Airline industry nosedives as oil prices soar, war looms

Amid expected $13 billion loss, ticket prices could drop briefly - and then soar.

The nation's aviation system, one of the US economy's bedrock industries, is facing its worst crisis in its 70 years of boom-and-bust cycles. And this is before a war starts.

Experts say that fuel prices, already almost twice as high as a year ago, are expected to spike, while passenger travel slows to a trickle. That combination could debilitate already struggling carriers like United and could force them into liquidation. Others, like American, could be pushed into bankruptcy.

For the US traveler, the fallout could produce less access, particularly to smaller cities. Although ticket prices are expected to fall even further than current levels to entice passengers into the sky, that will only be temporary. As more airlines go bankrupt, the overcapacity in the industry will shrink, and prices for leisure travel will likely climb far higher.

But the impact could go way beyond making it harder to plan a trip to visit Grandmother. If the airlines start collapsing, it will cause a ripple effect from Disney World to the Golden Gate: For every job lost in aviation, four others disappear in related industries.

"Airlines are the lifeblood of commerce, of movement in this country, and they could be choked off economically," says James May, president of the Air Transport Association.

This week, Transportation Secretary Norman Mineta acknowledged a war would hurt US airlines and said the government was "ready to move very quickly if the need arises" to help.

A bill introduced yesterday on Capitol Hill would provide loan guarantees to cover increased fuel costs. But many lawmakers are skeptical about giving the airlines a bailout similar to the $15 billion in loan guarantees and grants they provided after Sept. 11.

And most airline industry executives, already burdened with crushing debt loads, aren't looking for more loans. They'd instead like to see the government lift a variety of taxes and fees.

They already feel the need. On Tuesday, many international carriers canceled some flights to the Middle East. That has a direct impact on their US partners, which are dependent on the overseas carriers to connect passengers to international networks.

United has already seen its international bookings go down by 40 percent. Other airlines predict trouble as well. The last time the country went to the orange alert status in early February, international travel dropped by 20 percent.

Even without a war, the airline industry faces serious challenges. With war not factored in, the industry was on target to lose $6.7 billion dollars. In the case of a war lasts more than three months, airline executives predict the red ink will flood to $10.7 billion. Add domestic terrorism, and they're expecting a $13 billion shortfall.

That's forcing some significant restructuring that many airline experts say is long overdue. Bankrupt US Airways and United are leading the way. They've already slashed capacity, cut back some routes, and are negotiating reductions in labor costs, their highest expense.

On Tuesday, a bankruptcy judge approved US Airways' restructuring plan, pending the resolution of a conflict over underfunded pension liabilities. But it's been rough going for United. On Monday, the airline went to court and urged a judge to abrogate its labor contracts so it could cut costs by $2.8 billion, saying it faced liquidation otherwise.

That incensed workers, flight attendants in particular. "The cuts United are proposing would put thousands of flight attendants at an income level qualifying them for welfare," says Greg Davidowitch, head of the Association of Flight Attendants.

But management and unions at all the airlines are also working cooperatively to try to press Washington for some kind of bailout. "We just don't think it makes sense for congress to allow the airlines to swirl down the drain right now," says Gregg Overman of the Allied Pilots Association.

But some economists believe the airlines created their own problems by racking up huge debts and high fixed costs during the booming '90s, and say they should be left to the competitive market. That's sparked talk of nationalizing some airline routes, particularly to small cities.

Others see a less dramatic outcome. Once labor costs are brought in line, airlines will reduce the differential between business and leisure fares. Super-cheap fares will disappear, but so will outrageously high walk-up ones.

"Hopefully we'll have some better days ahead of us," says Darryl Jenkins of the Aviation Institute at George Washington University.