Airlines Yet to Climb out of 9/11 Woes

The U.S. airline industry was in serious trouble after the terrorist attacks of Sept. 11, 2001.

All flights were grounded that morning - and kept grounded for several days. Even after they returned to the skies, fewer people flew, and airline losses mounted.

A full five years later, the industry remains distressed.

Carriers fly over a greatly changed landscape, with most players battered and still trying to recover from the worst period in the history of commercial aviation.

Airline consultant Michael Boyd of Evergreen, Colo., says the industry has been changed forever by the events of 2001 and afterward.

"Right after 9/11, the shutdown damn near killed the airline business. The slowdown after that in revenue drained cash, and then add to that, in the last two years, fuel prices going up," Mr. Boyd said. "All those events basically ended up with airlines changing the way they do business."

As an example, airlines used to have "relatively good compensation" and good benefits, he said.

"Those days - at least for now - are over. You're dealing with a situation where the market cannot support the cost structure that was there before, and airlines have adjusted to that," said Mr. Boyd, president of the Boyd Group.

Not all the things that have happened to the airline industry since 2001 can be blamed on the events of 9/11. The industry peaked in 1998 and 1999, when U.S. carriers reported net income of $10.3 billion on revenue of more than $233 billion.

As the technology boom collapsed in 2000, industry profits dropped to $2.5 billion, less than half the $5.4 billion net income from 1999, even though revenue climbed to $131 billion from $119 billion.

"The downturn started in the spring of 2000," consultant Michael Roach said. "It started more than a year before 9/11. 9/11 was not the cause. Obviously, it was a horrible event and seriously exacerbated things. But the industry was well into a down cycle."

While the terrorist attack "made it the down cycle to end all down cycles," Mr. Roach said it would be a "huge mistake to say 9/11 caused the current industry distress or the current down cycle caused the industry distress."

Instead, he said, "it was caused by years of letting costs get out of control in the belief that higher revenues would surely save the day."

In fact, fares on an inflation-adjusted basis have been declining regularly since the 1920s, said Mr. Roach, a founder and partner in the San Francisco-based aviation consultancy of Roach and Sbarra.

For 2001, the U.S. industry piled up an $8.2 billion loss, eclipsing the record losses of $4.8 billion posted by airlines in 1992. Between Jan. 1, 2001, and Dec. 31, 2005, carriers as a group lost nearly $35 billion.

What has made the industry's current problems unique is the length and depth of the downturn. U.S. carriers as a group have lost money for five straight years.

Bankruptcy beckoned

The previous worst period, 1990-1993, coincided with the first Persian Gulf War, a slow economy and an airfare battle in 1992 that featured a half-price sale that ruined the summer travel season for airlines. The four-year loss totaled less than $13 billion.

The previous downturn caused a number of bankruptcies. The nation's fifth-largest carrier at the time, Continental Airlines Inc., survived, but several others, including aviation pioneers Pan American World Airways Inc. and Eastern Airlines Inc., never made it out of bankruptcy court.

But that round of failures was restricted to middle-tier or smaller carriers. In the latest downturn, the nation's biggest carriers were hit.

No. 2 United Airlines Inc., No. 3 Delta Air Lines Inc. and No. 4 Northwest Airlines Inc. all headed into bankruptcy court to reorganize their finances and slash their expenses.

No. 1 American avoided bankruptcy only through hard-nosed bargaining that won $1.6 billion in concessions from employees and hundreds of millions of dollars in cuts elsewhere.