Turbulence for airlines growing

The industry faces upheaval as finances worsen and low-cost carriers gain ground.

The nation's major carriers are facing a do-or-die proposition that may change air travel in the United States forever.

The large traditional airlines are now so beset by debt, rising fuel costs, expensive labor, and tough competition from low-cost carriers that they're facing stark choices once unthinkable, even after the terrorist attacks shook the industry in 2001. Add to that the disruptions from multiple hurricanes this summer, and it's now downsize, economize, and streamline - as Delta Air Lines did last week - or face certain bankruptcy. If US Airways can't reach a deal with its unions soon, it could face its second bankruptcy in two years.

For the traveling public, this shakeout may mean that visiting a grandparent in one of the nation's smaller cities will be harder to do. Frequent-flier miles built up during years of loyalty to one carrier may disappear with the stroke of a bankruptcy court's pen. And once-familiar brand names like United Airlines and US Airways may be shelved in history books like other now-vanquished aviation giants Pan Am and TWA.

"This is the first time we've seen such an industrywide depression that really threatens the future of the larger carriers," says George Novak, an aviation expert at the Aviation Institute at George Washington University in Washington.

Delta signaled the beginning of the latest round of downsizing last week when it announced it would cut its Dallas hub and as many 7,000 jobs. US Airways says it needs to win $800 million in wage concessions from employees, or it's back to court this week - perhaps as early as Sunday. But analysts say the real changes, including possible liquidations, may not begin in earnest until next January, after the peak holiday travel season.

Still, with several lean and hungry low-cost carriers like JetBlue anxious to pick up routes and expand, the disruptions to daily service may only be minor. After Delta leaves Dallas, for example, travel agent Dan Sondhelm says he doesn't think customers will be inconvenienced.

"I expect the competition to come in and take on additional flights in Dallas," says Mr. Sondhelm, an independent travel agent with Global Travel International.

Yet aviation analysts say it's prudent for air travelers to be proactive. That's because the major network carriers remain in deep trouble. After two years, United has been unable to emerge from bankruptcy. Even Delta says that despite its cutbacks, it is still on the brink of bankruptcy.

"One of my colleagues just sent me an e-mail asking, 'Which should I burn first, my 300,000 Delta miles or my 100,000 USAir miles?' " says Clint Oster, an aviation expert at Indiana University in Bloomington. "I didn't have an answer for him, I just said, 'This is not the time to postpone that trip to Europe if you're thinking of using frequent-flier miles.' "

Traditional airlines vs. low cost

The traditional carriers' biggest fiscal challenges come in the form of fixed costs, such as unionized labor, which make it difficult to compete with their lower-cost nonunion rivals. [Editor's note: The original version of this story misidentified Southwest as a nonunionized airline.] Then there's the big carrier's network system, called the hub and spoke, which grew up after deregulation in 1978. The low-cost carriers are far more efficient because they fly point to point. Some majors are now trying to emulate that.

In Delta's latest move, the airline not only eliminated a traditional hub, but it also put more money into Song, its low cost subsidiary that was designed to compete head on, point to point, with JetBlue.

"Everybody is going to try to morph [into a low-cost carrier] because things in the industry are so bad," says Rich Gritta, a aviation economist at Portland University in Oregon. "The question is can they succeed, and I don't know the answer to that."

The airlines have also been beset by factors outside their control, such as the hurricanes, which have even put a damper on some of the low-cost carriers.

As Frances pounded Florida over the Labor Day weekend, for example, JetBlue grounded 262 flights. Since Florida represents 43 percent of its business, the airline is now projecting lower earnings for the quarter.

There's also concern about longer-term effects: "New Yorkers feel Florida is closed to tourism," says Gareth Edmondson-Jones, a vice president for the discount airline.

The airlines are also watching their bottom lines get squeezed by high jet-fuel costs, their second largest expense. So far this summer, fuel costs are up about 35 percent over last year. At American Airlines, the nation's largest carrier, every one-cent increase in the price of a gallon of jet fuel adds $33 million in costs.

Those higher costs are forcing airlines to become creative in trying to cut down on fuel consumption. They have reduced the amount of reserve fuel they carry for international flights, pared the use of fuel- powered ground units that run air conditioning, and encouraged pilots to use only one engine when taxiing. And, just like motorists, they've found there is a wide disparity in the price of jet fuel, so it's worthwhile to top up at the cheapest airport.

But many of the industry's primary problems go back to those fixed costs, like large pension payments. United, for one, had to go to Congress to ask for a special respite, which allowed it to reduce its payments to its pension funds. It has 18 months to make up the difference. Even then, it may not have the money to do it.

To protect the pensions, the Air Line Pilots Association is asking Congress to give them more time. "Our first priority is to protect those nearing retirement to make sure their money is there," says John Mazur, a spokesman for ALPA.

Pensions at US Airways

If Congress doesn't act in its favor, United may have to replicate US Airways, which terminated its payments to pension funds. This would shift the burden to the Pension Benefit Guarantee Corp., a quasi-government organization, which would reduce retirees' payouts, especially to the pilots. At US Airways, pilots have seen their pensions fall from as much as $100,000 a year to $28,500.

But some analysts say that the more pilots act to protect their pensions, the more likely it is that some of the major airlines will not survive.

"Even American and Delta may decide that the only way to get the concessions and contracts we want is to file [for bankruptcy]," says Mr. Gritta. "Then they can say, 'OK, guys, here's the deal. You can play ball and we can reorganize, or you can stick to your guns and we'll just go out of business.' "

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