Airlines' awful year

Already hurt by recession,
Sept. 11 attacks push U.S. carriers to record losses

David Armstrong / SF Chronicle 26dec01

YEAR IN REVIEW

If ever the nation's airlines had a truly horrible year, 2001 was it.

Consider this litany of bad news:

"We have a global recession, $35 (per gallon) fuel, five plane crashes, a terrible attack on our territory and more labor problems," said Michael Friedman, an equity analyst with American Express Financial Corp.

Or just consider the finances. The numbers are downright scary.

Storm-tossed by the global recession and rocked by the terrorist attacks of Sept. 11, the nine major U.S. carriers are expected to post a record $6.4 billion loss for 2001, according to leading Wall Street analyst Sam Buttrick of UBS Warburg.

Next year should be better, but far from good. Buttrick expects industry losses to range from $2 billion to $2.5 billion in 2002.

Hit hardest of all are the world's two largest airlines: No. 2 United Airlines, which saw two of its hijacked aircraft used in the terrorist attacks on the World Trade Center and Pentagon; and No. 1 American Airlines, which also lost two hijacked planes. American was again damaged when one of its planes accidentally crashed in Queens, N.Y., on Nov. 12, killing everyone on board.

Since Sept. 11, airlines have slashed flights by 20 percent, put off delivery of new aircraft and furloughed 100,000 workers in an attempt to control costs.

Simultaneously, airlines have slashed prices on leisure fares and tried to woo travelers by convincing them it is safe to return to the sky. That message clashes, however, with the sight of armed National Guard members patrolling airports and President Bush's declarations that airlines and airports are on the front line in the war against terrorism.

The financial situation grew so dire that Congress in late September approved a $5 billion cash payout and $10 billion in loan guarantees to help the airline industry return to stability. The airlines had argued passionately that billions were needed to stave off bankruptcy for major carriers. But both the airlines and Congress took political heat for approving the bailout without earmarking any money for laid-off airline workers. .

SIGNS OF IMPROVEMENT

The industry's efforts to get back to normal are beginning to bear fruit, though. In November, domestic revenue per available seat, a key benchmark, was down 19 percent industrywide from November 2000. However, that's an improvement from October of this year, the first full month after the attacks, when domestic revenue per seat was 24 percent lower than in October 2000.

"I think it's fair to say we are closing the gap compared with last year," said John Heimlich, an economist with the Air Transport Association, the trade organization for commercial airlines.

The gap between red ink and profitability, however, remains formidably wide.

Just on Monday, No. 3 Delta Air Lines warned it could lose up to $830 million in the fourth quarter of this year.

United lost $1.8 billion ($34.46 per share) on revenue of $13.2 billion for the nine months ending on Sept. 6.

In the same period a year ago, United's parent company UAL Corp. earned $121 million (66 cents per diluted share) on $14.6 billion of revenue. Since Sept. 11, United has slashed 20,000 jobs and 750 daily flights but still has lost $15 million a day.

United, the dominant carrier at San Francisco International Airport with half of all flights and passengers, was already being hammered by high fuel costs, the payout on a rich contract with pilots (who staged work slowdowns in 2000) and a steep, recessionary drop in business travel.

The carrier reported that its business-class traffic at SFO fell 34 percent in the second quarter of this year, a loss the airline attributed to cutbacks in corporate travel by Bay Area high-tech companies.

To make matters worse, United's plan to merge with US Airways fell apart last summer. United called off the deal in the face of antitrust opposition by the U.S. Department of Justice. This move pleased consumer advocates, who said that a merger with US Airways would raise fares and reduce competition.

Ironically, the proposed merger was a response to American's purchase of failing Trans World Airlines, which the DOJ approved. That acquisition allowed American to pass United and become the world's largest airline. .

UNITED FACES LABOR TROUBLES

Since Sept. 11, matters have grown even worse for United.

Its negotiations with the International Association of Machinists, whose members have gone without a raise since 1994, are deadlocked. Last week, the union, which represents 15,000 United employees, authorized a strike.

In response, President Bush ordered a 60-day cooling off period and created a presidential emergency board to mediate the dispute, postponing any strike until at least Feb. 21, well past the holiday travel season. Congress could then impose a settlement.

It was the second time this year that Bush had intervened to head off an airline strike. In March, he appointed a presidential board that worked out a contract and averted a strike by machinists at Northwest Airlines.

United's persistent troubles cost James Goodwin, UAL's chairman and chief executive officer, his job in October. With the support of United's politically powerful pilots and machinists, who have seats on the board, the job went to turnaround specialist John Creighton Jr., credited with reviving the fortunes of paper products giant Weyerhauser Inc. in the 1990s.

Making United a high-flier again won't be easy.

"It's more than any one guy can do," said Friedman, the analyst. "Many things have to go right."

But then, many things have to go right for the entire industry: better security, more passengers, more high-yield passengers, a return to profit for corporate clients.

The only major airline that has done tolerably well is industry maverick Southwest Airlines, the low-cost, no-frills carrier from Dallas. Southwest, which pulled out of SFO this year to cluster its services at Oakland International Airport and Mineta San Jose International Airport, earned $151 million in the third quarter.

Southwest did not lay off any workers or trim any flights, but it did postpone taking delivery of new aircraft until early next year and warned it could lose money in the fourth quarter.

FEARS OF FLYING

One of the airline industry's problems is the public's lingering belief that flying is unsafe. Posting National Guard troops in airports is meant to dispel that feeling, but critics say that presence is largely cosmetic.

Fliers are frustrated as well as anxious. Closer inspection of hand-carried luggage by baggage screeners has led to long lines and substantial waits at many airports. Even so, dangerous objects -- from knives to sneakers wired with explosives -- continue to be smuggled through major airports.

New Department of Transportation rules that allow gateway access only to ticketed passengers has sharply reduced business for airport merchants. Indeed,

this fall SFO temporarily reduced rents for its merchants to keep them out of bankruptcy, even as the airport said reduced passenger flow and lower fees and parking income would cause a $100 million shortfall this year.

Last month, Bush signed the Aviation and Transportation Security Act. The law federalizes airport security workers; therefore, cash-strapped airlines will no longer use much-criticized private firms to employ baggage screeners. The law requires screeners to be U.S. citizens, which has sparked another crisis at SFO, where some 70 percent of screeners are legal residents but not U.S. citizens.

In a sign that political in-fighting lies ahead, U.S. Sen. Dianne Feinstein,

D-Calif., has introduced legislation that would speed citizenship applications for non-citizen screeners.