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Wirraway
21st Oct 2004, 16:21
Fri "The Australian"

Major US airlines in freefall
A correspondent in Washington
October 22, 2004

US airlines dived deep into losses in the third quarter, stalling under the pressure of record fuel prices and near-lethal competition from budget carriers.

Four of the traditional carriers - American Airlines, Northwest, Delta and Continental - leaked red ink, even after unprecedented cost-cutting to skirt bankruptcy in an industry-wide crisis.

The two others - United Airlines and US Airways - remain in bankruptcy with their chances of escape in doubt.

"The situation is relatively bleak," said John Ash, managing director of Washington-based consultancy Global Aviation Associates. "It is driven in large measure by very low fares, excess capacity and very high fuel prices.

"Consequently, notwithstanding some major restructuring efforts undertaken by carriers - particularly American and, to a degree, Northwest - the outlook is not wonderful at this point."

AMC, parent of world No1 American, suffered a loss of $US214 million ($290 million) in the three months to September 30, after squeezing out a year-earlier net profit of $US1 million.

Total sales rose 3.4 per cent to $US4.76 billion.

"Our business was buffeted by three dramatic and harmful developments during the third quarter," AMR chairman and chief executive Gerard Arpey said.

"The first was record high fuel prices. The second was a weak revenue environment, which meant that despite our best efforts - and unlike other fuel-intensive businesses - we have been largely unable to pass the higher fuel costs on to our customers. The third development was the unprecedented series of hurricanes, which depressed revenue, increased costs and repeatedly disrupted an important part of our network."

It was the same story across the industry.

Northwest reported a net loss of $US46 million, reversing a year-earlier net profit of $US42 million. But revenue surged 13.4 per cent. "As in recent quarters, our operating performance was negatively impacted by record high fuel cost that continues to drive the dynamics of the airline industry," president and chief executive Doug Steenland said.

Continental posted a loss of $US16 million, after a profit of $US133 million a year before, even as sales climbed 8.4 per cent to $US2.56 billion.

Most worrying, Delta, which is fighting to avoid bankruptcy, said losses nearly quadrupled in the three months to September 30 to $US646 million, as sales rose 5.9 per cent to $US3.87 billion.

"Given Delta's heavy losses and dwindling liquidity, the company will likely have to decide whether to seek bankruptcy protection within weeks," Standard and Poor's analyst Philip Baggaley said. Mr Ash agreed. "I think Delta is going to have a horrendous time," he said.

US Airways also faced a challenge in escaping bankruptcy, Mr Ash said.

United, too, would have trouble returning to normal business unless it could cut away a huge liability with employee pension plans, which were underfunded by about $US7 billion, he said.

"Until they torch and replace their pension plans, particularly the pilot pension plans, they are not going to be able to emerge because they are not going to be able to attract fresh capital," he said.

Otherwise, United had some key strengths with a good network, healthy fleet and strong alliance, he said.

The US industry is heading for a shakeup. "By the end of next year, we could see a little different landscape, particularly for the legacy network carriers," he said.

AFP

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planemad2
21st Oct 2004, 21:55
It is a very sad state of affairs indeed.

It would appear that there will be many Airlines go out of business soon, some older established ones, also some new starts like Independence Air. :(

46Driver
21st Oct 2004, 22:06
Hopefully Independence can hang on - we have a big financial report coming out on the 27th I believe.

planemad2
21st Oct 2004, 22:15
I sincerely hope you are right.

However, information I have seen indicates they are in big trouble. :(

cyclops camel
22nd Oct 2004, 04:11
It infuriates me that although every airline is being equally affected by the high price of oil, no one will take the lead and start charging enough for their tickets to actually cover their costs! What other industry continually loses vast sums of money each year without biting the bullet and passing increased third party costs onto the consumer? Fuel levies are not enough. If a few majors increase ticket prices I think everyone will gladly follow suit.
Why not?!

