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Sun, Jul 11, 2004 - Page 12 News List

Trying to put airlines back in business

The days when pilots were paid the same salaries aas CEOs are long gone, and employees in the world's airlines indutries may be forced to do more for less

By Micheline Maynard  /  NY TIMES NEWS SERVICE , NEW YORK

LOW-FARE BLUES

Back then, airlines that were in decent financial shape could "simply ride it out" and go back to charging top dollar for fares once customers returned, said Michael Levine, a former airline executive who is now an adjunct professor of law at Yale.

Lorenzo agreed, saying that a single airline hub, like O'Hare International Airport in Chicago, could generate US$50 million in revenue a month for an airline during the industry's peak years.

Paradoxically, the latest restructuring is occurring amid strong economic growth. But the gains that in the past went to the major airlines are being taken away by low-fare airlines like Southwest and JetBlue, which for the first time are gaining market share as a group, even as the big airlines fight them.

Levine compared the traditional hub-and-spoke airline industry to an iceberg drifting toward the Equator.

"Some of the carriers are higher up the iceberg, and some of them are lower down," he said. When the ice begins to melt as the environment changes, "you can hope the ones down below drown before you do," but eventually everyone will drown, he said.

The Air Transportation Stabilization Board certainly turned up the heat last month, when, for the third time in 18 months, it refused to guarantee loans for the industry's second-biggest player, United Airlines, despite the company's powerful political support. That was just as well to critics of the board, which was created in 2001 to help airlines get back on their feet after the Sept. 11 terrorist attacks. Some critics, including Herbert Kelleher, the chairman of Southwest Airlines, said the loan guarantees amounted to little more than life support for uncompetitive companies.

United will now have to arrange additional financing itself. That will mean persuading potential investors and lenders that it can survive and prosper. Other airlines with above-average costs, including Delta and US Airways, face the same challenge. None have said how they plan to become profitable again, although Delta executives are scheduled to present a restructuring plan to the company's board next month. The chief executive, Gerald Grinstein, has promised that the plan will start to revitalize the airline.

But the pressure will not end even if United, Delta and US Airways figure a way out of their problems. Henry Joyner, vice president for corporate strategy at American Airlines, a unit of the AMR Corp, foresees years of turbulence, which experts say could lead to fewer jobs, fewer hubs and ultimately, airlines that bear little resemblance to those of today.

"We are going to get to a watershed, with some greater levels of change," said Joyner, whose company has been immersed in its own 18-month restructuring drive, which has included US$1.8 billion in concessions from its labor unions.

A QUESTION OF STRATEGY

So far, the major airlines' strategy of cutting ticket prices on routes where they compete head-to-head with low-fare rivals has failed because the big carriers have not cut costs as much as fares, pushing them deeper into the red while still losing market share. Even so, the large airlines, the so-called legacy carriers, have done little to change their basic strategy -- the hub-and-spoke system -- even though the low-fare competitors have placed more emphasis on direct flights.

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