Day of reckoning approaches for several big airlines
September 10, 2004
WASHINGTON – Several long-suffering airlines appear to have reached a breaking point, with fuel prices unrelentingly high, cash reserves dwindling and customers addicted to cheap fares.
US Airways may file for bankruptcy court protection a second time and could be forced to liquidate, Delta is on the precipice of bankruptcy and United is battling an employee revolt as it aims to scrap its pension plans.
The frantic restructuring under way at these carriers and others means more anguish for workers and shareholders, although fliers in most markets should continue to see an abundance of low fares. While not every carrier is guaranteed to survive, analysts say the imminent upheaval could augur a brighter long-term future for the industry.
“This is the beginning of the recognition that surgery is necessary for the legacy carriers,” said Michael E. Levine, a former airline executive who teaches law at Yale University. “And while it’s painful, and not all of the surgery will be successful, it’s the only way they’re going to get healthy.”
What ails carriers such as Delta Air Lines Inc. and US Airways Group Inc. more than anything else is the disproportionately high cost of their operations.
This makes it nearly impossible for them to compete with efficient, well-financed and fast-growing carriers such as Southwest Airlines Co. and JetBlue Airways Corp., whose cheap fares have become the standard by which budget-conscious fliers comparison shop. In fact, their larger competitors – whose costs per available seat mile in some cases are more than 30 percent higher than those of Southwest – have slashed ticket prices to unprofitable levels on many routes just to keep their customer bases from shrinking further.
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“Pricing power has moved from the airlines to the consumer,” said Phil Roberts, managing partner of the transportation consultancy Unisys R2A in Oakland, Calif. “And so what it comes down to, in the end, is the large carriers needing to create a cost base where they can be profitable at these price levels.”
With cash reserves shrinking rapidly and earlier efforts to slash expenses proving inadequate, some of the nation’s largest airlines are now moving ahead with dramatic transformation plans.
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