Suddenly, Carriers Can't Get off the Ground

Slumping business and vacationer demand proves weighty

Taking a midday flight on Northwest Airlines (NWAC )? Better pack a lunch. The nation's No. 4 carrier is dropping meal service on flights of less than 2 hours and 15 minutes. Starting Sept. 1, Northwest is also eliminating most special meals for coach-class passengers on domestic flights, including children's meals. The reason: Northwest Airlines Corp. is struggling to reverse losses that totaled $226 million in the first six months of 2001. The airline is firing workers, suspending executive bonuses, closing reservations call-centers, and retiring planes early. But even those tried-and-true fixes haven't been enough. By cutting back on meals, executives figure the airline will save another $1 million a month. "We felt this is the prudent thing to do," says President Douglas M. Steenland.

Only a year ago, Northwest was flying high along with most U.S. airlines. Business travel, the lifeblood of the airlines, had never been stronger. Consumers, flush from the economy's boom, were also taking wing. But with the economy near recession, business flyers have cut back, plunging the industry into its worst financial crunch in almost a decade. The slowdown has already taken its toll. On Aug. 13, citing a "calamitous" decline in business traffic, Midway Airlines Corp. (MDWY ) declared bankruptcy.

"BASKET CASE." There isn't much hope for improvement anytime soon. Higher wages and still-steep fuel prices, plus a seasonal drop-off in vacation travel, mean the skies will remain dark for much of the industry in the months ahead. The business, says David E. Swierenga, chief economist of the Air Transport Assn., "is a basket case."

It has been some U-turn. Industry profits totaled $2.6 billion in 2000. This year, the nation's 10 biggest airlines are expected to lose $1.5 billion, making 2001 the worst year for airlines since 1993. Take out profits by Continental Airlines Inc. (CAL ), which benefited from the energy boom, and perennially profitable Southwest Airlines Co. (LUV ), and the industry's losses would hit $2.2 billion.

Business travel is crucial for the major airlines because they derive the bulk of their earnings from high-margin first-class and last-minute tickets, which typically cost two to three times as much as coach fares. These days, with corporate profits hitting the skids, businesses are putting the brakes on spending. Siebel Systems Inc.'s (SEBL ) cutbacks are typical. Before the tech downturn, the San Mateo (Calif.) software maker permitted its sales and marketing people to travel whenever they wanted. When sales stalled earlier this year, Chief Executive Thomas M. Siebel halved the company's travel budget, to $18 million per quarter. "I said, `I don't want you to travel anywhere other than to see a customer."' At Gillette Co. (G ), where CEO James M. Kilts has ordered all units to achieve "zero overhead growth," many employees are now flying coach instead of business class to Europe. And at Staples Inc., "we are using a lot more teleconferencing today than a few years ago," says President Ronald L. Sargent.

Travel to and from high-tech hot spots has been particularly hard hit. American Airlines Inc. (AMR ) says business traffic at Austin, Tex., Boston, and San Jose, Calif., is down 15% from a year earlier. At UAL Corp. (UAL ), parent of United Airlines, summer business bookings at San Francisco and Dallas have been down as much as 34% in some months. "People are cutting discretionary spending, and unfortunately flying fits into this category," says UAL President Rono J. Dutta. UAL is forecast to lose $985 million this year.

More bad news is on the horizon. Vacationers, previously lured by fare sales and cheap tickets, aren't filling as many seats as they did only a month ago. And once the summer ends, tourist traffic tends to dry up. Meanwhile, international traffic--another high-margin business--is also weakening, as the economies of Europe, Asia, and Latin America head south. "When the general economy catches a cold, the airline industry catches pneumonia," says analyst Kevin C. Murphy of Morgan Stanley Dean Witter & Co.

Demand isn't the only problem. Fuel prices are inching higher, while wages are still climbing. Air Transport's Swierenga figures labor expenses will reach nearly $52 billion in 2002, up 15% from the $45.3 billion in 2000. He also says airlines are now paying 60% more for fuel than in 1999.

REDUCTION. To gain some altitude, the biggest airlines are casting off whatever they can. Almost all are reducing the number of flights they offer. Northwest is in its second round of layoffs this year, with plans to cut 1,625 of its 53,000 workers by year-end. American has lopped $200 million from its capital budget this year and plans an additional $700 million cut in 2002.

Most radical are restructuring plans at money-losing US Airways Group Inc. (U ) Blocked by the Justice Dept. from selling itself to UAL, US Airways wants to remake itself into a lower-cost regional company. It plans to replace 60 big jets with smaller regional ones that should be easier to fill and cheaper to fly.

Still, there are some signs of improvement. Rosenbluth International, a large corporate travel agency, says that in the five-week period ended Aug. 17, corporate bookings were up as much as 20% for 18 of its 25 biggest accounts. And a survey of 200 companies released on Aug. 20 by the National Business Travel Assn. finds that 74% plan to spend the same or more on travel next year compared with 2001. That, of course, wouldn't restore traffic to pre-slowdown levels. Says Rosenbluth CEO Hal F. Rosenbluth, "I don't think the climb out will be anywhere near as vertical as the decline was." Looks like business travelers may be forced to brown-bag it for a while, as the industry struggles to stay aloft.

By Michael Arndt in Chicago, with William Symonds in Boston, and bureau reports

    Before it's here, it's on the Bloomberg Terminal.