Airlines in Crisis: From Bad to Worse

The airlines suffered one of the new war's biggest blows; $15 billion won't begin to fix it.

By Shawn Tully

Although Jerry Greenwald isn't CEO of anything right now, he is better placed than anyone to judge the government's $15 billion bailout of the airline industry. In the late 1990s Greenwald ran United Airlines; before that he was vice chairman of Chrysler, where he negotiated the 1979 government rescue of his crucial but stricken company. He says it was the government's tough love that reshaped Chrysler into a world-class, highly profitable automaker. In exchange for $1.2 billion in loan guarantees, the government got concessions from Chrysler, as well as warrants that it ultimately sold for a $300 million profit. Greenwald shudders when he compares Chrysler's rescue with the no-strings-attached airline bailout.

"The federal government put us under tremendous pressure to create a strong operating plan before we got the money," he says. "Every constituency kicked in--the unions and management with pay cuts, suppliers with lower prices, banks by rescheduling loans. The government should have required the airlines to create a tough-minded operating plan showing how they would pay back the taxpayers' money." Washington could yet decide to get tough. Although the airlines are getting $5 billion in cash with virtually no restrictions, a blue-ribbon panel that includes Fed Chairman Alan Greenspan has the authority to impose conditions on up to $10 billion in loan guarantees. Without such discipline, worries Greenwald, the airlines could absorb the funds, fiddle instead of reform, then file for bankruptcy. "The government risks throwing good money after bad," he says.

Everyone agrees that the airlines needed a quick infusion of cash. But while the industry can rightfully blame terrorists for its descent into crisis on Sept. 11, it can only blame itself for being so financially vulnerable on that date. This is a business whose binge-purge cycles date back approximately to the Wright brothers. When times are good, its captains of industry accumulate planes and load on debt. When times are bad, they plead for antitrust relief so they can dominate their hubs even more completely than they already do.

Since Sept. 11, times have been desperate. Many planes are flying at less than 50% of capacity. Passengers and pilots are edgy; one pilot on a flight from New York to San Francisco introduced himself to his passengers, told them to look at his face and listen to his voice--and to "take out" anyone else who issued orders. David Neeleman, the CEO of JetBlue, a discount carrier, predicts that by next summer, traffic will be just 80% of normal. Asked if 80% would be enough to keep the airlines in business, he said, "Oh, no. A lot of these carriers operate at 3% margins or minus 5% margins, so they won't make it." Even with a bailout, the weakest majors, US Airways and America West, may go bankrupt. Some industry experts say the government might now permit United to take over US Airways, but Michael J. Boyd, a Colorado aviation consultant, is skeptical. "Who wants to merge the Andrea Doria with the Titanic?" he asks. "I see every airline in trouble."

In return for taxpayer money, the government could have required the airlines to restructure their hubs to encourage more competition and resolve the bitter labor relations that have plagued them--and their passengers--for years. Instead, one of the package's few conditions says top executives must forgo raises for the next two years, a meaningless gesture that would enable US Airways Chairman Stephen Wolf to collect as much as $11 million a year, the amount he made last year.

The post-bailout industry will likely be dominated by a few surviving majors saddled with more debt and even higher costs. Ticket prices, particularly for business travelers, seem likely to rise substantially to cover the airlines' ever-increasing labor and interest expenses. "I fear an industry with far fewer airlines and far higher prices," says Kevin Mitchell, head of the Business Travel Coalition, an industry group that represents corporate travel managers. The biggest danger is that the government will regulate prices or grant antitrust exemptions to ensure the airlines' survival. And don't rule out more subsidies. Robert Crandall, the former CEO of American, worries that the rescue package isn't large enough. "At a subsequent time," he says, the airlines may need "another infusion or more loan guarantees."

The terrorist attacks came at the worst possible time for the airline industry, which was flying into a full-blown economic downturn even before Sept. 11. During the mid-1990s, the airlines had embarked on one of their most prosperous periods in history, earning a total of $23 billion between 1995 and 2000. But--and this demonstrates why the airlines are such a lousy business--even in that roaring market, the industry managed a return on capital of only 8%, vs. 10% for autos and 12% for computers.

The airlines' returns suffered from large interest payments on a mountainous debt load--$30 billion, about equal to the industry's total equity. The carriers are also hostage to some of the worst labor-management relations in business. Because a strike is so devastating--a one-month walkout by pilots can wipe out a year's profits--airline executives can effectively be held up by their powerful unions. "The consequences of a strike in a major hub are so huge that there's no way an airline can take one," says Delta Chairman and CEO Leo Mullin. As a result, pilots for major carriers are some of the best-compensated employees in America.

Up, Up, and Away

High pilot salaries are forcing up ticket prices, particularly at the major carriers.

*Cost of flying one seat (empty or full) one mile.
n.a. Not available.

Sources: Air Inc.; Eclat Consulting; Back Aviation Solutions

Additional Reporting: Jeffrey H. Birnbaum
Christine Y. Chen
John Helyar
Brian O'Reilly

PAGES 1 | 2