead of flying waves of airplanes -- 50 or 60 at a time -- into hub airports within 20 minutes of each other, American will spread out its flights at its Dallas operation. It's called a "rolling hub" in industry jargon. Instead of planes sitting at gates while passengers scurry about, passengers will have to sit longer.

Planes will come in, unload and refill with a load of passengers waiting at the airport. Connections as long as an hour and a half may be more routine, but with the cutback in food on flights, travelers often prefer a longer connection time so they can grab meals.

But Michael Boyd, a Denver-based airline consultant, said American's cost-cutting strategy could backfire if customers are turned off by the waits.

"What airlines have to do is not just get efficiencies up. They also have to get more bodies on the airplanes," Boyd said.

The goal at American and other major carriers is to reduce operating costs enough to justify the lower fares that are needed to attract increasingly frugal travelers.

American is the No. 4 airline at Tampa International Airport, carrying nearly one out of every 10 passengers. The airline flies 23 daily jet departures from TIA to cities including Dallas, Chicago, St. Louis, New York and Miami.

American dominates at Miami International Airport, where it operates hubs for Latin American and Caribbean flights. The airline is the largest private employer in Miami-Dade County, with 9,300 employees.

American has 187 daily jet flights to 74 destinations from Miami International, where it carries half of all passengers.

The 7,000 jobs American will cut come on top of some 80,300 layoffs the airline industry announced last year. American and United Airlines each cut 20,000 workers. US Airways eliminated the largest share of its work force: 24 percent or 11,000 employees.

By mid 2005, American will retire its 74-jet fleet of 100-seat Fokker 100s, which had become expensive to maintain.

United Airlines

The most likely candidate to follow in US Airways' footsteps is Chicago-based United Airlines, whose future is similarly dependent on a lifeline from the federal government. United has asked for -- and appears unlikely to receive -- a $1.8-billion loan guarantee from the Air Transportation Stabilization Board, the agency established by Congress to help the industry after Sept. 11.

United's labor costs are among the industry's highest and its focus on business travel has been a particular liability. It is losing more than $1-million a day.

"They don't have a long time to go without restructuring," said Levine, the former airline executive. "The business environment is getting worse, not better."

Other airlines

DELTA: Chief executive Leo Mullin said in a letter to employees dated Aug. 2 that the Atlanta-based carrier competes with low-cost carriers, especially AirTran, for roughly 65 percent of its revenue. Mullin said Delta Air Lines "soon would launch a series of initiatives that will increase our cost competitiveness in crucial markets."

Delta expects a third-quarter loss similar to the $186-million it lost last quarter as weak revenue and costly insurance hamper results, the company said Tuesday.

CONTINENTAL: A spokesman said Tuesday that "some tweaking" of its own operations could be announced within a few weeks. "We're looking at what do customers want and what are they willing to pay for," the spokesman said.

SOUTHWEST: The no-frills airline has fared better than others since Sept. 11. With the lowest operating costs among the top 10 carriers, it can make money when full-fare fliers shop for bargains.

Southwest was the only major carrier not to lay off workers or slash its schedule after Sept. 11. Southwest has expanded flights and gained market share on competitors, as have low-fare rivals AirTran Airways and JetBlue Airways.

-- Times staff writer Steve Huettel contributed to this report, which used information from the Wall Street Journal.

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