Airline forecast: Less turbulence - East Valley Tribune: Business

Airline forecast: Less turbulence

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Posted: Sunday, December 21, 2003 1:08 am | Updated: 1:52 pm, Thu Oct 6, 2011.

The airline industry continues to survive on peanuts.

U.S. carriers hit by billions in losses in 2002 and 2003 are not expected to do much better than break even in 2004, analysts say.

While low-cost carriers such as the Valley’s America West Airlines and Mesa Airlines have taken their lumps since the terrorist attacks of 2001, it’s nothing like the nation’s largest airlines, which continue to try to recover from a fundamental change in traveling habits that began in the late 1990s.

"You’ve totally changed the model that works for the industry," said Perry Flint, managing editor for Air Transport World, a business publication for airline managers. "What we saw in the third quarter is many of these airlines, with a few exceptions, did return to profitability, but it’s the strongest quarter this industry sees, this is the best of the best, it doesn’t get any better and frankly, it was a pretty crummy quarter. I mean all these guys were floating just above sea level so it’s not the kind of money that pays back however many billions of dollars that’s been lost."

The magazine’s January issue is predicting U.S. carriers will make $400 million in 2004, a pittance in an industry where the total dollar value of all outstanding stock shares is $48 billion.

The industry has been hammered by fewer fliers, business travelers looking for cheap fares and labor negotiations.

"Certainly things could not have gotten much worse following Sept. 11, (2001), but I also think it’s fair to say they haven’t gotten a lot better," said Jonathan Ornstein, CEO of Phoenix-based Mesa Air Group, which flies in small regional markets and contracts with larger airlines. "The environment continues to be tough both on revenue basis as well as costs at the major carriers."

The Air Transport Association, an industry trade group, says airlines lost more than $11 billion in 2002 and are expected to lose between $7 billion and $9 billion this year.

One Wall Street analyst says the loss this year will be $5.4 billion, down from the earlier estimate.

Although the future is expected to improve, there is still some doubt as to whether airlines, sensing a turnaround, plan to add capacity next year. Ray Neidle, an airline analyst at Blaylock and Partners, says the additional capacity will put pressure on yields, the amount of money airlines make on each seat sold. He predicts light losses among the nation’s largest airlines.

"I’d rather see them get their prices up before they went ahead and started putting capacity increases in," he said of continued rock-bottom fares.

Scott Kirby, America West’s chief financial officer, said the nation’s largest six airlines, Untied, Delta, American, Northwest, Continental and US Airways, will continue to struggle and the industry will contract.

"It can happen from all or some of them shrinking as independent entities, it could happen from consolidation and shrinking or it could happen by some of them liquidating," he said. "I don’t have a good enough crystal ball to know which of those things will happen. I don’t think anyone does, but at the end of day, you wind up with less capacity from the big six and fewer (airport) hubs."

Kirby said there is no concern at America West over the large airlines, also called legacy carriers, increasing the number of routes they serve.

"You have to put capacity growth from the legacy carriers in context," he said. "They reduced their networks dramatically in 2003 because of the Iraqi War and SARS and much of the growth next year is just replacing capacity that was already in the system earlier in the year. I think that the real growth is much lower, and I actually believe the growth in demand is going to exceed the growth in supply next year. Clearly, if there was less growth coming from the industry as a whole, I think the industry’s financial results would be better, but I don’t view this as a big negative for the industry."

Huge changes in the airline sector began even before Sept. 11, Flint said.

"Revenue dropped out of the market in first quarter 2001" he said. "From 1997 on, you had an enormous boom driven by tech and telecommunication stocks and something called Y2K. By the end of 2000, all the Y2K spending was over, and all the techies were going back home now because there weren’t any more companies to fix and the dot-com boom was over."

During the good times, fares were not an issue for many business travelers. Legacy carriers charged as much as $1,400 one-way for walk-up customers.

"Airlines were basically doing so well, and there was so much revenue coming in, as usual, they permitted themselves to be held hostage by labor unions," Flint said. "I don’t know if permit is the right word, but what are you going to do? They can shut you down. In any case, whoever’s fault it was, the picture of airline labor costs just got totally messed up. The revenue disappeared and just dropped away. The model didn’t work anymore ."

Adding to the problem were business travelers revolting against high ticket prices. They searched the Internet for deals, conducted Internet meetings instead of flying to be face-to-face and wrapped trips around the weekend, when fares are cheaper.

Big airlines were all left in the same position, Flint said.

"The product they built their business around, which was this idea of a network that was going to cater to the business traveler, there aren’t enough people that are willing to pay the fares to support that system. The question is will it ever come back?"

America West isn’t banking on it. The carrier that once flew Boeing 747s to Hawaii and Japan transformed itself in 2002 thanks in part to a government-backed $380 million loan. It now says it competes with a handful of low-cost airlines that includes Southwest, Frontier and JetBlue.

The Tempe airline says lower business fares introduced last year are successful. In the third quarter, America West saw business revenue grow to 44 percent of total revenue, compared with 34 percent in the previous year.

"We’re seeing significant growth in business revenues while the rest of the industry is struggling with business revenue," Kirby said. "We’ve seen strong performance in leisure travel as well, but the biggest area of growth for us has been business traffic."

The pilots’ union has yet to endorse a new labor contract, but it is in the midst of the third ratification vote in a year. If approved, the pact will not increase the airline’s costs significantly, Kirby said.

The favorable financial outlook has America West planning to grow by 10 percent a year.

Mesa Airlines is also planning to grow and Ornstein says the concern over capacity increases by larger airlines is a nonissue.

"There’s going to be capacity coming into the system, and this will, in fact, be very helpful to consumers and push prices lower," he said. "All capacity means is ‘We can’t charge you more.’ "

Mesa, which flies under several names including America West Express, recently purchased the assets of the nowdefunct Midway Airlines and is in the midst of a unsolicited takeover bid for Atlantic Coast Airlines. The company announced Wednesday it has arranged permanent financing for eight regional jets.

"Waiting for the economy to bail us all out is a bad strategy," Ornstein said. "You have to operate your business effectively and efficiently and be able to make money in good times and bad times. We sell our product at market rates and we have to be able to build our product at market rates and that includes our airplane costs, fuel, our airport costs, and it includes labor."

Flint said it’s still unclear whether large airlines will bounce back.

"At least when you were paying $1,200 before, there was some semblance of a meal," he said. "Now you don’t even have that. All the network carriers have done is take away all the difference between themselves and the little guys."

Federal security measures have also kept people from flying, Flint said.

"I wouldn’t fly to Pittsburgh," he said. "I’m 260 miles from Pittsburgh and I’m going get into my car and drive and I’m going to drive in four hours and that’s going to be a more pleasant experience for me. I’m not going to have to take my shoes off, I’m not going to have to leave my bags unlocked, I’m not going to unbuckle my belt and get the full Monty there at the gate. People used to fly that (route), and they’re not anymore, and a lot of the people that would fly that kind of a trip are business people."

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