Airlines Struggle To Survive

Fat and happy just a few years ago, the nation's biggest airlines experienced the corporate equivalent of a heart attack in 2002. Now they are desperately trying to become lean and mean to ensure a healthier future - or any future at all.

With industrywide losses approaching $9 billion for the year, carriers such as American, United and Delta shed employees and excess planes, eliminated travel agents' commissions and levied new fees on everything from extra baggage to alcoholic beverages.

The biggest airlines also sought inspiration from Dallas-based Southwest Airlines, the soundest major carrier around and the only one to consistently report quarterly profits during the industry's worst downturn ever.

For example, American overhauled flight schedules at its hubs to use planes and employees more efficiently, reduced the number of different jets it flies to cut maintenance costs and tested a new fare structure to offer lower prices for business travelers - each a nod to the Southwest way. The Fort Worth-based carrier also asked employees to forgo raises next year and said it wants to change work rules to cut annual expenses by more than $3 billion annually.

"In the long run, the low-cost airlines were going to eat our lunch," Daniel P. Garton, American's executive vice president of marketing, said during a recent interview at the company's headquarters.

It was that same conviction that led Delta and United in 2002 to announce plans to launch their own budget airlines, which will offer point-to-point service and compete with Southwest and smaller imitators such as JetBlue, AirTran and Frontier.

Delta chairman Leo Mullin described the Atlanta-based carrier's goal bluntly: "To meet the low-fare carriers head on - first, to halt their progress and then to regain competitive share."

The low-cost, low-fare strategy proved both prescient and profitable at a time when travelers had become extremely frugal. With passenger demand and domestic ticket prices down nearly 15 percent from 2000 - the most recent profitable year for the industry - the dropoff in revenue was steep enough to force United and US Airways to file for bankruptcy.

By comparison, the cost advantage at Southwest is overwhelming enough that it can sell even cheaper tickets than its competitors and still prosper.

A study by a transportation consultant at Unisys found that the expense per-seat, per-mile at Southwest was 33 percent lower than the industrywide average in the first quarter of 2002.

Both United and US Airways hope to emerge from Chapter 11 as sleeker airlines and, if they're successful, analysts say it could encourage further cost savings within the beleaguered industry. Assuming United and US Airways reorganize with lower cost structures, analysts expect executives at other airlines to have increased leverage during contract negotiations with their own workers and vendors.

The long-term impact on consumers is likely to be mixed, analysts said. As airlines lower their costs, they should be able to support lower ticket prices. However, to squeeze savings from operations, carriers are likely to offer fewer perks at the airport and in-flight.

Garton said American is evaluating the costs and benefits of a wide range of services, including premium check-in and frequent flier rewards, as it decides which can be cut or curtailed and which must be preserved. He insisted that American doesn't need to get its costs or ticket prices as low as Southwest's as long as it offers a higher-quality product. Even so, Garton said, "we're all about narrowing that gap."

That gap grew but was not obvious during the 1990s, when rising costs at carriers such as American, United and Delta were offset by increasing demand for air travel and passengers' willingness to pay more for tickets - luxuries they could afford when the economy was expanding.

But when the economy soured, family vacation budgets shrank and corporate travelers had a tougher time getting approval for trips that previously were not an issue.

The decline in spending by corporations was particularly painful for the major airlines because business travelers often purchased tickets at the last minute, thus paying several times more per ticket than leisure travelers. To continue traveling, many business fliers began behaving more like cost-conscious leisure fliers, searching for cheap fares on the Internet, booking far in advance and scheduling itineraries that included a Saturday night stay.

Then came Sept. 11, 2001, and demand was further crimped by fears of terrorism and the perception that new security measures made air travel more of a hassle than it was worth. Almost immediately American, United and Delta cut back on capacity and jobs, while the industry secured $5 billion cash in emergency funding from the federal government.

But as multimillion-dollar daily losses persisted throughout 2002, the need for more fundamental changes at American, United and Delta became increasingly clear.

"There was a realization that they couldn't bet on market returns to save them," said David Treitel, chairman of New York-based airline consultancy SH&E Inc.

While the hub-and-spoke carriers are making progress as far as cost-cutting goes, they still have a long way to go.

The major carriers - excluding Southwest - are on pace to lose more money in 2001, 2002 and 2003 than they made during the nine years previous, according to Unisys. The outlook for 2003 is especially murky because of the threat of war in Iraq.

Nevertheless, the focus on reducing expenses at American and other big carriers has not gone unnoticed at Southwest, which is also experiencing greater competition from growing low-fare rivals such as JetBlue.

To be sure, Southwest is not sitting still. In the past year it lowered the ceiling on its fares by 25 percent to lure more cost-conscious business travelers from network carriers, reached new contract agreements with pilots, mechanics and ramp workers and expanded service while the major carriers cut back.

Southwest president Colleen Barrett recently responded to a journalist's question by saying that one of her biggest concerns was "the assumption that we're invincible."

"It's just not as easy as it used to be," Barrett said.