- The Washington Times - Wednesday, September 4, 2002

The nation's major airlines are measuring success by their ability to avoid bankruptcy a year after the September 11 terrorist attacks.
Don Carty, American Airlines' chairman and chief executive, summed up the state of the airline industry in a taped message last week intended to rally the spirits of employees, 7,000 of whom are expected to lose their jobs soon as the airline fights to avoid bankruptcy.
"Most of you seem to understand that what we're doing at American is designed to avoid the more drastic measures that other carriers have been forced to take," Mr. Carty said. "Clearly, everything we do to reduce costs now will make us more competitive in the future."
Recession in the first eight months of 2001 had been taking a heavy toll on the airline industry. Osama bin Laden and his terror network turned a bad situation into a catastrophe.
The Transportation Department shut down all airline traffic for two days after the attacks. Ronald Reagan Washington National Airport, a favorite airport for domestic flights, particularly for members of Congress, operated at only half capacity for months, and was brought up to speed only after heavy pressure was applied to the federal security agencies, some of which wanted to close it permanently. Nationally, only half the usual number of passengers flew in the first weeks after the attacks.
Security, which a wide range of critics called heavy-handed and sometimes unnecessary, hobbled air traffic for months. Only last month the Transportation Department indicated it would relax some of the requirements, such as asking passengers whether suspicious persons had asked to meddle with their luggage. The searches of selected passengers at the gate, which many travelers considered humiliating and unnecessary, were said to be on their way out, too.
The federal government showered $5 billion in cash and offers of $10 billion in loan guarantees to prop up the struggling industry. The measures have done little to help.
US Airways is in bankruptcy. American, the world's largest airline, is restructuring and cutting jobs to avoid bankruptcy. United Airlines, the second largest, says it will file for bankruptcy as early as this month unless it can reduce costs drastically. Passenger loads are still about 10 percent lower than before the attacks.
But now, White House economists are taking a "let it be" stance, to let the weaker airlines fail, leading to restructuring of the industry. The federal government will consider picking up the pieces afterward.
"I do not think there is a need for any significant bailout until we understand what the fallout is from the restructuring that is taking place inside companies and inside the industry," says Andrew H. Card Jr., White House chief of staff and a former transportation secretary.
Congress, which returns this week from its August recess, instead will focus on airline security, such as stronger cockpit doors, bomb detection and debate on whether pilots should carry guns.
For thousands of employees in the 680,000-worker, $104-billion-a-year airline industry, the government's economic strategy means they will be laid off.
Securing the skies
Part of the airlines' costs come from the government's new security measures. Bomb-detection equipment, added security personnel and loss of business from passengers annoyed by intrusive security and delays have cut deeply into bottom lines.
New security checks include the use of chemical swabs to detect bomb traces on shoes and luggage, and sensitive metal detectors that can lead to strip searches. Women and occasionally men have complained of being groped by security screeners.
Meanwhile, jet fighters are authorized to fire missiles at airliners that exhibit any unusual behavior. The Transportation Security Administration, a government law-enforcement agency created as a result of the attacks, sends air marshals chosen partly for their marksmanship to pose as passengers on airline flights.
The TSA is racing against a Nov. 19 deadline from Congress to convert security screeners at all 429 of the nation's commercial airports from private security guards to more highly paid and ostensibly more highly trained federal officers. Baltimore-Washington International Airport was its first testing and training facility. Supervisors are to use lessons learned at BWI to train screeners at other airports.
However, questions linger about whether the marshals' training is adequate in the TSA's rush to hire. Mr. Carty says the "military attitude" that sometimes substitutes for customer service "is both nuts and needlessly expensive." Al Gore and Dan Quayle, both former vice presidents of the United States and readily recognizable by almost all Americans, have been searched as prospective terrorists.
However, reducing the emphasis on security is not likely. Many passengers, frightened in the aftermath of September 11, demand it, intrusions and humiliation or not. A survey by AAA found that 87 percent of American adults were willing to pay more for a round-trip airline ticket to fund additional security. Fifty-one percent said they wanted pilots to carry guns.
Already struggling
Some of the industry's problems can be traced to the unprecedented decade of economic growth and the dot-com craze that sent the stock market to record highs in the mid-1990s. As the economy soared, so did business and leisure travel.
