Washington — Mass layoffs, a looming cash crunch and bankruptcy protection.
Sound like Air Canada? You bet.
But it's also the grim reality facing several major U.S. airlines, including US Airways Group Inc., United Airlines Inc., Delta Air Lines Inc., and at least one of the once-thriving discounters, ATA Holdings Corp.
Just like Air Canada, they are being savaged by soaring jet fuel costs, falling revenues, stiff competition and lingering terrorism fears. Most airlines are looking at radical changes, including significant employee salary, benefit and pension clawbacks and other cost cuts.
One carrier is struggling to emerge from bankruptcy protection (United), while two more have warned that they could be forced to go that route within months (US Airways and Delta). Two other airlines ( Northwest Airlines Corp. and Continental Airlines Corp.) are engaged in tough negotiations with employees over pay cuts. All of the major airlines are expected to post hefty losses this year.
No corner of the industry is immune from the downdraft. Even profitable Dallas-based Southwest Airlines Co., which pioneered the successful low-fare and no-frills model, announced last week that it is cutting 88 flights to concentrate on more lucrative and longer-haul routes.
“There is no doubt that there should be a major restructuring of the industry over the next two to three years,” said Ray Neidl, airline analyst at Blaylock & Partners LP in New York.
“Basically, we have too many airlines, with too many expensive hub operations, and right now, too much capacity.”
Whether antitrust regulators allow a major consolidation remains unclear. But analysts say that whatever happens, the industry landscape is about to be transformed.
The most vulnerable carrier is US Airways, the seventh-largest in the United States, which is teetering on the brink of bankruptcy protection for the second time in two years. The airline is staring at a crucial Sept. 30 deadline, when it must undergo a strict U.S. government financial review under the terms of a $1-billion (U.S.) loan guarantee. Several pension payments also come due then.
To free up cash, it is negotiating with its unionized workers to chop $800-million in pay and benefits, part of a sweeping reorganization that would see the airline abandon its hubs in Charlotte, N.C., Pittsburgh and Philadelphia to become a shorter-haul discounter.
Mr. Neidl of Blaylock & Partners gives US Airways a 50-50 chance of re-entering bankruptcy protection, pointing out that the airline needs to come up with annual savings of at least $1-billion to satisfy federal authorities.
Another bankruptcy could well spell the end of the airline, its chairman, David Bronner, has warned.
“If it goes back into bankruptcy, my guess is it never comes out,” Mr. Bronner bluntly said in a recent newspaper interview.
The prospects for United and Delta are only marginally better, according to many analysts.
Airlines are looking everywhere to shave costs, and employee pensions have become a key target.
UAL Corp., parent of United, stunned its employees and retirees earlier this month by unilaterally halting payments into its pension plans. The company has warned that it may have to radically chop benefits to meet underfunded pension obligations that now total as much as $7.5-billion. United has until Sept. 30 to file a reorganization plan in U.S. bankruptcy court.
US Airways has already jettisoned its pilots' pension plan. Northwest, Delta and American Airlines Inc. have similarly underfunded pensions.
This all has the makings of the worst pension crisis since the steel industry collapsed in the 1970s, according to Elizabeth Bailey, a professor of business and public policy at the University of Pennsylvania's Wharton School of Business.
“In the steel case and the airline case, retirement pension funds seem to definitely be in play, just like rewriting of health benefits seems to be in play,” she said.
But cost cuts are a two-edged sword, particularly for United, which risks seeing its revenues plunge as it strives to contain expenditures. Perhaps more than any other airline, United has been savaged by low-cost competition at all of its hub cities, including San Francisco, Chicago, Denver and Washington.
United, the No. 2 airline in the United States, appears to have lost the pricing power that comes with being an industry heavyweight. In recent months, every time the airline has tried to push fares higher, it's been beaten into retreat by competitors that stubbornly keep their prices low.
The airline has dropped fares 10 per cent in the past year on its top 20 routes. In spite of that, it continues to lose market share out of its hub airports. Cost cutting also risks further alienating the airlines' employees. Last week, United suspended $500-million in payments to its pension plans and warned it must dissolve the plans altogether to stay in business.
Meanwhile, Atlanta-based Delta, the United States' third-largest carrier, is contemplating a sweeping “360-degree” reorganization designed to stave off bankruptcy. The airline, which has run up $5.6-billion in losses over the past three years, is burning through its $2-billion cash reserves at a rate of $350-million every three months.
Delta plans to simplify its fare structure, extract $2.3-billion in cost cuts from employees and focus on longer-haul flights.
All of the major airlines are getting hammered by surging jet fuel prices — their second most important cost after labour. Analysts estimate that airlines need a world oil price of $31 to $33 a barrel to break even. The current price is more than $10 higher, pushing jet fuel prices up 11 per cent in the past three months and nearly 50 per cent from a year earlier.
Airlines have tried to offset the higher prices by hedging jet fuel contracts, flying newer and more fuel-efficient planes and flying slower. Some airlines have even started cutting the amount drinking water they take on board in a desperate effort to trim weight.
