Who will be the first to go?

After another grim year for US mainline carriers, many think it is only a matter of time before a major collapses

After a year in which US majors posted a collective loss of more than $7.5 billion and are about to enter an equally gloomy 12-month period in which the predicted break-even has been postponed for at least a year, some players will be hoping that 2005 could be the year in which a major airline goes out of the business.

The last time the industry witnessed such major casualties was nearly 15 years ago, when Eastern Airlines and Pan Am disappeared. Conditions now would seem to favour a repeat, which would reduce the excess capacity plaguing the industry.

Consider the current picture in the US airline industry: about 20% of its capacity is operated by carriers in bankruptcy reorganisation; the relatively profitable low-fares sector is expanding mercilessly; almost no US major is hedged against record high fuel prices; and a new fares structure introduced by Delta Air Lines in January threatens to trim industry revenues by as much as $3 billion out of about $70 billion this year.

Bankruptcy gains

Nevertheless, the "shrinking sector" scenario is likely to remain a desire rather than a reality. Bankrupt carriers United Airlines and US Airways have not only remained alive, they have gained steerage: US Airways, the weakest among the legacy carriers, has gathered financing to enable it to stay in operation. The airline has lined up funding from a unit of General Electric Capital and won federal backing to use loan-guarantee finance and won further cost cuts from its unions.

Meanwhile, Independence Air, the struggling new low-fares regional jet operator that emerged from feeder carrier Atlantic Coast Airlines, has also won financing from GE.

United seems content to use its 25 months of bankruptcy protection as a tool to continue cutting labour costs. The ATA Airlines saga demonstrates another way forward: the low-fares network carrier filed for reorganisation in late October, but rather than shrivelling away, negotiated a pact with low-fares carrier Southwest Airlines that injected Southwest cash into ATA's operation and strengthened its position at its Chicago Midway hub.

Meanwhile, Delta, on the steps of the bankruptcy court late last year, has won enough new financing and labour concessions to allow it to continue its transformation plan this year, despite a $2.2 billion loss for the quarter and a $5.2 billion record annual deficit.

The next year is likely to be dogged by the same forces that made 2004 a disaster: high fuel costs, excess capacity and low yields.

Of the $7.5 billion US industry loss, rising oil costs accounted for at least $6 billion and are on course to eat up much of the gains of labour cost cutting, warns American Airlines chairman Gerard Arpey. Like most other majors, American is hedged at just 4% for the first quarter, giving it little protection from fuel shocks.

For the first quarter of this year, US domestic capacity will be up by about 4%, while low-cost capacity will be up by almost 10%, estimates a Seabury/Airline Planning Group analysis for American Express. Total seats on low-cost carriers will rise to more than 26.4% of the total, from 25.1% in the first quarter of 2004.

Average US ticket prices have fallen by almost 10% since 1991, and yields were dropping even as the US economy recovered.

American fall

At American Airlines, the nation's largest carrier, yields fell in the last quarter of 2004 by almost 7%, year-on-year, as transcontinental yields plummeted by 16.5%. At Continental Airlines, generally considered the legacy carrier closest to profitability, fourth-quarter yields dropped by about 4%, which Merrill Lynch analyst Mike Linenberg calls "a discouraging trend".

For this year, Linenberg believes that 2005 industry losses will balloon to $3.4 billion from the $1 billion he had projected just weeks ago. Analyst Gary Chase of Lehman warns: "By our estimation, industry profitability even in 2006 is in question."

DAVID FIELD / WASHINGTON DC

Source: Flight International