Airlines saw the economic growth as an opportunity to secure a niche. They invested hundreds of millions of dollars in new airplanes and support facilities.
But then the dot-com bubble burst. Along with it went the fortunes of many airlines as companies cut business travel and vacationers stayed closer to home.
Major airlines started posting quarterly losses and turned to cash reserves. AMR Corp., the parent company of American Airlines, lost $507 million in the second quarter of 2001. United Airlines' parent company, UAL Corp., lost $365 million. Financial analysts were predicting $2 billion in industry losses for 2001.
Within days after the attacks, layoffs that would grow to 105,000 by mid-December started for U.S. airline employees. At the same time, when Ronald Reagan Washington National Airport was closed for three weeks, hurting the airport and local economy, Arlington-based US Airways, the airport's largest airline tenant, was crippled.
The airlines pleaded to Congress for help. Delta Air Lines Chairman Leo Mullin told the House Transportation and Infrastructure Committee during a Sept. 18 hearing that without federal assistance, "almost no airline is strong enough to survive for long, facing the upcoming challenges."
Committee Chairman Don Young, Alaska Republican, agreed, saying, "We have to get this done as soon as possible or we will not have an air transportation system."
Voice in the wilderness
But now the pleas for more government bailouts are going mostly unanswered.
Congress and the Bush administration set up the Air Transportation Stabilization Board to determine which airlines could qualify for the $10 billion in federal loan guarantees available for their industry. The panel, of three voting members, has become mired in accusations of favoritism toward major airlines and unrealistic demands to qualify for the assistance.
Airlines that can demonstrate the abilities to cut costs and regain financial stability can win federal loan guarantees. A loan guarantee means the government will repay the bank if an airline defaults on a loan.
Eighth-largest airline America West received a $380 million loan guarantee in January. Seventh-largest US Airways has been approved for a conditional $900 million guarantee. United Airlines is making drastic cuts to qualify for a requested $1.8 billion loan guarantee, and last week announced that it must cut labor costs by 20 percent over the next six years.
The government panel rejected applications from four small airlines: Frontier Flying Service, National Airlines, Spirit Airlines and Vanguard Airlines. The committee said it was not convinced these airlines could repay the loans. Major airlines are rethinking their business plans to operate more like low-cost carrier Southwest Airlines, the only large airline to remain profitable.
Southwest does not operate "hub" airports, as major carriers do, in which flights are concentrated in peak flying times. Instead, Southwest maintains brief turn-around times, getting its planes, mostly Boeing 737s, back into the air as soon as possible. The result is greater productivity from employees, aircraft and other facilities.
Meanwhile, the airlines are reducing the number of flights they offer by about 9 percent while revenue is off 15 percent to 20 percent, according to the Air Transport Association, a trade association for major airlines.
Airline marketing departments are seeing a corporate attitude shift that emphasizes productivity over customer convenience. But as the airlines retool their strategies, the financial turmoil caused by the September 11 attacks continues to ripple through the economy. The industry lost about $10 billion between September 11 and the end of the second quarter of this year, even with billions of dollars of help from the federal government.
Ripple effect
The airlines' loss has turned into a loss for the U.S. economy, especially the industries that depend on air travel. Washington is an instructive example.
"The greatest effect was on tourism," says Delegate Eleanor Holmes Norton, the District's nonvoting member of Congress. "This is a major tourist destination. Anything that creates fear of attack will hurt tourism and therefore the District's economy particularly. As the airline debacle shows, also the regional economy."
During the last quarter of 2001, the city's tourism and hospitality industry took an estimated $1.2 billion hit. Hotel occupancy rates dropped to as low as 25 percent immediately after the attacks, while restaurants posted huge drops in business.
But tourism officials say things have changed for the better.
"We have recovered faster than we expected," says William A. Hanbury, president and chief executive of the Washington DC Convention and Tourism Corp. He says the city's travel and tourism industry is on pace for a full recovery by the first quarter of 2003.
Since the attacks, the District has promoted itself heavily, especially with television public service announcements starring the cast of the presidential TV drama "The West Wing" and most recently a commercial featuring members of Congress, first lady Laura Bush, the Redskins' Darrell Green and singer Roberta Flack.
