- The Washington Times - Sunday, October 26, 2003

The Washington-area airports slowly are returning to pre-September 11 passenger levels.

But the numbers are climbing on the strength of discount carriers instead of the major airlines. And airports nationwide are making a greater effort to accommodate them.

Although the economy — and travel — is starting to pick up, major airlines are trimming services while the up-and-coming discount carriers that run mostly regional and low-fare flights are bulking up.

When the dust of competition settles, some major airlines are expected to be not-so-major anymore.

Improved quarterly earnings reports for major airlines — also known as network carriers — means they have “moved from life support to the critical list,” said Ray Neidl, airline industry analyst for the Wall Street investment firm Blaylock & Partners.

The airline industry has lost $18 billion in the past two years, which prompted massive cost-cutting, layoffs and revamping of business plans.

American Airlines, the nation’s largest, reported its first quarterly profit in 2 years. The airline earned $1 million on revenue of $4.6 billion. A year ago, it lost $924 million in the July-September period.

Northwest Airlines and Continental Airlines also squeezed out small profits.

However, Arlington-based US Airways, another network carrier, reported a $90 million loss in the third quarter.

By contrast, discount carriers reported profits that continued to soar compared with their bigger competitors. Southwest Airlines’ profit rose 41.5 percent to $106 million from third quarter 2002. AirTran Airways and JetBlue Airways both reported record revenue and healthy profits.

“The majors have done a lot of cost reduction; but unless revenues begin coming back, there will be a lot more pain,” said Darryl Jenkins, director of George Washington University’s Aviation Institute.

The big carriers quickly are being replaced by the discount airlines that control nearly a quarter of the market, up from 10 percent about five years ago. Before long, they will control 40 percent of the market, Mr. Neidl said.

“They control the pricing now for the industry, and that will not change,” he said.

The last are coming in first

The profits of the discount airlines are garnering attention like never before.

An offer by Mesa Air Group to buy Atlantic Coast Airlines Holdings would have sparked only moderate interest in the airline industry a few years ago. Both of them are small airlines operating on largely regional routes.

However, the industry has been changed by the economic slump and terrorism.

Small or regional airlines that previously only picked up the passengers overlooked by network carriers are guiding the industry’s course.

“The [discount airlines] have begun their rampage unchecked, which has caused the majors to throw out everything not fastened down,” Mr. Jenkins said.

Now, the $471.6 million hostile-takeover attempt from Mesa Air Group is raising eyebrows among major carriers that see another challenger.

“We have the opportunity to create the leading regional airline in the United States,” Mesa Chief Executive Jon Ornstein said in a statement when the proposal was announced.

Many network carriers are establishing low-fare subsidiaries as they try to stem losses. The subsidiaries, which operate under simplified business plans, are supposed to win back the market lost to low-fare competitors such as Southwest, JetBlue and AirTran.

Delta Air Lines, for example, started its Song subsidiary in the spring, after JetBlue stole some of its market share on the East Coast.

United Airlines announced last month its plans to start service in February with a discount subsidiary based in Denver.

Airports move ahead

The economic recovery that airlines hope will help them regain their financial footing also would be good news for airports.

Ronald Reagan Washington National and Washington Dulles International each served about 200,000 fewer passengers in August 2003 than in August 2001.

There were a little more than 1.2 million at Reagan Airport and 1.6 million at Dulles Airport in August this year.

More than 1.9 million passengers used Baltimore-Washington International Airport in August compared with just fewer than 2.1 million two years earlier.

Construction projects that were delayed are being resumed at the airports, but with a slightly realigned focus on security. And they are being built for an array of airlines that were mere upstarts a few years ago.

After September 11 at Dulles, “it was decided that projects that improve capacity, safety or security would move ahead, and other projects to replace older facilities would be rescheduled,” said James Bennett, president of the Metropolitan Washington Airports Authority, which manages Reagan and Dulles.

The airports authority is spending $8 million per year more on security than before September 11.

