|
|
|
|
 |
BusinessWeek: January 11, 1993 |
|
|
ONLINE FEATURES
Book Reviews
BW Video
Columnists
Interactive Gallery
Newsletters
Past Covers
Philanthropy
Podcasts
Special Reports
BLOGS
Auto Beat
Bangalore Tigers
Blogspotting
Brand New Day
Byte of the Apple
Economics Unbound
Eye on Asia
Fine On Media
Green Biz
Hot Property
Investing Insights
Management IQ
NEXT: Innovation
NussbaumOnDesign
Tech Beat
Working Parents
TECHNOLOGY
J.D. Power Ratings
Product Reviews
Tech Stats
Wildstrom: Tech Maven
AUTOS
Home Page
Auto Reviews
Classic Cars
Car Care & Safety
Hybrids
INNOVATION
& DESIGN Home Page Architecture Brand Equity Auto Design Game Room SMALLBIZ Smart Answers Success Stories Today's Tip INVESTING Investing: Europe Annual Reports BW 50 S&P Picks & Pans Stock Screeners Free S&P Stock Report SCOREBOARDS Hot Growth 100 Mutual Funds Info Tech 100 S&P 500 B-SCHOOLS Undergrad Programs MBA Blogs MBA Profiles MBA Rankings Who's Hiring Grads |
|
Industry Outlook: Services
AIRLINES: STILL NO WIND AT THEIR BACKS Not exactly a ringing vote of confidence. But executives see tentative reasons to believe that 11/23 won't be as disastrous as '92, when domestic industry losses totaled an estimated $L7 billion. The recovery is finally starting to roll. Further upticks in the economy showd boost business bookings at least, moderately in the first half and may bolster pleasure travel by the second half. And while airport user fees and other charges are rising, rigorous cost-cutting begun in 1992 will keep expenses from spiraling. Barring an unforeseen disaster, such as a spike in fuel prices, the industry should approach breakeven in 1993, says Lawrence R. Crawford, president of aviation consultant Avitas Inc. KNOCKOUT. The key to success will be fare boosts. "We've been selling our product at below cost for too long," says Delta Air Lines Inc. President W. Whitley Hawkins. That hit home last summer, when a 50% sale led by American Airlines Inc.-in retaliation against a promotion by a rival carrier-attracted travelers in droves, boosting traffic 12%. But higher volume couldn't offset the drop in revenue: The cheap fares cost the industry at least $1 billion in revenue and prompted lawsuits by rivals against American for predatory pricing. Now, airline executives are vowing to avoid nuclear-scale price wars. Most have already nudged fares up 20% since fall, and they're limiting discounting to specific markets. Problem is, self-discipline on pricing will go only so far. Fares remain hostage to a simple economic law,: When supply exceeds demand, prices fall. And there's wide agreement that there are still too many seats chasing too few passengers. When traffic was rising 10% a year during the late 1980s, airlines ordered hundreds of jetliners. Then, the recession cut growth just as the new planes were being delivered. Airline executives say it should be 1994 before jet deliveries slow enough to bring capacity into balance with demand. Liquidations of weaker carriers might have accelerated that. But $1 billion in capital from foreign airlines and employee concessions is flowing into carriers such as Trans World Airlines Inc. and Nofthwest Airlines Inc. So even ailing airlines should remain aloft for the near term, says Merrill Lynch & Co. analyst Candace Browning. She thinks the industry will boost capacity this year by 3% domestically and 11% internationally. That will force carriers to focus more on cost-cutting. The Big Three-American, United, and Delta-have already announced more than $15 billion in capital-spending cuts through 1995. Northwest, which has been scrambling to avert bankruptcy, canceled $3.5 billion in Airbus Industrie orders in December. But most carriers also need savings that will boost the bottom line immediately. So in December, Delta cut wages by 5% and cut its dividend 83%. Northwest is seeking wage concessions, and American plans to chop some $300 million from its projected 1993 operating budget of $13 billion. More profound changes are in the wind. American says that if it can do so profitably, it may shrink the airline by closing hubs or selling assets. Or it may offer some bare-service to that of Southwest Airlines Co., an enormously successful short-haul competitor. Southwest has shown that, at least on quick flights, customers prefer lower fares to amenities such as meals. U. S. carriers could be roiled, meanwhile, by increased turbulence in foreign markets. The carriers have had some fabulous successes in recent years, capturing dominant market shares on routes to most European countries and Japan. But now, France, Germany, and Japan are moving to protect their carriers by seeking restrictive air treaties that threaten the foreign growth and profits of U. S. airlines. British Airways PLC'S failure to win -approval of a $750 million investment in USAir Inc. will exacerbate the problem. Washington had conditioned the deal on liberalization of the British market, which could eventually have helped open other markets. For the short term, at least, the process may be stymied. The nixed investment could leave USAir vulnerable to bankruptcy, though some experts think BA or even another foreign airline will put forth a new offer. Whatever else happens, most U. S. carriers have to put their finances in order. The Big Three alone have doubled their leverage in the past four years, and their debt is now roughly 80% of capitalization. First Boston Corp. analyst Paul Karos thinks American will be the first to ease its debt, but not until 1994, when demand should come into line with capacity. So in '93, job No. 1 for U. S. airlines may be to hang on for one more year. | |
|
|
|
|
|
Copyright 1991-2009 by The McGraw-Hill Companies Inc. All rights reserved.Terms of Use | Privacy Notice |
