Asia Times: Major changes in the air


	February 13, 2002	atimes.com

Global Economy

Major changes in the air
By Alexander Casella

GENEVA - September 11, 2001, is a date that the airline industry is not likely to forget. In the first four days after the events of that day, US domestic airline bookings fell by 74 percent and bookings in the rest of the world were down by 19 percent. But the "fear factor" that led a considerable number of passengers to postpone their air travel in the wake of the attacks is now overshadowed by a far more pervasive phenomenon: a worldwide crisis in the aviation industry from which very few airlines will emerge unscathed.

Before September 11, the airline industry was already on the edge of the abyss. The terrorist attacks in New York and on the Pentagon were the straw that broke the camel's back.

At its onset, 2001 had been projected as a good one for the aviation industry and both the International Civil Aviation Organization (ICAO) and the International Airline and Transport Association (IATA) had forecast a growth rate of 6 percent. However, by August there were clear indications that the situation had changed. The economic slowdown that had hit the United States at the end of 2000 was starting to have an impact on the airline industry in the form of a major reduction of the load factor in business class, the airlines' main source of income. In an industry where profit margins were at best 2 percent on capital, this diminished load factor spelled the difference between profitability and loss.

The problem was compounded by the fact that most airlines were both considerably in debt and lacked reserves. This was due in great part to the fact that, over the previous 10 years, airlines had increasingly been leasing aircraft rather than buying them, a policy that further augmented their debts and diminished their assets. Thus, by the summer of 2001, the airline industry was already experiencing considerable difficulties and, in August Northwest Airlines announced its first layoffs. The, terrorist attacks the following month could therefore not have come at a worst possible time for an industry that was already experiencing declining - if not outright negative - growth rates.

In order to assess the dimensions of the crisis as well as its long-term consequences, at a time when the airline industry is losing between US$6 million and $7 million a day, the International Labor Office (ILO) organized a meeting in Geneva to review the situation. The conclusions of the meeting were sobering if not disheartening: in the short term, the shock of September 11 brought the airline industry on the edge of the abyss. In the long term, that is over the next three to five years, it will change the very substance of civil aviation.

September 11 had a precedent, albeit on a small scale. In 1991, as the Gulf War erupted, the number of air passengers suddenly plummeted. Caught unaware, the airlines took time before reacting and when they did they simply cut capacity by 20 percent. As a short-term expedient, the measure was effective but it failed to address the real issue, namely the airlines' cost structures.

After September 11, the airlines, which had learned their lesson during the Gulf War, reacted far more quickly. In the weeks following the attack, the airlines of the industrialized countries of North America and Europe embarked on a major cost-reduction exercise that resulted in some 120,000 job cuts.

This in turn impacted the whole spectrum of the aviation industry, namely aerospace, airport services, catering and the like, and by December total job cuts in the field of aviation reached 400,000. Job cuts were, however, not enough to keep all of the airline industry afloat. Airlines such as Sabena, Swissair, Ansett, Canada 3000 and Midway, which prior to the attack had been experiencing serious financial difficulties, collapsed.

In response to the attack, the US government set up a $15 billion fund that included $5 billion to cover the losses that US airlines had to bear for the closure of American airspace and $10 billion as loan guarantees. The US rescue package was also aimed at providing the airlines with the funds necessary to pay for increased insurance premiums to cover "war damages".

According to the IATA, revised insurance costs for the airlines worldwide might reach a total of $9.5 billion in 2002 and insurance premiums could go from 1 percent to 10 percent of the operational costs of airlines, with a decrease in insurance coverage. As of today, these war risks are covered until the end of March, with the situation after that date being at best uncertain.

Indeed, "uncertainty" is the word that best qualifies the current state of the airline industry, with the delayed effect of September 11 now affecting Asia. "Ultimately," commented Bert Essenberg, of the ILO Transport Department, "the airline industry will have to rethink itself."

According to Essenberg, the major obstacle to this reassessment is the Chicago Convention of 1944 that established the regime of national flag carriers and is still largely in force. "What the world needs," commented Essenberg, "are real open skies and an end to the limitations on national ownership, but a number of governments, and in particular the US, oppose such a measure."

Pending such a development, Essenberg believes that the future for the airline industry is bleak. The restructuring of the airline system in the industrialized world is still three to five years away, he believes, and when the process is completed there will be only two kinds of survivors: low-cost, no-frill airlines and the big players. Among those who will survive, he sees three to four major alliances such as Sky Team, Star Alliance and One World.

Lufthansa might well become the major European airline, with British Airways or Air France, which are not overly dependant on the North Atlantic traffic route, perhaps in second position. KLM is in a good position with strong reserves, but its home base is too limited and cannot be expanded. In Asia, Essenberg believes that the survivors will include Singapore, Cathay, Qantas, the new Japanese air system of JAL/JAS and one mainland Chinese air carrier. All the other airlines, he feels, will either disappear or become class B regional carriers.

Essenberg does not expect air traffic in terms of number of passengers to recover fully, that is to say to return to its pre-September 11 level, before 2003. With current average worldwide load factors at 68 percent and profitability level load factors at 78 percent, profit is still a very long-term prospect. For the survivors, that is.

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