“Dealing with these increased security costs in light of a declining industry over the past two years has been a challenge,” Mr. Bennett said.

Nevertheless, he and other airport officials see progress.

“The Washington airports are seeing gradual recovery, and it is due in large part to our strong market here,” Mr. Bennett said. “However, the aviation industry is still going through major changes, and the recovery has some fragility.”

Baltimore-Washington International Airport has recovered at a slightly quicker pace. The steadier stream of customers for BWI’s discount airlines means the airport was not forced to put off major projects.

“BWI is in the midst of a very aggressive, five-year, $1.8 billion expansion program,” spokesman Jonathan Dean said.

The plan includes more parking, better vehicle and pedestrian access to the airport, and greater terminal capacity.

Small airports still face restrictions

Smaller airports that are not affected by flight restrictions around Washington have recovered since September 11.

Others within a radius extending 15 to 30 miles from Reagan Airport have been nearly ruined.

If private airplane pilots enter the restricted zone, they risk having their licenses taken away or even being shot down. Before the attacks, flight restrictions were limited to two miles around key landmarks.

“You couldn’t fly right over the White House, but you could get pretty close,” said Wendy Carter, manager of Montgomery County Airpark in Gaithersburg. “You could fly up the [Potomac] River.”

Now, pilots using Montgomery County Airpark, which lies 22 miles from the White House, must file flight plans and receive special codes from the Federal Aviation Administration. If they vary from their flight paths to within 15 miles of the White House, “I think it’s pretty much of a shoot-down at that point,” Mrs. Carter said.

Flights at the Montgomery County Airpark are down 50 percent since September 11.

“There won’t be any recovery until the [zone] goes away,” she said. “The viability of the airport is definitely in jeopardy.”

College Park Airport, which also lies within the restricted zone, is operating about 10 percent of the flights it had before September 11.

At Frederick Municipal Airport, which lies eight miles outside the restricted flight zone, business has never been better.

The airport handled about 130,000 takeoffs or landings in 2000. Now, it is handling about 156,00 per year and is home to 260 private aircraft.

Some of the new business comes from private airplane owners who relocated from airports within the restricted area.

“I feel very fortunate to be located where we are,” said Charlie Abell, Frederick Municipal Airport manager.

The airport is undergoing a $5 million runway rehabilitation, which was delayed for one year after September 11 when FAA grants were diverted to security concerns.

Business travelers seek options

The economic slump of the past few years, combined with the growing availability of discount airline tickets over the Internet, is making companies more price-conscious.

The Travel Industry Association of America says business trips are expected to increase 4.2 percent next year, which would be the first annual increase since 1999.

Lucrative business travel used to be the lifeblood for airlines.

“Business travelers now use discount carriers and discount tickets,” Mr. Neidl said.

The major carriers complain that their bigger expenses make it difficult for them to match the fares offered by discount carriers.

Added to the billions of dollars per year they pay for pensions, capital expenses and debt, they now must contribute to extra security costs.

Travelers can expect to pay up to $10 more for their tickets because of an airline security tax enacted by Congress in February 2002.

The fees, which pay for the Transportation Security Administration, were suspended June 1 to give airlines a break during the economic slump caused by war with Iraq, but were reinstated this month. Passengers pay $2.50 per leg up to a maximum of $10.

The problem for the major carriers lies with their earlier success and their basic operating plans.

The growth that turned them into large corporations with thousands of union employees and hundreds of airplanes meant they took on huge overhead costs. Even a slip in customers can hurt them badly if it is sustained for more than a few months.

In addition, they operate a hub-and-spoke system in which flights are centered around peak flying times at major airports. The system works well for business travelers flying on short notice between major cities. However, it is not the most efficient use of airplanes and crews.

Discount airlines use a point-to-point system in which they fly only nonstop service, changing schedules frequently to match flight demand. As a result, they earn more revenue per passenger by keeping their planes in the air longer and making the most efficient use of crews.

They also limit themselves to one type of jet, which means less training is needed for maintenance and operating crews.

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