WASHINGTON, Jan. 15 (UPI) -- It would almost be cliché to say that few industries have suffered a greater impact from the events of Sept. 11 than the airline industry. But with implications ranging from cyclical market trends to consumer safety, fewer businesses are facing more unpredictability than airlines.
What's more, the losses this industry has incurred have not been due to any 1-day event.
This was the focus of the Economic Strategy Institute-Sloan Congressional Forum on the evolving landscape of the global airline industry Monday. The forum featured research presented by three academic delegates and David Schaffer, the congressional counsel for the Aviation Subcommittee and House Committee on Transportation and Infrastructure.
Before September of 2001 and following an economic boom between 1995 and 2000 in which annual net profits for U.S. airlines averaged $3.5 billion, the airline industry was showing signs of deterioration.
According to Bill Swelbar, an adjunct fellow at ESI and managing director of Eclat Consulting, the deterioration of profitability for network carriers (such as American Airlines and Delta) began as early as 1998. This trend was evident while most industry watchers were speaking of the industry's record profits.
Peter Belobaba, forum delegate from the Global Airline Industry Program at the Massachusetts Institute for Technology, concurred with the figures and pointed to the "disastrous" reports produced by the second quarter of 2001. The loss in revenue, which came to $1.5 billion for U.S. airlines, was mainly driven by an excess of airline capacity and a decline in business-fare revenues of nearly 30 percent.
But he said the capacity problem was cushioned by the use of Internet bookings, which saved in ticket distribution costs and filled seats with consumer-friendly discount rates. Meanwhile, increases in operating expenses and fuel prices edged up by 9.7 and 8.9 percent respectively, reversing the gains made in purchasing efficiency.
According to Schaffer, the pre-Sept. 11 data was indicative of the predictable cyclic trend of the airline industry. He pointed out that the market fluctuations of the 1980's followed the same trend as the 1990's, when profits were down early in the decade and recovered in the latter half.
In highlighting the effects of Sept. 11, Swelbar's presentation focused on the loss of service in some smaller markets and the capacity cuts of some of the larger airlines. The majority of the cuts have occurred in the Northeast region of the United States, consisting of all airports north of Virginia and east of Pennsylvania, with a total service reduction of 20 percent. Many of these cuts, he said, will be permanent.
Belobaba's showed that most North American and European airlines reacted to Sept. 11 by laying off workers --140,000 in the United States alone -- and by reducing passenger capacity. But despite a traffic rebound last November, average fare yield was at least 15 percent lower.
The U.S. government was quick to respond to the airline industry's hardships last year. In November it passed the American Tourism Stabilization Act, offering federal assistance to the most severely affected airlines.
But Schaffer acknowledged that government engagement has also been a cyclic trend.
"In the past 20 years we've seen less taxes, fees and regulations during the industry's weaker times. When the industry was making gains, the government returned to measures that protected the consumer," he said.
Schaffer believes that many of the changes to take place will stem from the Stabilization Act, which, he says, is the pivotal issue in Congress these days. He said that one of the most interesting decisions to unfold is the compromise Congress will have to make on appropriating funds to smaller airports that are losing service.
"There are some in Congress who want to protect service to smaller hubs, but free market proponents think that will just expose these airports to weaker markets," he said.
One of the most significant market trends that has developed from the combined woes of Sept. 11 and last decade's profit downturns is the emergence of competition from the low-fare/niche segment. Before Sept. 11, airlines such as Southwest and Air Tran experienced an upswing in profit change by as much as $33.7 million, Swelbar's research showed. Moreover, between November of 2000 and 2001, these carriers decreased their passenger capacity significantly less than the major network carriers.
But the most glaring difference that Swelbar pointed out was the operating costs of the low-fare carriers. Network airlines spent $4 billion to produce 6.4 billion air service miles, while niche carriers spent $638 million to produce 7 billion ASMs.
"The trick to having a successful airline these days is to go out and buy a bunch of beat-up DC-7s (1953 propeller-powered transports) and offer minimal rates," said Darryl Jenkins, director of the Aviation Institute at George Washington University.
All of the delegates agreed that there would have to be some major restructuring in infrastructure, pricing techniques, airline consolidation and security operations.
"I don't think we'll be flying Southwest 747s to Tokyo, but we can expect some serious changes," said Swelbar.
