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The Seattle Times

Business & Technology: Friday, March 28, 2003

Airline failures no tragedy, experts say

By Steve Johnson

Knight Ridder Newspapers



The war in Iraq is hurting the airline business, but most of the nation's airlines were in abysmal shape even before fighting began. And there is growing sentiment that the best thing for consumers and air carriers may be to let the weakest companies fail.

Among the weakest: United Airlines, the nation's second-largest carrier.

"I'd rather see an airline go out of business than see the government bail them out," said Darryl Jenkins, director of George Washington University's Aviation Institute. "It shortens the pain. ... Everybody who's left would be more or less healthy."

Jenkins may not have to wait long to see if he's right. Hobbled by huge debts and dwindling lines of customers, the industry is staggering through what appears to be its worst upheaval.

"It very clearly is the toughest condition we've been in," said James May, president of the Air Transport Association, which reported Wednesday that passenger traffic plummeted 10 percent and carriers announced more than 10,000 job cuts in the last 10 days.

The airline trade group hopes to get money from Washington. On Wednesday, Senate Republican leaders took a step toward creating a limited package of up to $3 billion in airline aid to include in an emergency war-appropriations bill.

Even with federal aid, May warned, the situation is likely to get worse.

"On some days, some carriers are reporting that they are having more cancellations than bookings for the same flight," he said.

Since the terrorist attacks of Sept. 11, 2001, the industry has lost more than $18 billion, laid off nearly 100,000 employees and seen its combined debt balloon to more than $100 billion, hurting its ability to borrow more.

United and US Airways were forced into bankruptcy last year, followed by Hawaiian Airlines this month. Other major carriers - including American Airlines, Delta, Continental and Northwest - are teetering financially.

Bankruptcy, however, might not be the worst of it.

United warned recently it could be forced to liquidate its assets, which would mean going out of business. The company lost $3.2 billion last year and is on pace to do worse this year. It has reported losing a total $749 million in January and February.

If United was forced to liquidate, according to some experts, here's the likely impact on several sectors of the economy:

Consumers: Most agreed that losing United's flights initially would inconvenience passengers, raise uncertainties about whether other carriers would honor United's frequent-flier miles and cause ticket prices to jump.

"I think on the whole, consumers will pay more for air service," said Kurt Forsgren, a transportation expert with Standard & Poor's. "There certainly will be some fallout."

But analysts noted that airlines have gone out of business previously without causing major problems for consumers. Besides, they added, other carriers would probably take over United's routes, which would increase flights and help lower prices.

United ranks fourth in the number of flights at Seattle-Tacoma International Airport, behind only Horizon, Alaska and Southwest airlines. Its 920 landings in February amounted to 7 percent of Sea-Tac's total.

Competitors: If United were to die, American and Northwest would likely take over many of their flights. Smaller, low-cost carriers, such as Southwest and America West, would probably take over some domestic routes.

Experts say entrepreneurs would likely launch airlines to grab some of United's business, making sure to avoid the sort of labor contracts that have hobbled the industry.

One of those mulling the option is Virgin Atlantic founder Richard Branson of Britain. A spokesman for his firm said this week that liquidation of a major U.S. carrier would "present a unique opportunity."

Employees: If United goes out of business, the biggest losers would be employees. It's unlikely many would be picked up by other airlines. And even if United emerges from bankruptcy, experts say, employees would likely find their ranks considerably thinned and having to work longer hours for the same or less money.

Those sort of changes are becoming a painful fact of life for airline employees. Labor accounts for most of the industry's cost, so struggling airlines are seeking concessions from workers to stem their huge losses.

"If we look at the industry two years from now, it definitely will not be the same as it is today," said Jahan Alamzad, president of CA Advisors, a San Jose, Calif., aviation-consulting firm.

Unfortunately for a lot of people, he added, "airline employees will be the biggest area of impact of airline restructuring."

Copyright 2003 The Seattle Times Company