Jewish World Review April. 3, 2003 / 30 Adar I, 5763

Christopher Elliott

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Consumer Reports


Airlines can stay afloat on their own during this war



http://www.jewishworldreview.com | Well before the first shots were fired in Iraq, the Air Transport Association (ATA) issued a dire warning about the coming conflict. James May, the trade group's president, projected $10.7 billion in likely industry losses, a reduction of 2,200 daily flights and the elimination of 70,000 additional airline jobs in the United States. "There is serious risk of chaotic industry bankruptcies and liquidations," the ATA reported.

Just this week, American Airlines narrowly avoided an immediate bankruptcy filing, but will lay off 20% of its pilots. United Airlines, already in bankruptcy, seeks $2.56 billion in annual labor savings through 2008. US Airways emerged from Chapter 11 protection on Monday, but a 20% drop in its bookings during the war's first week tempered that good news.

"We'll have to manage our business based upon what happens in the Middle East," US Airways spokesman David Castelveter said.

Aid for airlines

So it is no surprise that congressional Republicans are pulling together a package of roughly $2.8 billion to offset the airlines' security and insurance costs. That's on top of the $5 billion in aid and $10 billion in loan guarantees related to 9/11 that the airlines already have pocketed. And there's talk of even more money on the way.

Lawmakers should consider these requests carefully. Is this conflict really going to cripple the airline business? Not necessarily. If the war's bitter effects serve to make the airlines more efficient and competitive, the results will be healthier companies and better-served travelers. Consider:

  • A military conflict is a good excuse for more airlines to seek bankruptcy protection. A Chapter 11 filing makes it easier for a carrier to void impractical or unaffordable union contracts, thereby reducing its expenses and helping it return to profitability. Airline Web columnist Charles Leocha calls this "competitive bankruptcy."
  • Even without formal restructuring, war permits airlines to invoke a so-called force majeure clause that allows them to temporarily operate outside their negotiated labor agreements, offsetting the losses resulting from reduced bookings. Northwest Airlines invoked the clause last month as it announced 4,900 more layoffs, and US Airways' chief executive David Siegel told The New York Times Sunday that the airline industry as a whole "is absolutely in a force majeure situation." Such short-term relief might help some airlines pull through without further assistance from taxpayers.
  • Being down-and-out can give the airline industry a morale boost from a sympathetic public. After 9/11, some travelers thought it was their patriotic duty to travel by plane; many did. In the months after the terrorist attacks, business as measured by revenue passenger miles rebounded. The year ended with only a 6% loss; in 2002, the loss was 2.3%. It isn't unreasonable to expect a concerned public to rally around this beleaguered business again.
  • The hardships of war will reshape the industry for the better. "The airline industry was long overdue for economic reforms in light of its high cost of operations and built-in inefficiencies," says Michael Pisani, who teaches international business at Central Michigan University.

Among the desperately needed changes: reducing bloated wages, cutting operating expenses and maximizing capacity by flying more full aircraft to high-demand destinations.

Let them go it alone

The war in Iraq promises to accelerate this restructuring process; a bailout now would arrest it. Left alone, the airlines that emerge from this difficult stretch will be more able to serve Americans' transportation needs.

The notion that war is good for business isn't new. It has been proved time and again, including after World War II, during which the entire economy was lifted out of the Great Depression by the war's stimulus to spending.

More government money might help the airlines in the short term. But down the road, that aid would leave the United States with a weak, inefficient and uncompetitive airline industry.



JWR contributor Christopher Elliott is National Geographic Traveler's ombudsman. Click here to visit his site. Click here to sign up for his newsletter. Comment by clicking here.

Up

02/06/03: No Point in Collecting Miles?

01/29/03: Are stubby stewardesses affecting the safety of flights?

© 2003, Christopher Elliott