INDUSTRY TRENDS
Beyond the Headlines

Air Line Pilot, June/July 2004, p.35

U.S. Airlines Struggle in Economic Uncertainty

The U.S. airline industry has lost more than $30 billion over the last 3 years, and while some in the industry are still hoping for a recovery in 2004, the battle is proving to be uphill all the way. The U.S. airline industry is now projected to lose at least $3 billion in 2004.

"Overall, the industry has experienced limited economic recovery, but so far this hasnít translated into profits," says Ana McAhron-Schulz, director of ALPAís Economic and Financial Analysis Department. "The recovery has been in the form of a return to pre-9/11 traffic, and international yields are stronger. The proliferation of low-cost carriers, increased debt loads, declining domestic yields, and higher fuel costs have all led to ongoing losses and deteriorating balance sheets.

"Debt loads are tremendous," she says. "Airlines have had to borrow significant amounts of cash to fund operations. Without those funds, more carriers may face bankruptcy."

With all of these factors at play, "management will continue to threaten downsizing, outsourcing, and bankruptcy," says McAhron-Schulz. "Sometimes an airline does have a need for relief, but we often differ with management on how much relief is necessary, what is an acceptable and fair pilot group contribution, and whether the airline has a viable business plan."

A number of other key issues will have a significant effect on the industry. After Sept. 11, 2001, Congress voted to provide as much as $10 billion in cash and loan guarantees. Not all this money was disbursed, as airlines had only through June 2002 to apply for the loans. At press time, the Air Transportation Stabilization Board is considering whether to grant United Airlines a $1.6 billion guarantee. In Chapter 11 reorganization since December 2002, United has been counting on the loan to help it exit bankruptcy.

In April, Congress gave several carriers another economic boost with $1.3 billion in temporary relief from deficit-reduction contributions to their employee pension plans. The measure wonít help most low-cost carriers, which frequently use 401(k) retirement plans instead of traditional pension plans and, therefore, do not need relief. In fact, many of the discount airlines see this type of government intervention as a threat, providing an unfair economic advantage to the larger, more established carriers.

Another key issue is that the U.S. government may soon allow even more competition into the market, making it much harder for airlines to achieve cost-effective operations. The United States and the European Union are negotiating an "open skies" agreement that would allow greater access to foreign markets on both sides. The EU is lobbying aggressively to secure domestic U.S. routes in exchange for more slots at European airports.

Although the Bush administration is saying that itís not prepared to open domestic markets to foreign carriers, some administration officials have said they favor permitting increased foreign ownership of airlines operating in the United States. Foreign interests are now restricted to a 25 percent voting stake, but the EU is demanding that the limit be raised to 49 percent. That would require legislative action. DOT Secretary Norman Mineta says there is enough support in Congress to pass such legislation. ALPA is adamantly opposed to that proposal.