Problems, Problems


America's Airlines and the War: The Darkest Hour

Miami does not have a visitor-friendly airport.
At Miami International, a cramped and dingy labyrinth, the message is: Just Try to Find Our Baggage Claim Area!

- Dave Barry

As America's air force took to the skies this week to bomb Iraq, its commercial airline industry was struggling to stay airborne.  Big network carriers such as American Airlines and Continental lurched closer to bankruptcy.  This week, United Airlines admitted for the first time that its botched efforts to restructure itself under Chapter 11 of the bankruptcy code might fail, resulting in liquidation.  Traffic is collapsing; United Airlines said that its international bookings were 40% down last week.  If this were only an effect of the war, that would be bad enough.  But some customers may simply be avoiding airlines that look like they might go bust, for fear of being left in limbo.  Even if the air miles of frequent fliers might survive bankruptcy, flights booked directly on an airline that succumbs could be lost forever.

Add to that the doubling of jet fuel prices in less than a year.  The Air Transport Association (ATA), an industry group, believes that war and the threat of terrorism could deepen the industry's losses to US$10.7 billion this year, worse than the US$7.4 billion they lost in 2002.  Warning of chaos, the ATA says that "a forced nationalisation of the industry is not unrealistic."

Naturally, the airlines have every reason to play up the crisis.  Seeking deep wage cuts, airline bosses want to foster a more {"realistic" view of their finances among the industry's union leaders.  In Washington, DC, the airlines hope that panic will help them to secure more subsidies, less tax and "compensation" for billions of dollars in extra security costs.  This week, the government hinted at a softer line when Norman Mineta, the transport secretary, said that he stood ready to help the industry in the event of war.

Without help, with the notable exceptions of the stronger low-cost carriers such as Southwest Airlines and JetBlue, all of the big network airlines are heading for bankruptcy within the next two years, says Samuel Buttrick of UBS Warburg, a Swiss bank.  "And, for some, why wait?"

As airlines and travel agents reported a surge in cancellations this week, industry bosses were struggling to put a figure on the war's likely damage.  In the wake of the Gulf war of 1991, seven American carriers filed for bankruptcy and four liquidated themselves.  In 1991, airline sales fell by 12%, year-on-year, in the first month of fighting and by about 7% in the eight months after the outbreak of war.  This time the losses may be far bigger as war coincides with a high risk of terrorist attacks.

One indication of what might happen is the further 3% decline in traffic that followed the government's decision in February to raise its domestic terrorist alert to "code orange" (indicating a "high risk of terrorist attacks").  International traffic - above all, business travel - is particularly at risk.  The ATA reports that advanced bookings for international flights fell by more than 20% after the code orange alert in February.  Any successful terrorist attack on American soil, meanwhile, would worsen the calculus yet more.  The ATA, for instance, guesses that a terrorist attack of the same sort of magnitude as those on New York and Washington in September 2001 would deepen the industry's losses by a further US$2.3 billion this year, and result in job losses running into the hundreds of thousands.

As for fuel costs, since February 2002 the price of jet fuel has risen from 60¢ to more than US$1.20 a gallon.  The airline industry says that it loses up to US$180 million a year for every extra cent added to the cost of fuel.  Many airlines routinely hedge themselves to a degree against rising fuel costs: Southwest Airlines, Northwest Airlines and Delta Air Lines are all reported to have reasonable protection from rising prices, at least for now.  But their worsening finances increasingly hamper their ability to hedge themselves.  Who would willingly enter into long-term financial contracts with an industry in which more than US$100 billion of debts perch atop shareholders' equity which the market now values at less than US$2 billion, and falling?  (Already the debt markets are practically closed to the airlines.  Citing war, this week the big credit-rating agencies were preparing for further downgrades of airline debt.)

To judge by the airlines' share prices, the stockmarket seems to be betting on imminent mass bankruptcies.  Barring a collapse in the price of oil (to, say, US$10 a barreI), or a sudden, inexplicable, surge in the appetite of business people for air travel, the only way that most of the American airlines not yet in it can now avoid Chapter 11 is to renegotiate their labour contracts before they go bust.  America's biggest airline, American Airlines has prepared a glide path down to Chapter 11 by laying out a cost-cutting strategy and a financing plan before it asked its workers to agree to wage cuts.  It says it needs to cut its wage bill by 21% to stay out of bankruptcy.  United, by contrast, belatedly doing everything backwards as it heads from Chapter 11 to Chapter 7 liquidation, wants to cut employee costs by 36% (or US$2.6 billion a year). Delta and Northwest each say they have to make deep cuts as well.

