Reborn, old U.S. airlines look to soar again

Roland Jones Business news editor • Profile • E-mail

When Northwest Airlines emerged from bankruptcy protection May 31, it marked the first time in almost five years that no major carriers were in bankruptcy proceedings.

Like other carriers that filed for protection from creditors in the years since terrorist attacks of Sept. 11, 2001, Northwest has emerged slimmer, with a lower cost structure and ready to soar.

And some analysts say Northwest is positioned to thrive in the years ahead as the industry once again is making money and filling seats at record levels.

But just as the carriers are gaining altitude, they are facing fresh headwinds as rising jet fuel costs eat into profits and consumers are resisting fare increases and cutting back on air travel, due in part to the downturn in the housing market.

“The domestic operations of all the major U.S. airlines in the United States are still under pressure,” said Vaughn Cordle, who runs AirlineForecasts in Washington, which tracks the airline industry. “We’ve crunched the numbers for the 34 major airlines in the industry that make over $100 million in revenue each year and we estimate that the industry is coming up $8 billion short in revenue for this year relative to what they need to break even, and they need to raise fares by about 7 percent across the board to return to normal.”

Northwest and three other "legacy" carriers all have been through bankruptcy in recent years: Delta, United and US Airways. The airlines already were hurting as the economy slipped into recession in early 2001, and then came the terrorist attacks, which severely affected travel for both business and leisure. At the same time lower-cost carriers led by JetBlue and Southwest were challenging the traditional fare structure of their larger rivals.

The carriers are all thriving now, benefiting from a growing economy and lower costs approved by the bankruptcy courts — often at the expense of worker pay and benefits.

But the big carriers still face fierce competition from their smaller, nimbler rivals, which have successfully held prices low even as jet fuel costs have risen, and are not saddled with debt and the cost of an older work force, including pensions and retiree health care, said Cordle.

“The fundamental problem with the U.S. airline industry is there are too many competitors,” Cordle said. “They compete away their revenue, and so they can’t properly invest in their companies. That leads to morale problems and the quality of service going down, and so the product is bad because earnings are inadequate."

He said consolidation would help solve the industry’s problems but is unlikely in the near future. Airline stock prices are overvalued, he said, and consolidation usually happens in an industry's downward cycle. And two recent proposed deals failed to work out: US Airways’ bid for Delta, and AirTran Holdings' offer for Midwest Air Group both were rejected.

Before the economy fell into recession in late 2000, the airline industry was on a roll, riding the economic boom of the 1990s, when business travel rose and fuel prices stayed low. U.S. airlines took in about $5 billion a year in profits from 1997 through 1999 and almost $2.5 billion in 2000, but then lost some $50 billion in the next five years.

Freshly restructured, airlines like Northwest are hoping to recapture some of their former glory. Northwest, for example, used bankruptcy protection to cut costs by $2.5 billion a year, including labor cost savings of $1.4 billion, and cut debt by $4.2 billion.

MORE FROM AVIATION

Aviation Section Front

BA, Iberia say merger a plus for passengers Boeing chooses S.C. for new 787 line Boeing posts quarterly loss, lowers forecast Continental loses $18 million in third quarter Boeing expects $1 billion charge Frontier Airlines set to emerge from bankruptcy Japan minister says JAL won’t be liquidated As fees rise, airlines test flier limits Report: Troubled JAL mulls raising $2.8 billion Airline industry lost over $6 billion in 1st half Aviation Section Front   Add Aviation headlines to your news reader: