NEW YORK, NY (15 Dec 2002) -- Who changed the economics of the U.S. airline industry, killing its main business model and leaving so many carriers in debt and disarray? Look to the vanishing business executive and a gang of orange and red jets. With airline losses likely to exceed $9 billion this year and with United Airlines on its way into bankruptcy, the search for a new industry model has gained speed. Airline management is expected to undertake its most serious battle in years with organized labor. Industry giants such as United Airlines will try to become more like their nimble low-fare rivals, scheduling their flights more efficiently even if it means less convenience for their customers. Passengers, though faced with few immediate changes, may soon be forced to acknowledge the gap between the level of service they want and the one they are willing to pay for. The path to this overhaul winds back to the deregulation of the U.S. airline industry in 1978, when the carriers won the right to compete on price. But the inevitable was delayed by the fitful growth of start-up carriers and the willingness of corporate America during the 1990s bubble to pay almost any price for a seat. These days, those spendthrift executives have vanished in a flurry of corporate cost-cutting and the complications added to travel since the terrorist attacks on the United States last year. Meanwhile, the orange and red Boeing 737s of Southwest Airlines have spread to almost every part of the country, bringing price competition to many routes that full-fare carriers once dominated. Imitators of Southwest such as JetBlue Airways, based in New York, have added to the established airlines' troubles. "Airlines have steadfastly resisted abandoning their business model, and they're still drowning," said Bob Harrell, a travel consultant in New York. Now, he said, "they have concluded that doing nothing is no longer an option." Even an unexpectedly fast economic rebound, and the new corporate spending it would bring, would be unlikely to restore the industry's old profits. With the rise of the Internet, vacationers and road warriors are on a nearly equal technological footing with the industry itself, and passengers can save hundreds of dollars merely by making minor changes in their travel plans. These pressures will force United and other big airlines to look for cost savings above all else, executives and analysts say. As if that were not hard enough, the big airlines will need to reduce expenses even as they are cutting last-minute fares - as some have begun to do in recent weeks - to win back business travelers from discount carriers. Without business travelers to foot the bill, the extensive networks of frequent flights that the airlines have built up over the past decade will probably shrink. "The public is not willing to support the levels of airline service that we've had in the past," said Alfred Kahn, an economist who oversaw much of the industry's deregulation as a government official in the 1970s. "Airlines are going to have to shrink their operations in some way." US Airways sought bankruptcy protection in August. American Airlines, Delta Air Lines and most every other big carrier except Southwest are posting losses, as they have for almost two years. Many executives say moving toward a Chapter 11 bankruptcy filing by United, which was pushed to the brink last week when the federal government rejected its plea for $1.8 billion in loan guarantees, will give the industry leverage over its unions that it has not had in years. Government officials called United's problems too deep to be solved by a cash infusion. "You have powers in a Chapter 11 world you don't have when you're outside," said Douglas Steenland, president of Northwest Airlines. "You can avoid paying debt, reject leases on airplanes and get collective-bargaining agreements restructured." | | With the ability to renegotiate labor contracts based on the industry's new realities rather than those of the late '90s, United could try to fulfill airline executives' longtime dream of cutting the high wages of pilots and some other employees. "It could create a ripple effect," said Jim Corridore, an analyst at Standard Poor's Corp. "They'll have a huge competitive advantage over AMR and Delta, who might have to do the same thing - file for Chapter 11 - to get an advantage. It's in the realm of reality." Airline unions still have significant power because of their long history of success and the fact that many airline workers are hard to replace. Still, faced with a shrinking industry and little hope of finding new jobs at similar pay, workers may show less resolve than in the past. But while union concessions would put the industry on firmer financial footing, falling wages and lost jobs could create morale problems in an industry in which small errors can produce tragedy. Even as the per-mile price of flying has fallen by half, adjusted for inflation, since deregulation, and even as airlines have built an impressive safety record, travelers have grown frustrated with the industry. Pilots and gate agents often underestimate delays. Planes sometimes land on time only to wait for empty gates. Frequent-flier tickets to Hawaii or Europe must sometimes be reserved almost a year in advance. But discounters such as Southwest and JetBlue have generally avoided travelers' anger by clearly explaining what their airlines offer and what they do not. "When you fly a well-run low-cost airline," said Robert Yeager, an international relations consultant based in Oakland, California, who flew to New York on JetBlue last week, "you really realize what United is trying to fight." In recent weeks, American, Continental Airlines and Delta lowered some full fares in an effort wean some travelers from advance-purchase tickets and woo them from discount airlines. In some markets, last-minute fares have fallen by about one-third. Even though air travel has fallen sharply since the terrorist attacks last year, these reductions are among the first steps to cut business fares officially, rather than by offering bulk discounts to companies. "The days of the $3,000 walk-up fare from New York to L.A. are over," said Holly Hegeman, an analyst at PlaneBusiness.com. Of course, relatively few people buy full-fare tickets. The more important changes probably will be in the space between expensive last-minute fares and cheaper advance-purchase fares. At those levels, airlines are likely to cut prices and impose stricter rules. A traveler will sometimes receive a discount for buying a ticket at least 10 days in advance, even if the trip does not include a Saturday night stay, but will be punished for not sticking to that schedule. Starting Oct. 1, many airlines made so-called nonrefundable tickets true to the term. If travelers miss a flight - without rescheduling for the same day and paying a penalty - they often lose the entire value of the ticket. On Jan. 1, passengers who want to take a different flight on the same day as their original trip will sometimes have to pay $100, according to Rosenbluth International. In effect, the industry is offering business travelers a compromise. Airlines will stop charging so much for last-minute tickets, but they will no longer allow passengers to buy inexpensive tickets and then change itineraries. Leisure travelers are unlikely to benefit from the changes. In recent years, whatever complaints they have had, they have often received the comforts and schedules of full-fare service at low prices as the majors tried to match the discounters. With fewer business fliers, airlines have eliminated some flights and plan to cancel more. "We need a system where you can go from anywhere to anywhere with just one stop," said David Neeleman, president of JetBlue. "But do we need 10 different hubs with six different airlines to do that? I don't think so." Gordon Bethune, chief executive of Continental, said a 15 percent cut in flights across the U.S. air system would allow airlines to become profitable. SCUBA FORUMDISCUSS THIS TOPIC - Dive in and have your say at Scuba Forum |
