Industry Outlook 1991: SERVICES
`IT'S GOING TO BE HORRIBLE'
Each Monday, rain or shine, the top executives of American Airlines Inc. meet with Chairman Robert L. Crandall for a day-long war council. American prides itself on such careful planning. But these days, even the weekly huddles aren't coming frequently enough for that. "We have a business plan," says Robert W. Baker, American's senior vice-president for operations. "But it's being revised almost before the ink dries."
Amid the turbulence of wildly fluctuating oil prices and sluggish traffic, 1991 will be that kind of year for U. S. airlines. The shock wave that hit when jet-fuel prices doubled after Saddam Hussein invaded Kuwait last August has left industry executives stunned. Fuel prices have retreated some since, but the airlines still are paying nearly $70 million more a week for fuel than they were in July. Add to that the impact of weak traffic caused by the recession, and it's clear why airlines posted an all-time record loss of about $1.4 billion in 1990. "The airline industry in the United States is literally going broke," laments Crandall.
TWO FOR ONE. Signs of distress are everywhere. Some 10,000 airline jobs have vanished since August, and Robert J. Aaronson, president of the Air Transport Assn., suspects that carriers will slash 10,000 more after the holidays. Crushed by debt, Continental Airlines Holdings Inc. tumbled into Chapter 11 on Dec. 3. Pan Am Corp. is trying to escape the same fate by agreeing to sell its prized London routes to UAL Corp. and, perhaps, the rest of the company to Carl C. Icahn's Trans World Airlines Inc. Midway Airlines Inc., meantime, has retreated from a hub in Philadelphia, while USAir has dropped all expansion plans. And Eastern Air Lines Inc. is flying only because Bankruptcy Judge Burton R. Lifland has released enough funds to ensure its temporary survival.
Unless the industry gets a respite from fuel prices soon, things will only get worse. "It's going to be horrible," predicts Pan Am Chairman Thomas G. Plaskett. The airlines can't even recoup their higher costs with fare increases. Despite a 15% hike in published fares, they have only been collecting a little more than half that in added revenues. A fare war in August to generate traffic meant that many passengers were flying on cheap tickets last fall, says Louis J. Valerio, United's senior vice-president for finance. The airlines had counted on making up the difference with tickets sold for this winter. But a two-for-one sale in November doused these hopes. Now, a liberal frequent-flyer promotion, started by Delta Air Lines Inc. and being copied widely, will further increase the number of freebies.
Look for more discounting this winter. Both weak and strong airlines have ample incentive to cut fares. The likes of Eastern and Midway need cash to pay bills. And healthier rivals, such as United, American, and Delta, want to protect market share. They would rather sacrifice profits now in hopes of driving weak airlines under. Warns Salomon Brothers Inc. analyst Julius Maldutis: "You haven't seen anything like the fare wars that are gonna come."
Industry executives anticipate a bloodbath: 1990's fourth-quarter loss of $1.5 billion could be duplicated in 1991's first quarter. And that much red ink in just six months is accelerating what experts call the final stage of the industry's post-deregulation consolidation. Even before Iraq took Kuwait, overcapacity, stubborn labor costs, and sluggish demand were draining airline profits. And when fuel prices recede, those travails won't be over. "There are too many seats chasing too few customers," says Crandall.
The pressure already is reshaping the industry. In response to United's $400 million bid to buy Pan Am's London route authority, American cut a deal to buy the London routes and some Chicago gates owned by TWA for $625 million. If the Transportation Dept. and British authorities approve the deals, United and American will soon extend their bitter domestic competition into a foreign market for the first time. The purchases would make Delta a distant No. 3. But with healthy balance sheets, all three should find safe passage through the current crisis.
Which carriers will disappear is a tougher call. History shows that airlines cling to life relentlessly. Continental, for instance, tumbled into Chapter 11 purely to survive. Now it can rework its $2.9 billion in debt. TWA is also weak, but Icahn has enough cash to keep it aloft. And if his deal with Pan Am goes through, he can probably raise more cash by selling off parts at a profit.
Others aren't so flush. Though Midway dodged a bullet by selling its Philadelphia hub to USAir, analysts say its prospects are still grim. And Eastern, probably the worst off, isn't likely to make it past spring.
PACIFIC OVERTURE? While the biggest fear of airline executives is that such turmoil will invite re-regulation, that isn't likely soon. A more plausible reaction is one that's being mulled over by Transportation Secretary Samuel K. Skinner: loosening the rule that bars foreign carriers from owning more than 25% of the voting stock of a U. S. airline.
If Skinner encourages larger holdings by foreigners, foundering U. S. carriers could get an infusion. Scandinavian Airlines System could increase its 16.8% stake in Continental, for example. KLM Royal Dutch Airlines might be allowed to retain all of its $400 million investment in Northwest Airlines Inc., much of which Skinner had previously demanded be sold.
Looser rules could even help the mighty. Delta owns 5% of both Swissair and Singapore Airlines Ltd., and they each hold 5% of Delta's stock--relationships that could easily be strengthened. Might that spur American to seek a foreign partner to shore up its weak position over the Pacific? In a time of constant change, that's just one more item for Crandall's busy Monday agenda.Michael Oneal in New York