46Driver
22nd Oct 2004, 18:06
Not every airline is affected by fuel the same. Southwest hedged their fuel at roughly $35 a barrel - I think Continental is hedged at $44 a barrel. It makes sense for them to drive out of business those that were not smart enough or unable to purchase fuel options earlier.

Lodown
22nd Oct 2004, 18:11
I think you'll find Cyclops that the majors have tried several times in the US to raise ticket prices hoping to have other airlines come on board. It hasn't worked. And why should it? The companies that are managing to keep afloat look at their lower prices as a competitive advantage and customer numbers increase as a result.

rescue 1
23rd Oct 2004, 09:50
If they all raised there ticket prices, the healthy now would be even healthier and be able to offer greater returns to there shareholders, while it gives the others time to tread water.

The difficult part would be determing where the water lies with the consumers.

Uncommon Sense
23rd Oct 2004, 10:02
Within Australia simultaneously raising prices would be seen as collusion and anti-competitive practice by the ACCC.

Ironic isn't it.

In the interests of competition, you must first become insolvent.

Many thought the folly of de-regulation had been learnt in the US many years ago.

Apparently not.

U2
23rd Oct 2004, 12:58
I don't see the economic arguement here, how can these people cliam that low fare are driving the industry when most of the major airlines are increasing sales during hard times. The industry is making a loss due to overcapacity, not fuel prices or low cost carriers.

The problem is that no one will give up their market share. It would be alot cheaper to have airplanes on the ground then to fly at a loss.

Go figure.

U2

Three Bars
23rd Oct 2004, 13:00
Ah yes, the aviation industry.

If I go broke after you go broke, then I must have won!

Lodown
23rd Oct 2004, 17:37
As drastic as it appears, this is just business in a competitive marketplace. Unfortunately, the employees who can’t take their retirement benefits and run, or can’t relocate to equivalent or better jobs are very much on the receiving end.

You don’t think Qantas isn’t noticing what’s going on in the US and Europe? The company has been devoting a considerable amount of time and resources to change before the same happens on this side of the pond. Much of the company’s effort in recent years has been directed towards not giving any more prospective startups a chance to get a foot in the door. If they see a crack in their defenses, they’re plugging it as soon as possible.

The LCCs are hard to stop. They generally start on a small scale (eg. Southwest in three cities in the Texas market), get established into the market and then grow from there. The majors disregarded them for a long time, and then suddenly found themselves competing directly and losing in the same markets. The LCCs are nimble and flexible. The majors are heavy and slow to change in response. Darwinism at its finest.

druglord
24th Oct 2004, 02:22
I don't think deregulation is the problem. Competition is what drives capitalism. The problem right now is too much competition. Capacity isn't the problem either. Aviation in the US is back to pre 9/11 numbers. It'll be survival of the fitest. My predictions are:
US Air - gone
Indy Air - gone
Southwest -steady
Delta - 3 years to stablize
United -same
Continental -fine
Northwest - flat

On The Horizon
24th Oct 2004, 07:54
Could someone from the US or knows the US laws answer this question ?

Can any of the majors AA, United, Delta be stopped from using one of their subsidiary airlines like Eagle paying alot lower wages deliberately cannibalizing the parents routes? Idea being then the parent company can remove mainline from the route. Producing big wage savings, Much like Qantas appears to have done with some routes with Australian Airlines.

druglord
24th Oct 2004, 11:46
There's no laws regarding routes and that's exactly what's happening. The only limitations are scope clauses produced by the union which dictates the number of seats on an aircraft that can be flown as the subsidary (cf to mainline) and the number of these they are allowed to have. Comair - Delta's massive subsidary is currently about to top out on their scope clause with about 4000 pilots and I don't know how many jets. The mainline jets are getting taken off routes and replaced by multiple RJ's/mulitple departures.

Australia is about 3 years behind the US in industry trends so what you are about to see is gonna get real ugly. Australia is at the top of a giant nasty restructuring with flying being taken from the mainline and going to the lowest regional carrier bidder.