TIME: Almanac 1993/TIME Almanac 1993.iso/time/111290/1112200.000

Text File | 1992-08-28 | 8.3 KB | 160 lines

                                                                                BUSINESS, Page 52

Trouble on The Horizon


Buffeted by rising fuel prices and falling traffic, U.S.
airlines are heading for a major shake-out

By JANICE CASTRO -- Reported by Gisela Bolte/Washington and
Richard Woodbury/Houston


    Talk about bad timing. Just last week officials at
Continental Airlines proudly unveiled new interior designs for
their aircraft. But the spectacle of the troubled carrier
showing off its blue-and-gray fabrics and contoured seating
reminded airline experts of the old line about rearranging the
deck chairs on the Titanic. Just a week earlier the airline had
veered away from a return trip to Chapter 11 bankruptcy
protection, from which it had emerged four years ago. Instead
Continental may try to raise cash by selling off some of its
valuable routes and other assets. Like many of its competitors,
Continental has been caught in a powerful economic downdraft at
a time when the airline was expanding and ill-prepared for
trouble.

    No industry is being hit harder by gushing crude prices than
the airlines. Loaded with debt after a string of mergers,
takeovers and multibillion-dollar orders for new aircraft, U.S.
carriers are reeling under the one-two punch of explosive fuel
costs and a recessionary slowdown in air travel. Says Stephen
Wolf, head of United Airlines: "Fourth-quarter projections for
the industry are nothing short of alarming."

    Fuel prices have run up faster than ever before. After Iraq
invaded Kuwait, jet-fuel prices more than doubled, to $1.46 per
gal., before settling last week at $1.04. The U.S. airline
industry consumes at least 15 billion gallons of jet fuel
annually, which means that every 1 cents increase in fuel prices
will increase total operating costs by $150 million. The results
are devastating. U.S. carriers expect to lose $1.2 billion
during the October to December period alone, more than the
industry has ever lost in an entire year. Aiming to ride out the
crisis, airlines are slashing costs, scrimping on fuel and
cutting service. They have laid off more than 8,000 workers
(1.6% of their labor force), with more to come. They have set
up special conservation committees to find ways to save jet fuel
and have parked dozens of aging gas guzzlers on the tarmac.

    Travelers will ultimately suffer from the cutbacks. Some
carriers have eliminated flights on their least profitable
routes and tightened up on such passenger perks as
frequent-flyer programs. To pass along some of the higher fuel
expenses, airlines have boosted fares three times since August,
by a total of 15.3%. They are likely to do so again in the
coming weeks, despite fears that higher fares will drive away
the customers. Making matters worse, the government has just
slapped the industry with $18.6 billion in airline-ticket taxes
and other special levies during the next five years as part of
the deficit-reduction deal.

    Passenger-traffic growth was anemic for the year even before
the gulf crisis erupted. Domestic passenger miles have increased
only 2.7% this year, while the foreign business of American
carriers has grown 17%. But the airlines are watching a
relatively slow year turn into a disaster. The financial
outlook: "Stinko," declares Robert Crandall, chief of American
Airlines, one of the healthiest carriers. Michael Durham, the
airline's chief financial officer, blames the fuel jolt as the
No. 1 problem. "There's very little you can do when a commodity
that represents 15% to 20% of your total operating costs goes
up by almost 100%. It's a very difficult time to make money."

    The flurry of financial blows has knocked the stuffing out
of an industry that made a record $1.7 billion in profits in
1988. After a wrenching consolidation during the '80s that
forced over 200 carriers to merge or disappear, the few
remaining major companies are about to undergo another
shake-out. Already wobbling badly, a couple of the weakest ones
-- Pan Am and Eastern -- may disappear. Others, like TWA and
Continental, may be forced to merge with stronger partners or
shrink down to a more manageable size.

    Once America's flagship carrier, Pan Am has lost $2 billion
over the past decade. After two fruitless years of seeking a
buyer or merger partner, the airline has begun to raise cash by
selling off its prize assets: international routes. Last month
the carrier agreed to sell its U.S.-to-London routes to United
for $400 million. Still trying to sell off its Northeastern
shuttle, Pan Am is fast running out of marketable assets.

    Eastern is trying to survive by offering upscale service at
coach prices. Since September, Eastern has managed to fill some
empty seats by offering free upgrades to first class, but that
is not enough to steer it out of bankruptcy. Besides losses of
$1 million a day, the carrier has been socked lately with an
additional $1 million in daily fuel costs.

    Continental was particularly ill-prepared to weather the
downturn. The carrier accumulated more than $2 billion in
long-term debt in the process of building itself into one of the
five largest U.S. carriers. Rival carrier Delta confirmed last
week that it may buy some of Continental's assets. At TWA,
market share has slipped from about 10% in 1985 to 8% currently.
Since TWA boss Carl Icahn failed to move quickly enough to
replace his aging aircraft, the airline is stuck with a fleet
that is particularly thirsty and costly. New Boeing and
McDonnell Douglas passenger jets are as much as 25% more fuel
efficient than the older 747s and DC-9s that fill TWA's hangars.

    Desperate to cut costs, airlines have been scrutinizing
their operations from the executive suite to the passenger seat.
American has frozen management hiring and halted all
nonessential capital spending. USAir has delayed taking delivery
of 28 new Boeing jets for three years. Chicago-based Midway is
closing down its hub at Philadelphia, which it bought only a
year ago from Eastern, and plans to sell its operations there
to USAir for $67.5 million. Northwest has trimmed its flight
schedule by 24 daily flights, or 2% of its total. Even
Phoenix-based America West, one of the fastest-growing U.S.
carriers, is cutting some late-night and weekend flights.

    Some of the most ingenious cost-cutting measures are those
dreamed up by Continental's Fuel Conservation Task Force.
Seventeen fuel-guzzling old Series 10 DC-9s and 727-100s have
been grounded. Airplanes will taxi out to the runway on one
engine instead of two. Airliners parked at the gates will be
heated and cooled by ground-based units instead of onboard
auxiliary-power systems. Someone even figured out that by
removing all those little armrest ashtrays -- since passengers
can no longer smoke on domestic trips -- Continental can reduce
aircraft weight by 50 lbs. a flight. While that is a minuscule
portion of a 737's unloaded weight (70,000 lbs.), it is a
painless saving. In all, Continental estimates that the measures
will save it tens of thousands of dollars a day.

    Even so, the industry is bound to consolidate further. High
costs mean that ambitious carriers like USAir, Midway and
America West are reining in their plans. A year ago, five
airlines -- American, United, Delta, Northwest and Continental
-- dominated the top tier of the U.S. industry, accounting for
66.3% of all passenger miles. Because of problems at
Continental, that tier may soon shrink to four powerhouses.

    As the industry is gradually concentrated in fewer hands,
fares will tend to rise. Megacarriers facing less competition
are also more likely to drop service to less profitable markets,
depriving local residents of affordable transportation choices
and hurting regional economies by choking off business travel.
Says Christopher Witkowski, executive director of the
Washington-based Aviation Consumer Action Project: "Passengers
will be paying more for service that is of a decreasing
quality." In the long run, the industry will regain its
strength. Boeing chairman Frank Shrontz, who enjoys a
bird's-eye view of the business, maintains that
passenger-traffic growth will average 5% or more for the next
15 years. The bulk of that growth, though, is likely to be
carried by the Big Four.