Airlines: The Clouds Keep Getting Thicker

Flight 587 is another blow to carriers' darkening prospects

In this strange new world tainted by terrorism, bad news is relative. So airline executives breathed a rapid sigh of relief when the crash of American Airlines Inc.'s Flight 587 in New York on Nov. 12 appeared, at least from early reports, to be the result of a mechanical problem, not sabotage. "I never thought I'd use the words `hopeful' and `mechanical failure' in the same sentence," says Marianne McInerney, executive director of the National Business Travel Assn.

Yes, it could have been worse for an airline industry already reeling from the September 11 terrorist attacks. But that doesn't hide the fact that the outlook remains depressingly bleak for the airlines well into next year. And the American accident, which killed more than 260 people, is likely to further depress Thanksgiving and Christmas travel, typically the only bright spots in a normally weak quarter. "We think a lot of people are going to stay home for the holidays," says analyst Susan Donofrio of Deutsche Banc Alex. Brown. Until now, leisure traffic had been tepidly coming back since September 11, but only with deeply discounted fares. "Consumer confidence in our industry faces yet another speed bump to recovery," says William S. Swelbar, managing director at ECLAT Consulting. "The timing couldn't be worse."

Indeed, immediately after the latest crash, travel agent Eric Ardolino, president of A&S Travel Center in Wallingford, Conn., says a handful of his clients canceled trips, including a $6,000 Thanksgiving vacation to the Bahamas. "People are scared," says Ardolino. America West Holdings CEO W. Douglas Parker says bookings fell 20% the day of the accident, but requests for refunds didn't surge, as they did after the attacks.

The crash could add $400 million to industrywide losses, says analyst Samuel Buttrick of UBS Warburg. That and the slow rebound in revenue even before the latest accident may result in overall losses of $6.4 billion for the industry this year, up from Buttrick's previous forecast of $5.6 billion. He's expecting Thanksgiving traffic to be down about 20% to 22% from the year before, with little immediate impact from the crash. Most tickets have already been bought and are non-refundable. But air travel at Christmas could fall another five percentage points beyond the 15% drop he had been expecting. "The airlines have a very big profit problem, which this crash exacerbates," says Buttrick. "But this crash isn't the big event."

AMERICAN'S PLIGHT. American, which lost two planes in the September 11 attacks, is likely to suffer more than its rivals. But analysts don't expect the impact on it to be long-lasting. That's been the case in past airline accidents. Buttrick expects American to lose $740 million in the fourth quarter, including up to $100 million as a result of the Nov. 12 crash. But the damage could deepen if terrorism isn't ruled out and American is seen as a particular target because of its name. "That [would be] catastrophic for American," says consultant Stanley L. Pace of Bain & Co.

Another risk is that the latest accident plus fatal crashes on American since 1995 in Cali, Colombia, and Little Rock, Ark., could raise widespread doubts among travelers about its safety record. "I won't fly American because they've had too many crashes," says Edward C. Gray, a Charlotte Hall, Md., retiree who worries whether maintenance has been adequate.

For the rest of the industry, though, the biggest problem remains the fact that costs continue to outstrip revenues. And that's after carriers have slashed 20% of capacity and cut such amenities as meals and airport clubs. Analysts and airline managers are widely predicting a shakeout, mostly through bankruptcies and asset sales, not outright mergers. Helane Becker, an analyst at brokerage Buckingham Research Group, says some smaller players could fail within the next two months. And with a poor holiday period, some majors could falter in the first half of next year, even with the $15 billion federal bailout passed after September 11.

ENDANGERED. America West (AWA ), US Airways (U ), and United Airlines (UAL ) top the list of most-endangered carriers, say many analysts. But the wild card is how the government will administer its $10 billion federal loan-guarantee program. On Nov. 13, America West was the first to file for some $400 million in loan guarantees, after winning $600 million in concessions from aircraft leasing companies and vendors, contingent on the federal financing. "We feel very confident with these loan guarantees, we absolutely are in the clear," says CEO Parker.

But many industry experts are hoping the loan board will avoid propping up carriers that might have been en route to bankruptcy even before September 11. "The real question is whether the government is going to use the loan-guarantee program to make sure no airlines fail. That would be unfortunate, because we have too much capacity," says economist Gary J. Dorman of National Economic Research Associates Inc. Analyst Becker agrees. "The question for Congress and the administration is: Do they want a healthy, competitive industry, or do they want a lot of airlines?" she says. If blows like the Nov. 12 crash keep coming, they won't be getting either.

By Wendy Zellner in Dallas, with Michael Arndt in Chicago and bureau reports

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