On the face of it, union bosses ought to be in the mood to talk.  A poorly paid job is better than no job at all, and United's talk of liquidation - together with new forecasts showing that it expects to incur losses of US$877m in the present quarter alone - brings the prospect of tens of thousands of permanent job losses one step closer.  Once bust, American firms can in any case ask the bankruptcy-court judge to void existing labour contracts, a step that United is already threatening to take.  Union leaders ought to be able to strike better deals for their members out of court, argue some industry bulls.  Now that all hope is otherwise lost, goes this reasoning, the unions will quickly come to the table.  If that happens, the airlines' share prices could quickly double or triple.  As pigs fly.

Mr Mineta's comments offer at least a glimmer of hope of a government rescue, should the industry's fortunes worsen sufficiently.  This complicates tactics on both sides of the table.  America's Air Transportation Stabilisation Board, set up after the terrorist attacks of 2001, has already bailed out several airlines with soft loans.  Perhaps United's hesitant progress through the bankruptcy courts reflects the undue emphasis its new management team has put on winning government help.  The mere possibility of more public money, meanwhile, will probably encourage unions to hold out for longer.

As if all that were not bad enough, another discouraging piece of news comes from America West, a mid-sized airline that the government rescued last year.  As America went to war this week, America West's pilots overwhelmingly rejected a proposed contract which, while reducing job security and retirement benefits, amazingly included an 11% salary increase.  Union leaders said that they liked the look of the raise, but that what they really needed was a defined-benefit pension plan, not the defined-contribution plan that management had offered them.  ]ust so.

Source: The Economist 22 March 2003

Please Note: For problems related to the War on Terror, please see:

bulletAirport Security - I'm a Boeing 757 captain with 28 years of experience.  I've had 14,000 hours of flying time.  I have a bachelor's degree in aviation, and I am a US citizen.  Last week, while traveling in uniform to work, my suitcase and flight bag were opened and dumped on the floor in the initial screening.  Then, since my ticket was one-way, the same thing was done to my flight bag when I got to the boarding gate.  Later, still in full uniform and with an airport identification card, I was asked by a screener to take my shoes off.  I'm ready to quit flying, so I can imagine the public's disdain...
bulletPatting Zoo - US Representative John Dingell, a Democrat from Dearborn, Michigan, was forced to strip to his underwear Saturday at National Airport to prove he wasn't smuggling a weapon aboard a Northwest flight to Detroit.  "They felt me up and down like a prize steer," said Dingell, 75.  "I was very nice, but I probably showed I was displeased..."

Computer Woes Continue to Plague Airlines

Jacque Martin-Downs, from Detroit, looks for her luggage at the baggage claim area
inside the Cincinnati/Northern Kentucky International Airport 27 December 2004 in Hebron, Kentucky.
 Luggage was stacked in rows longer than a football field as airlines struggled to recover from delays
and mix-ups caused by regional carrier Comair's holiday weekend cancellations from a severe snowstorm
and the failure of US Airways' baggage system.

by Harry R Weber

Atlanta - The cancellation of 1,100 Christmas Day flights by Comair because of computer troubles is prompting calls for more investments in backup systems and other technologies to prevent further groundings and damage to an already struggling industry.  The foul-up was hardly the first: A computer glitch grounded 40 Delta flights in May.  A power failure created a computer problem that forced Northwest to cancel more than 120 flights in July.  A worker keystroke error grounded or delayed some American and US Airways flights for several hours in August.  "Obviously, the airlines have become way too dependent on computers," said Terry Trippler, an airline industry expert in Minneapolis.  "Imagine a computer glitch and all the Wal-Mart stores across the country shut down, (founder) Sam (Walton) would come out of his grave."

Bruce Schneier, a computer security expert in Mountain View, California, said the issue boils down to cost versus benefit.  Airlines could upgrade existing computers to handle more transactions, install sophisticated backup systems that come on when the primary system fails or buy high-performance software that is used by NASA, nuclear plants and medical facilities to keep critical systems running at all times, Schneier said.  "It's certainly feasible, but it's my guess it's not economic," Schneier said.  "My guess is it is cheaper for the airline to absorb this loss, which doesn't happen often, than to fix the problem."

Transportation Secretary Norman Mineta called for an investigation Monday into the Comair cancellations.  Mineta said in a letter to the agency's inspector general that people "must learn from the situations" to make sure they don't happen again.

