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Remembering 9/11
Airline woes extend beyond 9/11
Two years later, carriers still feeling the impact, but that's the least of their troubles.
September 10, 2003: 6:13 PM EDT
By Chris Isidore, CNN/Money Senior Writer

NEW YORK (CNN/Money) - Two years after the Sept. 11 attacks, the nation's largest airlines are still feeling the effects of the terrorism threat, but that may be among the least of their problems.

The industry faces hundreds of millions of dollars in increased security and insurance costs and an ongoing loss of revenue since some passengers are still nervous about flying. And after a Sept. 9 ruling, they face lawsuits from people injured and the families of those killed in the attack.

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But industry experts say it is the weak economy and increased competition from low-fare carriers that pose a bigger threat, and could mean billions of dollars more in losses for the nation's largest airlines.

"The [big] carriers are unfairly being hit with some of the increased security costs, but even absent that, the losses would be pretty close to where they are now with or without 9/11," said Ray Neidl, analyst with Blaylock & Partners. "This was something going to happen to [them] no matter what happened."

Since the attacks, two major carriers have filed for bankruptcy protection -- United Airlines parent UAL Corp. and U.S. Airways -- and a number of smaller carriers have stopped flying. The two biggest airlines -- No. 1 American Airlines, owned by AMR Corp. (AMR: Research, Estimates), and United -- have used the tough environment to win wage cuts from their unions, allowing the two to record profits in some recent months.

But demand for air travel remains weak, and carriers had to cut fares to try to fill planes with leisure travelers over the summer. Fare-cutting means losses will continue unless there's a substantial pickup in demand, especially for higher-priced business travel. And many analysts say some of those lucrative business travelers aren't coming back, even when economic growth picks up.

"Business travelers have learned that you don't need to pay those [higher, unrestricted] fares," said Jim Corridore, who tracks airline stocks for Standard & Poor's. "There is always going to be some business travel that needs the flexibility to change flight plans. But the policy of many large corporations will be to book in advance to save money or justify it when you don't."

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Many analysts now believe the industry as a whole will again lose another $3 billion to $4 billion in 2004 -- a loss for this year of between $6 billion and $7 billion, even after federal assistance is guaranteed -- which would make four straight years of losses. The industry lost nearly $20 billion combined in 2001 and 2002, even after $5 billion in direct pre-tax federal aid. Even the industry's trade association admits the problems for many carriers go far deeper than the security costs and lost revenue due to security concerns.

"Surely there is some residual fear or sensitivity to the announcement of threats, but clearly less than there was after 9/11," said John Heimlich, managing director of economics for the Air Transport Association, an industry group. "A greater residual is economic fallout from 9/11 and corporations being fiscally conservative on spending."

Even the ATA says it can't calculate on how much traffic continues to be lost due to 9/11, either due to passenger fears or concerns about the hassle of dealing with greater security delays at airports. But one thing is for sure: Traffic on flights shorter than 500 miles, for which people can drive or take a train, have fallen more sharply than traffic on longer flights.

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Traffic has tumbled 20 percent on the shorter flights in the first eight months of the year, according to research firm Back Aviation, while traffic has fallen 9 percent on longer flights of at least 501 miles.

The salt in the wounds for the industry: Short-haul flights tend to command higher fares. "There's a lot of business travel in short haul," said Heimlich. "That certainly hurt us."

Longer flights, including traditionally profitable trans-continental flights, have seen more competition as smaller, low-fare carriers such as Southwest Airlines (LUV: Research, Estimates) and upstart JetBlue (JBLU: Research, Estimates) moved into more of those routes.

The growth of the low-cost carriers is a trend that has been building for more than a decade, as they carried about 23 percent of U.S. passengers in 2002, up from less than 10 percent as recently as 1990, according to Back Aviation.

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"People have known about the challenge of the low-cost carrier for at least a decade," said Jim Craun of Eclat Consulting, an industry consulting firm. "The major airlines did not have an answer. Instead they went about raising fares on the routes where the low-cost competition didn't exist. That was a game that would have caught up with them sooner or later, with or without 9/11."  Top of page

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