DAVID FIELD WASHINGTON
The year ahead may seem like the rerun of a familiar horror movie for some US carriers, led by a beleaguered United Airlines. But others detect a new sense of maturity which was missing during the last recession.
At United Airlines, the confluence of rising costs, increasing labour strife and falling revenues have made for a familiar crisis. In the words of chief financial officer Jake Brace: "We've been through this before." Its latest down-to-the-wire labour dispute caps a year in which United set a new record with the biggest full-year loss in airline history - a staggering $2.1 billion, beating the $1.24 billion record set by Continental Airlines in 1990 as it headed for bankruptcy.
Overall, the network majors posted a combined fourth-quarter net loss of over $3 billion, even after the Federal aid packages. For the full year that leaves a deficit of $7.3 billion, which easily eclipses the previous worst figure, set in 1992, when US carriers lost a total of $4.8 billion. Again only Southwest Airlines stayed in profit.
United is an extreme case but its magnified wounds are simply the state of the entire US industry written large. Like others, it cut back early. Like others, too, it trimmed costs while enjoying one great freebie: not cheap government money but sharply lower fuel costs, down 37% over the year.
Though they are record-breaking, United's losses could have been worse had it not cut expenses by an unprecedented 22.6%. Salaries dropped 20%, slightly lower than the 22% cut in capacity and enough to keep the losses down. "Simply put, our cost performance in December was superb," Brace says with a pride that suggests United knew the story would end well.
Meanwhile the outlook at American Airlines reflects a longer-term saga. After what chief executive Don Carty calls a "horrific" year, he pledges that American will re-evaluate the basics. "Our cost premium has been greater than our revenue premium," he says. "We've got to figure out a way to get that down or we have no sustainable business model."
That is no easy task given what UBS Warburg analyst Sam Buttrick calculates was a 32% revenue decline for the industry in 2001 on the back of a 20%fall in traffic and a 15% drop in yields. These combined to create "by far the largest quarterly decline in history", he says.
Any basic reform along the lines proposed by Carty and others could be made harder given what Deutsche Bank Alex Brown analyst Susan Donofrio says is a lack of forward bookings. "Revenue visibility has diminished," she says. "The booking curve has not expanded back to the normal four to six weeks."
If there is no clear vision it is easy for instant prophets to warn the industry against making the same mistakes. Some already have as the airlines begin to restore the capacity they so quickly trimmed. Here, though, the situation appears to be new: American, United and the other rebuilders insist that their growth is driven, as Brace puts it, "not by market share but by market demand".
In what seems a visionary conclusion, Carty insists that the industry has learned the lessons of overcapacity. The airline industry is, he says, is "marginally more mature" than it has been in the past. "In 1983 somebody would have seen [the cutbacks] as an opportunity to gain market share," he adds.
At a Goldman Sachs conference, Carty reflected: "Fifteen years ago, there was no discipline and no maturity on capacity, no discipline and no maturity on revenue management and no discipline and no maturity on pricing. Two out of the three are in good hands now." If Carty's is right, then maybe it is not a rerun the industry is looking at this year but the chance for some genuine innovation from the majors.
Source: Airline Business
