Airline industry is about to crash

Mumbai: Pre-terror strikes, the airlines in the West, mainly America, were finding their revenues drying up. Then came the Treacherous Tuesday. Since then most citizens in the West do not want to board any aircraft fearing it may deliver them straight into some office.

Industry estimates have said that the airline industry in the West was losing $250 million to $300 million a day before they resumed reduced normal flight schedules few days back. Domestic flights in the US are still going half-empty, some airlines have said. An industry association has forecast that traffic could be down 25 per cent to 65 per cent in the coming weeks and months as fearful passengers cancel or postpone trips.

American Airlines, unarguably the worlds largest airline, last week announced sweeping job cuts, and said it would lay off at least 20,000 people at its American Airlines, American Eagle and TWA units.
The No 2 US carrier, United Airlines, has also announced plans to slash 20,000 jobs, representing 20 per cent of its workforce.
The Chicago-based United Airlines has about 100,000 employees throughout its system.
United's layoffs follow cutbacks by other major US airlines looking to staunch losses as air traffic demand falls.

America West Holdings Corp said it may be forced to file for bankruptcy unless the US government quickly provided financial aid to the industry, while the board of directors of US Airways Group, Americas sixth-largest carrier, told shareholders at its annual meeting that it had less than $1.2 billion in cash on hand.

The credit ratings of the three largest US airlines have been downgraded by Moody's Investors Service, which usually translates into higher borrowing costs for corporations. American Airlines and Delta were dropped to junk bond status and United Airlines debt fell four notches deeper into junk. Moody's downgrades have affected about $38.8 billion of debt. Standard & Poor's, another credit rating agency, is reviewing all large US airlines' ratings for downgrades.

While European carriers did not reveal how their bookings have been developing since the attacks, German carrier Lufthansa AG last week warned it could no longer meet its previous targets for 2001 earnings and would make no reliable forecasts either. However, it said while it did not plan any job cuts, it would stop hiring new staff.

Cascading effect
The world's biggest airplane maker, Chicago-based Boeing, last week said it would lay off between 20,000 and 30,000 workers up to 15 per cent of its workforce as it expected a sharp drop in orders. This is before China, one of its biggest customers for airplanes, said it would proceed with an order for 30 Boeing jets.

Boeing also cut its forecast for aircraft deliveries and said the downturn could run into 2003 as US airlines reduced flight schedules after the WTC and Pentagon attacks.

European aerospace giant EADS, which owns 80 per cent of Airbus, Boeings major competitor, is reported to be scrapping plans to increase production at its commercial jet unit Airbus SAS to brace for a slump in the air travel market.

EADS however said it still expected a 10 per cent operating margin in 2004 and 15 per cent growth in earnings before interest and tax this year. Formed from the merger of Germany, France and Spains largest aerospace firms in July 2000, EADS (European Aeronautic, Defence and Space Co) makes virtually all its profits from Airbus, which in recent years has reaped the benefits of record orders.

Another airline affected badly is British Airways Plc, Europes largest airline, which is reported to be laying off 12.5 per cent of its workforce, grounding 20 aircraft and reducing flights by 10 per cent in the face of sharply falling demand following the US hijacked plane attacks.

The airline, which relies heavily on transatlantic business, said it would cut a further 5,200 jobs, in addition to 1,800 already announced this month due to the economic slowdown, to take the total to an eighth of its entire staff strength.

British Airways employs around 56,500 people. Its largest operating expense is its staff that represented 27 per cent of its operating expenses last fiscal, with handling and catering the second biggest expense followed by ticket selling, marketing and fuel.

It gains about a third of its revenue from the US and makes most of its profits from lucrative transatlantic business travellers. Along with its US and European rivals British Airways is trying to gain state aid in response to the crisis engulfing the airline industry.

Virgin Atlantic, another UK-based carrier, has also announced a 20 per cent reduction in operations and prune workforce by 1,200 to tide over one of the worst crisis for the international aviation business.
Air Canada, the sixth largest airline in North America, also cut its flight schedule 20 per cent and is seeking some US$2 billion to $2.6 billion in Canadian government aid due to the crisis.

Tourism in Mexico has also been hard hit by the decline in air travel and its top two airlines warned they might have to layoff workers like their American counterparts.

US airlines have warned of possible bankruptcy unless the US government acts swiftly to provide some $17.5 billion in financial aid. The White House has proposed a bailout plan for the airline industry, which includes $15 billion in direct cash assistance, but not $12.5 billion in loan guarantees. It has fallen far short of a $17.5 billion revival package as desired by the industry.

This crisis has revealed that airlines earnings are painfully fragile. The companies have small profit margins, carry large fixed costs that do not reduce when revenues fall, and their debt is much higher than equity.

What happens to Air-India?
After the terror strikes, Asian Airlines seemed relatively unaffected and the demand was relatively stable a week after the attacks a far cry from the marked downturn in bookings that airlines in the US have seen.

But this does not mean that all would be okay in the future. Though life could continue as usual, a troubled carrier like Air-India could find itself permanently grounded. It is true that even before the attacks, ailing carriers like Air-India, African Carrier, Air Afrique and Turkish Airlines, up for sale, were finding it hard to find fitter Western partners they needed for survival.

Air France, reported to be planning to save ailing African carrier Air Afrique, may opt out, while Turkish Airlines and Air-India may have to freeze their privatisation plans.

Further, India could find itself one airline short on the European sector as Richard Bransons Virgin Atlantic is reported to be reviewing its strategy for its fledgling unprofitable Indian operations.

During its short stay in this country, Virgin Atlantic has already notched up losses on the Delhi-London sector and its exit from India may be a distinct possibility if bilateral talks between the UK and the Indian government do not yield more ground in India for the airline soon.

Having already announced 20-per cent reduction of activities and grounding of five of its aircrafts in the aftermath of the US attacks, the airline said it would not be able to sustain its operations in India with just two flights a week.