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Which airline is next?
Fuel crisis could be the beginning of end of one or more of the nation's major carriers: experts.
May 25, 2004: 4:30 PM EDT
By Chris Isidore, CNN/Money senior writer

NEW YORK (CNN/Money) - With new threats of bankruptcies, and appeals for labor concessions and government assistance, the nation's major airlines are facing a crisis that may well spell the end for one or more carrier in the next few years, according to industry executives and experts.

Airlines have traditionally taken a long time to die -- Trans World Airlines lost money for decades before its final bankruptcy filing and acquisition. But experts say the carriers operating a big network of hubs and international flights -- the so-called legacy or major carriers -- face new challenges that could speed up their demise.

First is the growing competition from low-cost, low-fare carriers that is unlike any competitive threat seen by the industry before. Carriers such as Southwest Airlines, JetBlue and ATA have grown so fast and so large they have limited the ability of the network carriers to raise fares to stem losses, even with a record high percentage of seats being filled on aircraft last year.

The latest effort -- a $10-one-way fare hike announced by Continental Airlines last week due to the high fuel costs -- was abandoned this week.

"If fuel prices continue to remain at these levels and if the industry is unable to pass along these costs, no one is going to be able to survive," said Continental spokeswoman Julie King. Continental CEO Gordon Bethune told analysts last week that he didn't believe all the major carriers would survive.

No cushion left

A second factor is the prolonged period of losses. None of the big carriers other than Continental has posted a quarterly profit since 2000, and Continental has had only one profitable quarter since Sept. 11. Nor are any of them expected to be profitable this year, and only half are expected to have a profitable 2005.

"During the recent downturn, the legacy carriers have gradually used up their financial cushion of aircraft and other assets they can borrow against," said Philip Baggaley, the managing director for airlines and aerospace companies at credit-rating agency Standard & Poor's. "If they are forced to face a new crisis, they may fail more quickly than they have in the past."

Baggaley estimates that of the six major carriers -- AMR Corp.'s American Airlines, UAL Corp's United Airlines, Delta Air Lines, Northwest Airlines, Continental Airlines and U.S. Airways -- only three or four are likely to make it to the end of the decade.

The other problem is that a failure of a major carrier is unlikely to provide much long-term relief from competition, as it might have in the past, according to industry experts.

"The airplanes, the physical plant and production capacity of the industry doesn't change if a carrier goes out of business," said David Swierenga, an economist with industry consultant AeroEcon, who speculated that a major carrier's liquidation could open the door for even more competition from low-fare carriers.

Who goes, who survives?

The question of who might be forced to liquidate is a tougher question to answer.

US Airways, which has already gone in and out of a post-Sept. 11 bankruptcy, is facing the threat of another bankruptcy filing, US Air executives said.

Oil and Gas
Acts of terror

The airline is seeking further labor cost cuts from unions. Besides the fuel price increases, US Air is facing the most direct competition yet from a major low-cost carrier with Southwest Airlines' recent start of operations at its Philadelphia hub. US Air spokeswoman Amy Kudwa said the statement, made in an SEC filing, was a matter of prudence.

"There isn't any legacy carrier in the nation that can say with certainty that a bankruptcy filing is not possible," said Kudwa.

Still most analysts and experts say US Air is the big carrier most at risk.

"US Air is prime candidate (for closure)," said Ray Neidl, airline analyst with Blaylock & Partners. "The other big question mark is United, and how they restructure themselves."

United has been in bankruptcy since late 2002, and company spokeswoman Jean Medina says the airline is on course to emerge from bankruptcy this summer. But that will require it to win approval of $1.6 billion in federal loan guarantees which have yet to get OK'd by the federal board overseeing the assistance program set up after the terrorist attack.

"We believe that's a workable time frame, but there are some things out of our control," she said, citing the need for the loan guarantees.

Delta has also warned it faces a bankruptcy filing if it does not win labor concessions from its pilots. And Continental warned last week it would be forced to seek concessions it has thus far avoided if it doesn't get relief from high fuel costs or low fares soon.  Top of page

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