In a statement, Comair President Randy Rademacher promised cooperation with the DOT probe.  Several major airlines, though struggling with huge losses and high fuel costs, say criticism suggesting they were ill-prepared for computer problems is unfounded and that they have taken steps to fix the issue.  Comair spokesman Nick Miller said the Delta subsidiary already had planned to replace its scheduling system with one that can handle more transactions, but the new system was not set to come online until mid-January.

Tim Wagner, a spokesman for American Airlines parent AMR Corporation of Fort Worth, Texas, said the carrier already has solidified a backup system to prevent problems like one it had faced in August.  He said a worker had put incorrect information into the computer system, causing a chain reaction that also affected US Airways flights because the two carriers were using an operations system run by the same company.  At the time, he said, there was not a fail-safe that would have prevented the problem.  Wagner said the improvements made since then are about as good an assurance as any airline can make that future computer problems don't ground flights.  Nonetheless, he said he doesn't see a day when airlines return to less efficient manual systems.  "Without the computer systems, you wouldn't have the kind of air service you have today," Wagner said.

Thomas Becher of Eagan, Minnesota-based Northwest Airlines Corporation (NWAC), which blamed its July cancellations on a power failure affecting its computer systems, would not say Monday if the carrier has implemented a backup system since then.  A spokeswoman at Atlanta-based Delta Air Lines Incorporated, which told the FAA its May glitch involved a problem with dispatch computers that calculate weight and balance and handle information related to flight preparation and gate information, did not return calls seeking comment.

Industry experts worry about the financial impact of all these computer glitches.  Although the airlines won't release figures, experts say computer glitches like the one that affected Comair are likely to cost millions of dollars in lost revenues.  There's also the additional costs of providing stranded passengers with lodging, meals or seats on other carriers as well as employee overtime costs.  This comes as the major airlines have already lost billions of dollars in recent years because of high fuel costs and growth in discount carriers.  Trippler, the Minneapolis industry analyst, said more government oversight might be necessary to prevent such severe computer problems.  Schneier, the California computer security expert, said that lost revenue aside, there may be a more important reason for the airlines to work hard to prevent computer problems in the future.  "If this kind of thing could happen by accident, what would happen if the bad guys did this on purpose?" he said.

Source: 27 December 2004 Associated Press photo by David Kohl © 2004 Associated Press all right reserved

Workers Shouldn’t Have to Bail out Airline

Do you see that propeller?  Well, everything behind it revolves around money.

- Great Airline Quotes

It seems even Solomon would lack the wisdom to produce an equitable solution for US Airways executives and its machinists.  Certainly, US Bankruptcy Judge Stephen Mitchell could not.  Last Thursday he cancelled collective bargaining agreements between US Airways and the International Association of Machinists.  For union workers including many from Delaware County who work at Philadelphia International Airport, it means pay cuts ranging from 6 to 35% and the loss of thousands of jobs.

Mitchell also approved a request to terminate machinists’ and flight attendants’ pension plans and a frozen pension plan that was still providing benefits to 28,000 retirees.  For US Airways, it means a savings of almost $1 billion in pension obligations now through 2009.  It is the first time in the history of the US airline industry that such drastic action has been taken by a bankruptcy judge.  But, Mitchell maintains, he was basically caught between a rock and a hard place.  "Which is worse - that half of the mechanics lose their jobs or that all of the mechanics lose their jobs?" asked the judge, referring to the potential shutdown of US Airways.

Indeed, executives at the financially-beleaguered airline threatened liquidation of its assets as early as this week if they didn’t receive about $800 million in annual cost cuts from their labour unions.  Machinists will have a chance to nullify Mitchell’s alarming action on 21 January when they vote on the company’s proposed contract.  If approved, the outcome will still be bleak for the employees who, despite the tweaking of pay cuts and work rule changes, will have to make the same dollar level of concessions.  Union negotiators are not making a recommendation for approval but, as union president Randy Canale noted in a letter to members, "voting provides our members with an opportunity to avoid termination of their agreements."

Some choice.

Understandably, some union machinists have threatened to strike if their contract is cancelled.  But the bankruptcy judge has wisely observed that US Airways’ "financial situation is not going to be enhanced by labor strife.  I cannot decree labour peace any more than I can decree profitability.  The ultimate question is whether there will be any jobs at the end of the day," Mitchell said.  All the same, it seems employees have born the brunt of US Airways’ financial woes.

This is the third round of concessions US Airways has sought from its unions in less than three years.  Just last Wednesday flight attendants approved a new labour contract that cuts their pay by nearly 10%, saving the company about $94 million a year.  The federal government’s Air Transportation Stabilization Board lent US Airways $900 million in March 2003 to help it with its first bankruptcy.  The US Airways executives are hoping for an extension on the stabilization board’s 16 January financing agreement deadline by sufficiently demonstrating that they have cut labour costs.

