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War Speeds Airline Industry's Crash

AIRLINE INDUSTRY graphic
AP
US Airways flight attendant Alin Boswell saw his monthly pay dwindle by $600 and his dental insurance soar 200 percent this year as a result of concessions wrung from labor groups by the bankrupt airline.

Boswell resorted to clipping coupons, putting off home renovations and working two extra days per month to make up the difference, all the while saving for retirement. This week, when war broke out in Iraq, the 39-year-old resident of Alexandria, Va., took another 5 percent pay cut, demanding more financial discipline for an already frugal lifestyle. Boswell fears more sacrifice may be on the horizon.

"We have been told that this is going to be the end of the concessionary agreements that we need to reach," Boswell said. "But I can't say it's definitely the end."

War and the subsequent decline in travel demand has accelerated airline industry cutbacks. But analysts say it might not happen fast enough to avert more bankruptcies in an industry that remains expense-heavy and revenue-light.

On Friday, both Hawaiian Airlines and Avianca, the oldest airline in Latin America, filed for bankruptcy protection, and Northwest Airlines announced plans to cut 4,900 jobs.

"Let's face it, if you're an airline and your name doesn't begin with Southwest, then you are by default a bankruptcy candidate," Jamie Baker, an airline analyst at J.P. Morgan, said in an interview.

Earlier in the week, layoffs were announced by United Airlines and Continental Airlines and flight schedules were curtailed at Northwest and several foreign carriers as international travel plunged.

Airline stock prices rose Friday on expectations of a quick victory in Iraq. Yet even if the war proves to be short, causing fuel costs to drop and travel demand to return to pre-war levels, the downsizing is likely to continue.

The nation's largest airline, American Airlines, could be forced into bankruptcy by summer without an additional $1.8 billion in labor savings, analysts say. The No. 2 carrier, United, which is already in Chapter 11, this week said liquidation was a real possibility.

Estimates of roughly $6.5 billion in losses for major U.S. carriers this year were raised to more than $10 billion after the fighting began in Iraq, and that figure could rise further, the Air Transport Association, a Washington-based trade group said.

The fate of the industry rests primarily on the ability of troubled airlines to get wage and benefits concessions from employees, analysts said.

If United is forced to liquidate, that would lift the immediate threat of a bankruptcy filing by American and deliver a revenue windfall to competitors such as Continental and Northwest Airlines.

But the disappearance of United would also give low-fare carriers, such as Southwest Airlines and JetBlue Airways, room to grow, and that could magnify the predicament remaining carriers are already in today: they can't lower expenses enough to afford low fares.

A short war doesn't necessarily solve the industry's problems either, since a speedy victory might make it harder to convince employees to take pay cuts, Baker said.

Business travel has shrunk significantly since economy turned south more than two years ago, draining sales of last-minute fares, which can cost five times as much as advance-purchase tickets.

Advance bookings dropped sharply in the days and weeks leading up to war, particularly on international routes and among business travelers. Sales of trans-Atlantic fares, which are normally higher-priced than domestic tickets, fell more than 10 percent, according to the Air Transport Association.

The latest industry statistics, from February, show passenger demand and domestic fares were down 5 percent from last year and 18 percent from 2001.

The chief executive of Philadelphia-based travel management firm Rosenbluth International, Hal Rosenbluth, said bookings fell 27 percent on Wednesday compared with the previous week.

Some industry watchers say struggling carriers are likely to seize upon the fact that war is hurting their business as they negotiate with labor groups.

"There is good research that shows people in organizations are much more willing to accept costs imposed on them if they believe problems facing the organization are external rather than internal," said Peter Cappelli, a professor of management at the University of Pennsylvania's Wharton School of Business.

With labor accounting for 40 percent of the industry's costs, union officials anticipate a spike in layoffs in the weeks ahead and acknowledge that it's probably necessary.

"There's not much point in flying around empty airplanes, even we understand that," said Pat Friend, president of the Association of Flight Attendants.

That said, union leaders have joined in the chorus of airline executives pleading for financial aid from the federal government. Carriers have sought tax relief, an extension of war-risk insurance and help with security costs, among other requests.

Capt. Duane E. Woerth, president of the Air Line Pilots Association, said the government owes it to members of his union to provide money that would help preserve their jobs.

"We have guys in the National Guard flying missions in Iraq and I think they deserve to have something to come home to," Woerth said.