Airlines face grim future
by shrinking operations

By Brad Foss
Associated Press

The airlines are carrying lots of baggage these days, it's just the wrong kind.

Business travelers continue to spend less. Pension and security costs are on the rise. Debt is growing. And the perceived aggravation of flying is propelling many travelers to drive or take the train for shorter trips.

So, with a dismal third quarter behind them, and the immediate future looking grim, major carriers are shrinking operations again. They are unloading employees, real estate and aircraft as part of an ongoing effort to stanch the billion-dollar losses that have dragged their stock prices to historic lows.

"To the extent that anyone thinks large network carriers have been waiting for passengers to return, the announcements and actions taken in the last week should dispel that completely," said David Treitel, chairman of New York-based airline consultancy SH&E Inc.

In the past week, Delta Air Lines said it would lay off up to 8,000 employees, American Airlines said it would delay delivery of 34 jets through 2005, and Northwest Airlines said it would close a maintenance center and several ticket reservation offices. American announced in August that it would cut its payroll by 7,000.

Industry consultants expect that before the year is up there will be even more layoffs and that major carriers will be forced to further pare the number of short-distance flights, especially in smaller markets.

"Every carrier has seen traffic in the shorthauls just go away," said Robert Mann of R.W. Mann & Co., a Port Washington, N.Y.-based consultancy.

The latest wave of cost-cutting came as the nation's largest airlines racked up roughly $2.2 billion in third quarter losses, putting the industry on a pace to lose some $8 billion for the second year in a row. US Airways was forced into bankruptcy two months ago and other carriers are desperately trying to avoid the same fate.

"It's certainly more than a bit discouraging as an equity analyst when the most frequently asked question is 'What airline is going bankrupt next?' And when the follow up is, 'No, I meant after United?"' Samuel Buttrick, a UBS Warburg analyst, quipped in a recent report.

For all the clouds hanging over the industry, analysts found some bright spots within the latest round of earnings reports:

>> Southwest, which earned $75 million, said it would increase capacity by 5 percent in the fourth quarter.

>> Northwest, which lost $46 million in the July-September period, was praised for maintaining strong liquidity. It had $2.4 billion in cash on hand at the beginning of September, according to Salomon Smith Barney.

>> Continental, which lost $37 million, was credited with efficient operations, reducing its cost per seat by 4.7 percent compared with last year

But the industry tea leaves mostly foretell gloominess.

"In our view, one of the largest uncertainties hanging over the sector includes underfunded pensions," said Brian Harris, a Salomon Smith Barney analyst.

In 2003, Delta will have to spend up to $250 million in cash and take charges of up to $300 million to deal with the problem, Harris said. Other carriers face similar, if less severe, situations.

Another financial blemish for the industry is that debt in relation to capital has risen 44 percent, according to data released this month by the Department of Transportation.

As for travel demand, the fourth quarter is traditionally weaker because fewer business trips are taken around Thanksgiving and Christmas. Concerns about diminishing revenue have been exacerbated by the threat of war in Iraq.

Southwest, which hasn't posted a quarterly loss since the 1991 Gulf War began, hinted that a new war in Iraq could bring its streak to an end.

Even without a war, though, the major carriers have plenty to worry about.

Because of tighter security in the wake of the terrorist attacks, airlines added a $2.50 fee to ticket prices to reimburse the government, which now controls baggage and passenger screening. At a time when travelers are extremely cost-conscious, the airlines worry that these fees, which wind up in the government's pocket, will also drive away some customers.

An additional downside of the stricter security is what airline executives refer to as the "hassle factor," the added time spent at airports that makes cars and trains an attractive alternative for shorter trips.

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