Tuesday, October 4, 2005

The woes of US airlines

October 04, 2005, www.rediff.com

Seems like just yesterday when I was pacing the corridors of the Detroit airport early this year, waiting for the connecting flight to Syracuse, New York. Every other plane taking off from the runway was the trademark silver and red Northwest carrier, with dozens more standing in a row on a side.
Then comes the shocking news on September 14, that the carrier which made its presence felt in almost every city of the eastern coast of United States has filed for bankruptcy. Coincidentally, Delta Air Lines, third largest airline in America filed for bankruptcy on the same day.
The woes of America's airlines seem never-ending. On the one hand, the airlines of the emerging nations are growing by leaps and bounds with open skies treaties, more routes being covered and more players coming in into the market. On the other, the airlines industry of some of the developed economies, especially America, has been facing exceedingly difficult times since the start of this century.
Airline companies are a symbol of national pride for many countries. So, the government in many cases tries to bail out the troubled company. But, despite that, names like Swiss Air and Sabena of Belgium became history during the first round of crisis post September 11 attacks on the World Trade Center twin towers, which sent the insurance costs soaring for the airlines.
In the US, the government put together an aid of $15 billion (all taxpayers' money) to help the ailing industry then. United and US Airways filed for bankruptcy soon after the terrorist attacks. United Airlines is still under the chapter 11 proceedings and US Airways closed its merger plans with America West Airlines a week back (September 27) to emerge from the second round of its bankruptcy.
The other reasons that were blamed then were the downturn in the US economy, the foot-and-mouth disease, SARs epidemic, and the gaining importance of the low cost carriers like Ryanair and Jet Blue. What followed were fierce job cuts, cost cutting measures and restructuring.
The second round, now, is more worrisome. The trouble this time around is soaring oil prices. Fuel being the major expense for airline companies, cost of jet fuel at an average of $110 per barrel, post Katrina and Rita, is scary. Around 18% of the refineries (in terms of capacity) in US had to shut down due to the hurricanes.
This time around, even low-cost carriers like Jet Blue, Independence Air and Southwest are being hit very hard as the fuel costs remain same for them too. Jet Blue, a profitable company, has recently announced that this quarter it will lose money. Independence Air announced on September 30 that it will lay off 600 employees, 18% of its workforce. It is also resorting to cutting down flight schedules to cut costs.
Southwest Airlines, the most profitable airline company in US, however has hedged its position by entering into very long term contracts to purchase fuel.
American Airlines, the number one carrier in US, had to cancel a number of flights temporarily after a failed attempt to pass on some of the high fuel costs to the customers. Continental Airlines has announced that it will also increase the fares and many other airlines might have to follow suit.
Surprisingly, the US airlines industry is not undergoing any consolidation. It seemed imminent in 2001-2002, but nothing major happened. In this second phase too nothing major is in view. The only know proposed merger, that of US Airways and America West Airlines, is still under the lens. It is to be seen if the merger can successfully turn around US Airways which carries the burden of being in the midst of the worst-ever times for the airlines industry and the highest-ever cost of fuel.
Philip Baggaley, a senior airline credit analyst with Standard & Poor's, puts it rightly, "Airline mergers are very difficult. They require a lot of cooperation from labor, management attention and financing. All those things are in short supply when you're just struggling to survive."
Three out of the five major airlines in US are under chapter 11 bankruptcy code. What is to be seen is whether the industry will see a major overhaul and consolidation or will the government be willing to bail out the industry from the rising fuel prices.
In any case, the whole industry needs to spread its wings for prayers to tide over the difficult times.
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