Economy down in the air
Airline losses, economic impact reach beyond skies; other modes also hurt
NEW YORK (CNNfn) - The risk for the nation's airline industry isn't falling into a recession due to last week's terrorist attack. It's having the recession they were already in turn into a full-fledge depression.|
At least three major airlines, including Phoenix-based America West, are close to filing for bankruptcy protection, according to industry executives who testified in favor of an federal bailout package on Wednesday.
The carriers are expected to at least temporarily lay off about 100,000 well-paid employees by the end of this week, or about one in seven of the industry's workers. In addition, airlines spend $100 billion on goods and services.
Suppliers from aircraft manufacturer Boeing Co. (BA: down $1.37 to $28.39, Research, Estimates) to small mom-and-pop shop operators at the nation's airports will be cutting staff as well.
Some estimates are that for every job the airlines cut, the U.S. economy could lose another six jobs, bringing the jobs at risk to more than three-quarters of a million.
Boeing already announced it will cut 20,000 to 30,000 jobs by the end of next year due to a drop in new commercial aircraft orders, as it sees a drop in deliveries of nearly 40 jets this year and more than 100 next year. With airlines expected to ground up to 20 percent of their fleets through at least next spring, the demand for new planes has vanished.
The layoffs won't be avoided even if the Congress does approve a bailout. And if the airlines can't convince passengers it's safe to return to the air, even the $17.5 billion financial assistance package being sought by the industry might not be enough to save the major carriers from bankruptcy.
Airlines based their bailout plan on expectations that they could return to 85 percent of their pre-attack revenue by the end of June 2002. But today they're filling perhaps just a third of their seats.
Economic impact reaches beyond skies
Widespread bankruptcies in the industry could hit the pocketbooks of even those who never fly. Airline stocks and bonds, and municipal bonds issued by airport authorities, are widely held by institutional investors including pension and mutual funds.
Shares of the nation's top eight carriers lost $11.8 billion, or 41 percent of their combined market capitalization, on the first day of trading following the attack.
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Credit rating agencies have either downgraded the airlines' and airports' debt or put it on credit watch, suggesting a downgrade is coming. The debt of several carriers already is equated with junk-bond status.
Publicly-held debt and leases issued by U.S. airlines are believed to be in the neighborhood of $87 billion, with the airport authorities issuing tens of billions more.
But beyond the losses directly attributed to the industry, the inability or unwillingness of the nation's businesses to fly will hit almost every other industry, which could hurt efficiency and competitiveness if employees can't go where they're needed.
The reluctance of vacationers to take to the air could be a crippling blow to the nation's $578.8 billion travel and tourism industry. Travel-related spending supports one out of every 17 American jobs, according to the Travel Industry Association of America.
Less impact on other modes
The threat to the nation's other modes of transportation is far less in the short term. Some could even benefit if cargo or passengers need to find other ways to get where they're going.
But increased security at the nation's borders is causing havoc for the trucking system and for many factories that depend on just-in-time production, in which parts are due to arrive just before they're needed in an effort to control inventory costs.
Ford Motor Co. (F: down $0.60 to $14.89, Research, Estimates), the world's No. 2 automaker, warned last week its production has been disrupted partly because it sources so many of its engines and other parts in Canada. That caused it to lower its earnings forecasts for the third quarter.
Still, direct costs to other modes of transportation from the terrorist attacks will be relatively limited, although they will be felt.
"I think they will recover fairly quickly," said Ed Emmett, president of the National Industrial Transportation League, a trade group of companies that produce most of the freight moved by the various modes. "Still, I think it will be shown on the bottom line of any transportation company in the third quarter."
The real threat to transportation companies is the possibility of a recession if nervous consumers cut their spending, which traditionally accounts for two-thirds of the nation's economy. Consumers have been supporting a faltering U.S. economy in the face of deep cuts in business spending for the last 18 months.
Transportation in trouble before attack
Transportation firms from airlines to trucking companies to railroads and ship lines all were struggling due to a slowing economy even before the attack, and all are bracing for further weakness in its wake.
"We were seeing a pretty soft economy even before Sept. 11," said Roger Dick, spokesman for Yellow Corp. (YELL: down $0.84 to $18.90, Research, Estimates), one of the nation's largest trucking companies. "We aren't able to detect if it's slowed down further since then, though."
Airlines already had been the most heavily hit by the pre-attack economic downturn due to a sharp drop in business travel that began early this year. Airlines were projected to lose about $3 billion this year before the attack.
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Only two major carriers – Continental Airlines (CAL: up $0.01 to $13.96, Research, Estimates) and Southwest Airlines (LUV: up $0.06 to $12.89, Research, Estimates) – made money in the first two quarters of the year, and they were the only two that had been expected to end the year in the black.
The airline industry lost an estimated $1.36 billion last week as the nation's aviation system was shut down for two days, and industry executives told Congress they expected another $3.36 billion in losses the last two weeks of this month alone.
"We're not looking for a bailout. We're looking for a recovery to the sorry state of the industry before the attack," Tom Horton, chief financial officer of AMR Corp. (AMR: down $0.80 to $17.65, Research, Estimates), the owner of American Airlines and Trans World Airlines, told the congressional committee considering the industry's plea Wednesday.