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Major U.S. carriers: down but not out. (Airlines).

Article Excerpt
Last year was a landmark for the U.S. aviation industry. It represented the early stages of major restructuring that has accelerated in the first half of 2003. Ranging from comprehensive cost-cutting measures and new network strategies to redesigned pricing systems and mega alliances, every element of airline business models is under the microscope. The end game for each airline, of course, is near-term survival and eventual profitability, a condition the industry at large has not experienced since Y2K.

Certain external factors beyond the industry's control further have pressured carriers already faced with a prolonged traffic slump dating to late 2000 and exacerbated on Sept. 11, 2001. The war in Iraq and fears related to severe acute respiratory syndrome have decimated demand in many international markets, while Corporate America's cost-cutting focus has kept a lid on domestic business travel and wrecked airline pricing structures.

American Airlines CFO Jeff Campbell in January succinctly described the fare environment: "No systemwide fare increases were accomplished in 2002 but fare sales were robust."

According to the Air Transport Association, domestic fares in 2002 were 15 percent below 2000 levels. Year-over-year average fare declines persisted into 2003, amounting to at least 4 percent in each of the first three months of the year.

Furthermore, the American Express Business Travel Monitor found the average domestic fare paid by the company's corporate travel clients in 2002 dropped 9 percent, to $282, the lowest level in five years.

Other elements of the current industry crisis are of the airlines' own making. Cost structures, which had become inflated but temporarily sustainable in the boom years of the late 1990s, quickly became too burdensome and reached a critical stage in last year's depressed revenue environment. As a result, carriers honed in on their top cost item: labor. Reform is well underway.

Yet, according to Raymond James & Associates analyst Jim Parker, major U.S. carriers "will nor become low cost, regardless of new labor programs, and must shrink into a diminished premium-price market."

Shrinkage already has occurred as majors cut unprofitable flying by reducing frequencies and suspending certain services. Such downsizing obviously calls for corresponding employee reductions. Certain carriers even may follow America West Airlines in eliminating a loss-making hub, but most agree that overcapacity-- largely unresolved by carriers fearful of surrendering marketshare--continues to plague the industry and jeopardize any chance for near-term profitability

Meanwhile, competitive pressures applied by fast-growing low-cost carriers (see story, page 22) further complicate recovery efforts for major network carriers. The ultimate goal "is nor for everyone to look like JetBlue and Southwest," said former Federal Aviation Administration administrator Jane Garvey. "We can't forget the benefits that larger carriers bring, such as frequency and a hub and spoke system providing service to many smaller communities."

The confluence of challenges has airline executives closely monitoring weekly traffic reports, looking for any encouraging signs. There have been some. After a lengthy downward trend, ATA reported year-over-year traffic growth in the last week of April and first week of May. When the war ended, ATA stopped producing weekly traffic reports.

After two years of tumult, there are positive developments unfolding. Top of the list is labor cost reform, already taking hold at American, United and US Airways and likely on the way at others. Some economists and industry executives predict economic recovery and traffic increases in the third and fourth quarters, and mega domestic alliances, should they function as intended, will present incremental revenue opportunity for participating carriers.

Meanwhile,...

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