The effort seems to be working. Hotel occupancy is hovering around 75 percent, 1 percent to 2 percent below that of last year. Room rates and revenue, however, are still low, Mr. Hanbury says. Hotels reduced prices to get more rooms occupied, hurting the bottom line. The average room rate is $154 $10 less than this time last year.
The Four Seasons Hotel in Washington did not have to lower rates like some of its neighboring hotels, says Tricia Messerschmitt, director of public relations at the upscale hotel that caters to foreign dignitaries and corporate executives.
"Things are going very well," Ms. Messerschmitt says. "We had an exceptionally strong first quarter." Business at the Four Seasons started to pick up again in late October, she says.
So, too, for the District's Marriott and Renaissance hotels, which took a hit immediately after the attacks but were rebounding by November. "2002 has turned out to be a pretty good year," says Lisa Stewart, area director of public relations for Marriott. "From a business standpoint, September 11th is over."
Business travel isn't back to normal levels, but that has more to do with the sluggish economy than the effects of September 11, she says. The District's Marriott-owned hotels dropped their rates slightly to attract leisure travelers. As a result, new customers have tried those hotels and have booked business travel there, Mrs. Stewart says.
School groups a huge market for the local tourism industry, particularly in the fall and spring have been virtually nonexistent since September 11.
"Student and youth travel has not rebounded to our satisfaction," Mr. Hanbury says. Many school groups have canceled trips and made decisions that are still hurting the District's tourism business. The number of visitors at the 16 Smithsonian Institution museums in the city has dropped 31 percent for the first half of 2002 from a year ago. Revenue from the museum stores is down 19 percent.
Other historic sites close to Washington like Mount Vernon, the home of George Washington, have felt the sting as more visitors have opted to stay away from big cities, particularly Washington.
The restaurant industry took a hit in the beginning, too. As a result, the city joined forces with area restaurants to promote dining out with specially priced lunches and dinners. Over an eight-month period, three "Restaurant Week" promotions resulted in 15 percent to 200 percent sales increases at some places.
Profits for car-rental companies also vanished. Budget Group and ANC Rental Corp., owner of National Car Rental, have filed for bankruptcy. The entire industry appears headed for consolidation as car-rental companies search for partners to survive. Cendant, which owns Avis, has said it would buy Budget.
Hotel bookings and profits nationwide are lower than a year ago. Walt Disney Co. warned in its most recent quarterly report that profits probably would be down for 2002. International bookings at its hotels and resorts have dropped by 30 percent.
Aviation industry manufacturers and their suppliers also suffered losses. Worst among them was Boeing Co., the world's largest aircraft manufacturer. On June 30, 2001, Boeing forecast sales of 510 to 520 commercial jet deliveries this year. The actual figure is closer to 380 deliveries this year and 275 to 300 deliveries in 2003.
Now, Boeing's machinists are threatening to strike at a time the company is least able to raise their salaries.
It could have been worse
As bad as the effects of the September 11 attacks were, they were not as bad as many industry analysts predicted.
Airline officials who appealed to Congress for aid last fall were predicting industry losses of $18 billion by June 30. A drop in oil prices has saved the airlines about $5 billion in fuel costs. The airlines have not suffered any subsequent terrorist attacks, convincing many airline passengers that flying is safe.
In addition, the low-revenue routes dropped by large airlines were picked up by regional air carriers, such as JetBlue Airways and Midway Express. The smaller airlines operate with lower costs, meaning they can make profits more easily on routes that produce no income for major airlines. As a result, some of the regional carriers reported only minor losses as air traffic fell after September 11.
The question now is whether the gradual recovery will last.
As the Bush administration hints of war, Middle East political analysts say reprisal is nearly certain, whether against airlines or some other target. The Virginia-based Center for Emerging Threats and Opportunities says major terrorist attacks normally occur in one-year to 18-month cycles.
"We knew nothing about how to protect the homeland before September 11," Mrs. Norton says. "We now have to incorporate wartime security into an open society. No society as open as ours has ever had to do that before."
Donna De Marco contributed to this report.

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