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Airlines don't see relief over horizon

Problems, especially high labor costs, have long plagued carriers. The attacks brought them to a head.

By STEVE HUETTEL, Times Staff Writer

© St. Petersburg Times, published September 7, 2002

Problems, especially high labor costs, have long plagued carriers. The attacks brought them to a head.

The airline industry's last economic nosedive cost Mike Sorbie his job as a rookie US Airways pilot in 1991.

US Airways rehired him three years ago. And he kept flying after Sept. 11, even as air travel plummeted and the airline laid off nearly 1,100 pilots with less seniority.

Now, Sorbie is waiting for a pink slip. US Airways is preparing another round of pilot layoffs after landing in bankruptcy court last month.

"I thought I was over the bubble," said Sorbie, 37, who lives with his wife and five children in Pinellas County's East Lake area. "But not this bubble."

Despite the lukewarm economy, most of U.S. business has shaken off the worst effects of the Sept. 11 attacks. As Sorbie's plight illustrates, the airline industry's crisis is far from over.

Carriers lost a combined $7.7-billion in 2001 and are expected to lose $6-billion more this year, even after the $5-billion cash bailout from Uncle Sam, according to the Air Transport Association, a trade group representing major airlines.

United Airlines, the nation's second-largest airline, may join US Airways in bankruptcy court. United is having trouble borrowing money to cover losses and needs a $1.8-billion federal loan guarantee and concessions from employees, the airline's executives say.

Major network carriers that operate hub-and-spoke systems have tried aggressively to cut costs. They laid off about 80,000 employees, parked more than 300 planes, cut the few remaining frills and tacked on extra charges for excess bags and paper tickets.

The terrorist attacks caused new problems for the industry: skyrocketing insurance premiums, additional ticket taxes and long airport delays for customers.

But more important, the steep decline in passengers and in the fares they pay brought to a head structural problems that have plagued network carriers for years, aviation experts say. Among them:

A revenue system based on charging sky-high fares to business travelers. With companies cutting travel budgets and making employees fly on cheaper, nonrefundable tickets, business travel revenues began to decline in February 2001.

High operating costs. US Airways and United, with some of the industry's highest overall costs, are telling employees their survival depends on cutting labor costs.

Low-fare competition. As fares free-fall, efficient, low-cost carriers such as Southwest Airlines and JetBlue Airways continue to make money and grab market share from bigger airlines that had to cut flights and park airplanes.

"I'm not sure 9/11 by itself had any particularly profound impact," said Robert Crandall, former chief executive of American Airlines parent AMR Corp. "But it exacerbated the problems they had before 9/11."

Passenger traffic dropped by one-third last September compared with the same month a year earlier, according to the Air Transport Association.

The numbers slowly rebounded. But as recently as July, the most recent month for which the trade group has statistics, domestic and international traffic was down 10 percent year-to-year for U.S. carriers.

Fares, meanwhile, continue falling. The average fare for a domestic 1,000-mile trip, which peaked at $150.24 in October 2000, hit $109.68 in July.

Business travel revenue has dropped 32 percent since December 2000 -- twice as fast as the fares paid by leisure travelers -- and makes up 64 percent of total passenger revenue, down from 68 percent, the Air Transport Association reports.

The drop hit particularly hard because the network carriers had expanded flights and raised business fares during the frothy economic times of the late 1990s.

They didn't cut flights until after Sept. 11 and still haven't narrowed the gap between last-minute, refundable tickets for business travelers and the cheapest fares, said Duane Woerth, president of the Air Line Pilots Association, which represents 66,000 pilots.

"When the bubble popped ... they held onto this pricing model where they tried to make all their money off 20 percent of the travelers," said Woerth, a Northwest Airlines captain who lives in Indian Rocks Beach.

Financially ailing America West Airlines is the only major carrier to flatten its fare structure since Sept. 11. In recent weeks, the major network airlines slapped new restrictions on nonrefundable fares to make them less attractive to business travelers.

Why? Most carriers still think that unlike leisure travelers, business people aren't motivated to fly by lower fares, said David Swierenga, chief economist for the Air Transport Association.

But companies are finding less expensive ways to conduct business. More employees are driving for short trips, or they're teleconferencing. And business travelers are flying low-fare carriers or searching the Web for bargain, nonrefundable fares.

"The airlines may have permanently destroyed their ability to charge $2,000 or $3,000 to cross the continent," said Alfred Kahn, who led the Civil Aviation Board under President Jimmy Carter and is known as the father of airline deregulation.

A professor emeritus of political economics at Cornell University, Kahn said the financial crisis also will force major network airlines -- especially those seeking government loan guarantees -- to rein in their labor costs.

United last month told employees it must cut $1.5-billion in labor costs to qualify for a loan guarantee. US Airways has persuaded pilots, flight attendants, customer service agents and ramp workers to take pay cuts and reductions in benefits.

US Airways struggled with labor unions throughout the 1990s to reduce costs, largely without success. Chief executive David Siegel, who took over the airline in March, credits the crisis from Sept. 11 for getting employees on the same page as management.

"If you asked me if this company could restructure pre-9/11, I would have said it would have been extremely difficult," Siegel told the Washington Post.

Woerth and other labor leaders say airline executives are using labor costs as a scapegoat for their own blunders. They say exhibit No. 1 is the failed merger of United and US Airways, which distracted both companies from reacting to the souring economy.

Clearly, cost advantages are critical when revenues drop. Southwest is the only major airline to make a profit, albeit a smaller one, since Sept. 11. Along with JetBlue and AirTran Airways, Southwest is expanding its fleet and flight schedule.

"The problems big airlines have are almost entirely labor cost problems," Crandall said. "Revenues are sufficient to cover the costs of the Southwests and JetBlues, but not enough to cover the costs of the big airlines."

American Airlines, the world's largest carrier, expects to cut 7,000 more jobs. Chairman and chief executive Donald Carty said Friday that it needs to cut its permanent cost structure by at least $3-billion a year, or more than 15 percent, over the next several years. But instead of asking employees for pay and benefit cuts, American will take a page out of Southwest's play book and try to operate more efficiently.

American will reschedule flights at its biggest airports. Like other hub-and-spoke carriers, American has peak times when huge numbers of planes land at the hubs and passengers rush off to get on their next flight.

The system provides customers great convenience but creates operating inefficiencies. Employees stand around between peaks. Planes sit on the ground longer and get caught in line waiting to take off.

"Depeaking" will mean passengers wait longer for connecting flights. But American will get more utilization from its planes and believes customers will accept the extra wait to get lower fares.

-- Steve Huettel can be reached at or (813) 226-3384.

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