Now Continental Airlines executives are seeking $500 million in wage and benefits reductions and United Airlines executives say they need to cut $725 million off annual labour costs.  But the question remains, how did US Airways and other airlines get in this mess to begin with?

The high price of jet fuel is reportedly part of the problem with the Air Transportation Association estimating that all US airlines spent $6 billion or 40% more for jet fuel in 2004.  Increasing airfare competition from low-cost carriers is also apparently contributing to the economic crises of airlines.

While it is in the best interest of employees to do what they need to do to preserve their jobs, bailing out the airlines shouldn’t fall entirely on the backs of the workers - or the taxpayers, for that matter.  For employees to essentially be forced to choose the lesser of two evils by a bankruptcy judge, is a frightening omen for all American workers.  For current and former employees to be ruled out of their hard-earned pensions is an outrage. With the threat of more than one US air carrier dying, the government should demand accountability from corporate executives whose poor management decisions have contributed to their companies’ financial crises, and require them to make some monetary concessions of their own.

Source: 10 January 2005 © The Daily Times

Airlines Brace for Fare War, Other Troubles

It only takes two things to fly: airspeed and money.

- Great Airline Quotes

Falling traffic, rising losses, striking workers, failed mergers.  Some everyday problems for the world’s airlines

by Meg Richards

New York - Major airlines have moved to slash prices, but a potential fare war is just one of a multitude of pressures facing the industry.  Hefty fuel costs, challenging labour negotiations and mounting pension obligations add up to far bigger worries for airlines, especially the so-called legacy carriers - Delta, UAL, United, American, Northwest, Continental US Airways.  Financial professionals say it's a risky area to invest in.  "Unless you are a highly risk-tolerant investor, avoid airline stocks," said Brian Hayward, airline analyst at Zacks Investment Research in Chicago.

Long a cyclical industry, airlines have had trouble making money for decades and were especially hard hit after the 2001 terrorist attacks.  Passenger counts finally climbed back to pre-11 September levels during the fourth quarter of 2004.  But airline stocks have plunged since in 2005 amid weak earnings and word that Delta was cutting fares dramatically in an effort to lure back bargain-hunting business fliers.

The losses deepened as competing carriers rushed to match Delta's price action, which cut the most expensive fares by up to half and eliminated Saturday night stay requirements.  Delta's pricing action, a direct result of competition from successful low-cost carriers like AirTran, JetBlue Airways and Southwest Airlines, will likely accelerate industry restructuring, said Smith Barney analyst Daniel McKenzie.  When it comes to determining which companies will survive, cash flow will be key, he said.  "It is no coincidence we are seeing simplified pricing.  It was inevitable for the industry, given the aggressive growth of low-cost carriers.  There's probably been no carrier that's struck as much terror in the corporate offices of airline history as JetBlue.  That's what Delta has to respond to."

Hub fundamentals combined with cost structure will determine the long-term winners, McKenzie said.  But in the short term, a big question is what effect the price changes will have on airline profits.  Fuel costs also remain a wild card.  If crude oil prices soar back to the $55 range, it would increase bankruptcy risk for all the major airlines, McKenzie said.  As it is, Delta and American narrowly escaped filing for bankruptcy late last year, thanks to new financing and fresh labour concessions.  Currently in bankruptcy court are United and US Airways, which is just days away from the possible liquidation of its assets unless it receives concessions from its labour unions.

If one of the big carriers did go out of business, it would actually help the remaining airlines survive.  Almost everyone agrees the biggest problem facing the industry is excess capacity - too many seats in the sky.  If, for example, US Airways - the 7th largest carrier with 6% of seating capacity - is grounded by liquidation, it would create more business for East Coast competitors like Delta and AirTran, and the second-most vulnerable player, Independence Air, which is having trouble making jet lease payments.  It also would create an opportunity for an up-and-comer like JetBlue to step into the lucrative Northeast shuttle market.

The problem is, when airlines run into trouble, they never seem to stop flying.  This is, in part, because they employ huge numbers of people, which makes their demise political.

Source: 10 January 2005

Airports of the Future?


To view other articles related to flying including history, unusual flying machines, hot air balloons, skydiving, gliding, problems, airports, turbulence, pilots, crashes, the Paris Air Show, the future, blimps, space travel, solar sails and more, clicking the "Up" button below takes you to the Table of Contents for this section on Flight.

Back Home Up Next