Just at a time when it seemed conditions could not worsen, the world airline industry has been further hit by the uncertainties of war and the rise of severe acute respiratory syndrome (Sars) in the Far East.
This year’s airline passenger traffic through March had already been weak due to lingering fears of terrorism, the build-up to war in Iraq and a weak economy.
The spread of Sars completes a dismal picture. Unless current quarantine measures stem the growth of new cases, it appears unlikely that overseas travel will bounce back soon.
Losses in the airline industry are nothing new. It has not banked a cent since 1913, as it suffers from desperately thin profit margins and is at the mercy of fluctuating fuel prices.
But the past three years have marked the gravest crisis in its history, with United States airlines in the eye of the storm.
Earlier this month the Business Travel Coalition’s survey of 137 US and Canadian corporations revealed that 22% are banning travel to Asian destinations. The potential financial fallout if employees fall ill while in service is a key factor.
Since early March more and more companies and vacation travellers are choosing not to fly to Asia, fearful they could contract Sars during a flight, at an airport or in a foreign country.
As of April 25 the World Health Organisation (WHO) reported 4 649 cases — up 210 cases from a day earlier — and 274 deaths.
However, a few days later the WHO announced that the virus had peaked and was now declining in Hong Kong, Singapore and Canada.
Hit especially hard are Singapore Airlines, Qantas and Cathay Pacific. Singapore has already delayed placing new aircraft orders and cut flights by nearly 14%. Cathay Pacific, considered one of the world’s most financially stable carriers, has seen its passenger numbers plunge by about two-thirds, with losses running at $3-million a day. Flight schedules have also been cut four times since the outbreak of Sars, and 45% of its services are now suspended.
Across the Atlantic, US carriers are threatening to declare bankruptcy. Last week American Airlines, the world’s largest carrier, reported a $1-billion loss in the first quarter of 2003, after posting the largest loss in airline history last year. It threatened to be the largest airline failure since the collapse of United Airlines in December.
The carrier was saved after unions for pilots, mechanics and attendants agreed to take pay cuts. But the concessions were retracted after the unions learned that the airline had arranged bonuses and pension privileges for top management at a time when it was seeking pay cuts from the rank and file. His credibility shattered, chairperson and CEO Donald Carty resigned.
The global airline industry was already struggling when the tech bubble burst and the economy slowed in 2000, then the terrorist attacks of September 11 2001 added to the agony.
As people shunned air travel, many of the established airlines were forced to cut back schedules, reduce capacity and lay off staff.
European carriers managed to fend off financial ruin after taking their medicine early on. But September 11 hit them particularly hard, as there was little bail-out cash available. Swissair and Belgium’s Sabena were forced into liquidation, and others have drastically cut back their schedules.
Recently British Airways said it was cutting 4% of its seats, and accelerated its job-cut programme.
Air France has reduced capital expenditure, cut routes by 7% and postponed the delivery of seven new planes. However, traffic between Europe and Asia, and even toward the Middle East, appears to be holding up well.
Meanwhile, the big US carriers have only managed to trim about 5% off their operating expenses since 2000, despite the far more drastic slump in revenues.
Persuading staff to accept the sort of sweeping pay and benefit cuts the industry wanted after September 11 has also proved to be a hard sell.
In addition tax, security and insurance costs have risen sharply, and the airlines complain they cannot pass those costs on to travellers.
Fewer passengers are not the only problem. Discounts and falling ticket prices are also key to the airline industry’s flagging revenue. So far in 2003 the average price of a ticket for a 1 000-mile US domestic flight is $121,23, down 4,4% from a year
ago, according to the Air Transport Association. The average price of a ticket for a 4 000-mile US-overseas flight is $387,65, up 2,2% from a year ago, but down from an average $416,56 in 2000.
The good news is that falling ticket prices may be reaching a point where consumers’ desire for a travel bargain will overcome fear of disease or terrorism.
But will it be too little too late? After the first Gulf War several big names in the US airline industry went under, most notably Pan American and Eastern Airlines. Some industry experts suggest it is probable that one or more established carriers will have its wings clipped in the wake of Gulf War II.
Not all the news is bad, however. In the US, Delta just started a new discount airline called Song, and Southwest, the pioneer of discount flights, continues to post profits. In Europe Ryanair and EasyJet are still flourishing.
A world without a vibrant air travel system is unthinkable. Yet there’s little doubt the business will look very different after weathering the current storm.