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US major airlines buckling under challenge by low-cost competitors

AMR Corp.'s American Airlines and UAL Corp's United Airlines, the world's biggest carriers, duel daily for travelers like Brian Luneau. The Chicago lawyer dismisses both, choosing to fly Southwest Airlines Co.

Luneau prefers Southwest's punctuality, frequent-flier program and lower prices. "When they do massive discounting -- that's when I'll buy a block of tickets," said Luneau, who bought 12 round trips on the carrier this year to travel to his cottage in New Hampshire's White Mountains. He also makes it his first choice for business travel.

US airlines had a estimated third-quarter loss of as much as US$2 billion because travelers like Luneau chased lower fares or flew less while carriers' costs rose. US Airways Group Inc. sought bankruptcy protection in August and UAL has said it may be next.

Only two of the 10 largest carriers, Southwest and Alaska Air Group Inc., are forecast to make profits.

"The revenue is simply way, way off," Delta Air Lines Inc.

Chief Executive Officer Leo Mullin told reporters and analysts Sept. 19 at an Atlanta conference. "We continue to discount, and even to discount on discounts." Mullin and other airline CEOs told Congress on Tuesday that they also need relief from as much as US$4 billion in terrorism- related costs this year, through reduced taxes, cash aid and low-cost insurance. Carriers received US$5 billion cash as part of a rescue package after last year's terrorist attacks.

The Bloomberg US Airline Index has declined 46 percent so fart this year on industry losses of US$3.8 billion in the first half and the lack of expected profits for major airlines this year or next. The index is down almost 30 percent from Sept. 17, 2001, when trading reopened after the attacks.

Fort Worth, Texas-based AMR, the world's biggest carrier, had a third-quarter loss of about US$2.86 a share, according to the average analyst estimate in a Thomson First Call poll. Mullin's Delta, the third-largest US airline, is expected to have a loss of US$1.50 a share in the third quarter.

UAL is forecast to have a loss of US$7.06 share. The Chicago-based carrier's unions this week proposed cutting US$1 billion in annual labor costs for the next five years to help the company qualify for a federal loan guarantee and avoid bankruptcy.

Southwest, the biggest discount airline, is forecast to have a profit of 6 cents a share. Dallas-based Southwest is the only carrier to remain profitable since last year's attacks, aided by lower labor expenses and a company-owned fleet with only one type of plane. Its market share exceeds all rivals combined.

"They get only the planes and gates they need and use them very efficiently," said Nick Redfield, a fund manager at Banc One Investment Advisors, which held 16.6 million Southwest shares as of the end of June, according to a filing with the US Securities and Exchange Commission.

Alaska Air Group will have a profit of US$0.43 a share, based on the average estimate. The parent of ninth-largest US carrier Alaska Airlines has lower unit costs than some rivals. In addition, its West Coast routes are longer and fewer travelers have opted to drive to avoid increased airport security.

Third-quarter revenue for the industry was about 20 percent lower than last year, said David Swierenga, economist for the Air Transport Association trade group, which estimates the industry loss at as much as US$2 billion. Less revenue from business travelers at network airlines, which funnel flights through big airport hubs, is the main cause, analysts and executives said.

Business travelers are flying less and they've become better bargain shoppers, especially when looking on the Internet. In August, average fares for US travel in business and first class were 13 percent lower than a year earlier and coach fares were down 9 percent, according to the Air Transport Association.

The airlines have "provided a lot of opportunity for people to find much lower-priced seats," said Eric Connerly, a fund manager at Boston Partners Asset Management LP, which owns shares of several airlines.

Businesses started reducing travel budgets early last year as corporate profits began to shrink. The Sept. 11 attacks deepened the decline in travel and fares, and the recovery has been weaker than the airlines expected.

Carriers reduced seat and flight capacity 20 percent after the attacks to match the lower demand and reduce expense. Capacity was still down about 9 percent in August from a year earlier.
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