REPORTS BY KIERAN DALY / DAVID FIELD / DAVID LEARMOUNT / RAMON LOPEZ / KATE SARSFIELD / GRAHAM WARWICK AND JUSTIN WASTNAGE
At best a lengthy recovery; at worst more carriers face bankruptcy, while analysts predict $4.4bn losses this year
Within a day, the terrorist attack on the USA had claimed its first economic victim: Midway Airlines, in bankruptcy reorganisation since mid-August, shut down because it lacked the cash to weather the immediate impact.
First to suffer, however, was public confidence in US airlines and that may make the industry a larger victim, with the prospect of further closures and falling aircraft production levels.
UBS Warburg analyst Sam Buttrick sees the US airline industry's total losses reaching $4.4 billion this year, almost double the $2.3 billion he had forecast before the attack and "the largest absolute loss ever". Citing reduced travel demand, combined with higher fuel prices and increased security costs, Buttrick believes airlines will now lose $400 million next year instead of the $700 million profit he had forecast.
These predictions pale into insignificance compared with the International Air Transport Association's estimate that the global airline sector could face a bill approaching $10 billion in lost revenues, maintenance and labour costs as a result of the attack.
Chris Avery of JP Morgan Securities in London points out that between 1991 and 1993 major US carriers lost over $10 billion, and several went into Chapter 11 bankruptcy protection due to the combined effects of the Gulf War and economic recession - and that was without a terrorism threat to its domestic market.
Bear Stearns analyst Steve Binder warns Boeing's commercial aircraft production could fall by 10% because of reduced airline demand. "We believe there is a growing chance that Boeing's 2003 output could fall to the low end of our previous range of 375 to 400 deliveries. In fact, deliveries of 350-375 aircraft could be more likely," he says. Analysts at JPMorgan predict deliveries "will drop more materially than we had been forecasting, particularly for Airbus".
Airbus shareholder BAE Systems admitted it had already revised down production estimates and may look again at the numbers.
The airline industry was already headed for a bad year and is now on the way to "a very, very bad year", says ABN Amro analyst Ray Neidl. Demand for business travel was already down because of the weak economy. The attack is now expected to hit leisure travel.
Avitas consultant Adam Pilarski says: "I would not be at all surprised to see a 25% drop in traffic in the next two to three quarters. It will take at least that long for the industry to recover. This is different terrorism and has in effect eliminated discretionary travel."
Early surveys of corporate travel departments suggest they will not resume flying for weeks, says the Business Travel Coalition's Kevin Mitchell, while Air Security International managing director Charlie LeBlanc says corporate travel deferrals may last indefinitely.
But Pilarski adds: "This recovery will be slower and from a worse base than the decline the carriers saw after the Iraqi invasion of Kuwait and the Gulf War."
While the cost of jet fuel rose last week, analysts said such increases were the result of distributiondisruption and market speculation rather than a longer-term interruption to supply, as happened in 1991 when a major percentage of the world supply was cut off. OPEC secretary general Ali Rodriguez said in a statement after the attack that the cartel was committed to maintaining market stability.
Standard & Poor's placed the credit ratings of all US airlines on watch with negative implications, citing the attack. The credit watch implies that downgrading of the ratings is likely, which would increase carriers' borrowing costs. S&P is also reviewing its credit ratings on Air Canada and British Airways due to its dependence on the US market.
Paul Dempsey, head of transportation law at the University of Denver, predicts the future of some carriers is at stake. "They will lower fares to try to cover costs and this will just exacerbate an already-ugly economical situation," he says.
Though Dempsey will not identify vulnerable carriers, industry sources say US start-up Vanguard Airlines could be forced to ground itself, while National Airlines, already in Chapter 11, could struggle to reorganise.
America West Airlines had just over $146 million in cash and cash equivalents on hand at the end of the last quarter, making it vulnerable to the downturn. The difficult situation at US Airways in the wake of the collapse of its merger with United Airlines will markedly worsen.
Neither is the situation confined to the USA. Several European carriers had posted profit warnings even before the attack last Tuesday. Others such as Sabena, Swissair and AOM-Air Liberte face severe difficulties as the European market heads for recession and the region could see its own casualties if the economic gloom darkens further.
Source: Flight International
