Attacks likely to kill off sick airlines

Aviation firms are reporting dire problems following the US atrocities, but many were already in trouble, say ARNOLD PICKMERE and agencies.

British Airways will plunge to a record loss this year following the terrorist attacks on America, according to the first authoritative assessment of the airline's prospects.

The prediction came as Swissair, Europe's fourth-largest airline, stopped flying after failing to get rescue financing aimed at staving off bankruptcy.

Many other airlines - not least Air New Zealand - are struggling.

BA has responded to the crisis by axing 7000 jobs, grounding 20 aircraft and reducing capacity by 10 per cent - with the result that it will operate 190 fewer services a week.

But analysts believe it may need to make further cuts depending on the extent of President George W. Bush's war on terrorism.

What was going on before the terrorist attacks?

At the end of June, only 10 weeks before the attacks on the World Trade Center, the International Air Transport Association (representing 275 airlines) reported its world air transport statistics.

It said that last year IATA members carried 1.4 billion scheduled passengers, an increase of 5.2 per cent. International passenger numbers actually jumped 9 per cent - the biggest annual rate of growth since 1992.

But the strong growth in international passenger and cargo services has not been reflected in airline profitability. IATA airlines made a total profit on international services of $US2.8 billion ($6.6 billion), an increase of only $US400 million.

What happened after September 11?

The US suspended flights for three days. Since then, tourists and businesses have been avoiding flying.

Less than two weeks after the atrocities, Congress opened its coffers to the American airline industry with $US5 billion in emergency aid and agreed to guarantee up to $US10 billion in borrowings.

But could such a short shutdown threaten an entire industry?

American magazine Business Week suggests that, before the attacks, analysts expected American airlines to lose $US2 billion this year. With the effects of the terrorism this could turn into $US5 billion.

"Even if the aid package could get them back to the status quo, the status quo is not a good place to be," Kevin C. Murphy, a Morgan Stanley Dean Witter analyst, told the magazine. "Some carriers are mortally wounded."

The major American carriers have announced services and payroll cuts of around 20 per cent. Some predict the American industry will cut up to 100,000 employees and 900 planes as airlines downsize to the levels of the mid-1990s.

How about outside the US?

Chris Tarry, an aviation analyst with Commerzbank, forecasts BA will make a pre-tax loss for the year of £326 million ($1.12 billion). He also believes the collapse in traffic on transatlantic routes will help wipe up to £1 billion from the airline's revenues this financial year. For the following year he forecasts a loss of £70 million.

The forecast loss would be the worst in the airline's history and the first since its privatisation in 1986.

Last week, BA disclosed it had lost £48 million in revenue in the week after the attacks on New York and Washington as transatlantic travel fell 60 per cent.

Forward bookings across the Atlantic are reported to be down by between 30 per cent and 35 per cent. This compares with a 24 per cent decline in transatlantic traffic in January 1991 when the Gulf War began.

BA is more exposed to a fall in the transatlantic market than its European rivals. The North Atlantic accounts for 37 per cent of BA ticket revenue. According to the Economist, Virgin Atlantic is also heavily reliant on the transatlantic trade and has announced 1200 job losses

The terrorist attacks also intensified problems at Swissair, which has secured a last-minute financing deal with Switzerland's two biggest banks, UBS Warburg and Credit Suisse Group. The banks are thought to be providing 1 billion Swiss francs ($1.4 billion) to the airline, whose chairman and chief executive, Mario Corti, had earlier warned it might not be able to pay its fuel and wages bills this month.

The company said Sabena, its Belgian associate, also required a heavy injection.

Some of this may sound familiar to New Zealanders. Airline pundits joke that the state of Swissair's Belgian acquisition suggests its name may stand for "Such a bloody experience never again".

Even before the terrorist attacks, Swissair had run up huge debts in an attempt to expand. None of the money being provided by UBS and Credit Suisse will be used to pay off debt, sources said.

While Swissair is reported to have cut 3000 jobs so far, Alitalia in Italy has shed 4000, or 17 per cent of its workforce.

Air Canada has followed the American carriers and cut 20 per cent of its capacity. It is also after Government aid.

Asian airlines have had some shelter from the full fallout of the terrorist attacks but some, such as Cathay Pacific, have reported a sudden decline in traffic across the Pacific and say forward bookings look weak.

Cathay Pacific, the fifth-largest airline in Asia, has indicated it may need to cut certain routes in response to the downturn being experienced by the aviation industry.

Singapore Airlines, the region's largest airline, predicts the overall usage of passenger and cargo capacity will weaken further but says the industry was also one year into a cyclical downturn.

Why do airlines have trouble coping with a sudden drop in business?

Airlines are capital-intensive and need to maintain a network of flights, either on their own or coordinated with others.

A single aircraft can cost $200 million, so debt levels are often high. And their workforces are highly unionised and well paid. Key staff such as pilots and mechanics also hold considerable clout, because they are hard to replace.

And according to an Economist estimate each airline needs to fill three-quarters of its seats to make money - even a drop of five percentage points can damage operating profits.

Some of these staff costs can be judged by one of the strings that come with the US Government bailout of the country's troubled airlines.

This condition says that airline executives who earned $US300,000 or more last year cannot be paid more this year or next. And their severance packages cannot be more than two years' pay.

What are some of the problems flowing from airline closures?

Ask the people who worked for or provided services for Ansett New Zealand a few months ago. The effects can spread very far.

The International Air Transport Association reckons the total economic output of the air transport industry equals the gross domestic product of Britain or France, providing a lifeblood for travel, tourism and "just-in-time" delivery for urgent travel and goods.

A downturn in aviation can bring worries such as estimates that the global demand for jet fuel will drop between 5 per cent and 10 per cent, maybe more, by the end of the year.

And the effects of terrorism?

The worry is not just fewer people flying. Airlines and many other industries such as hotels and others rely heavily on business people to provide their custom.

And what will become of conference and conventions and face-to-face meetings such as the Commonwealth Heads of Government assemblage in the long term? A worry in recent years has been that telephones, video-conferences and the internet would eat into the need for such meetings.

Figures for the 1990s suggest the fear has been unfounded.

Numbers attending such events have risen. Conferences in the US alone generate billions of dollars each year and visiting such events is no longer the privilege of the top brass in a company. The right to attend a certain number of conference and training programmes a year is written into the contracts of many American middle managers as well.

Since the attacks on September 11, the Economist reports, at least 60 international conferences have been cancelled. And Britain and other places report declining numbers of tourists. Even attendances for the early days of Munich's Oktoberfest are said to be almost a third down on last year.

How may the attacks affect airlines in the longer term?

At least in three obvious ways.

Insurance costs will rise substantially.

More security will cost more money in screening, training and employing suitable staff.

And it is also feared that the tight security measures that seem inevitable will also mean that aircraft turnaround times will increase. That means fewer flights a day by each aircraft and higher unit costs.

A further result of the downturn is predicted to be more airline mergers and fewer governmental restrictions on ownership, in the light of Government bailouts now being required in several countries.

Can anything else go wrong?

Possibly. In Britain this week passengers were warned that they could face higher airfares and later mail deliveries if Britain outlaws night flights to comply with a ruling of the European Court of Human Rights.

The Daily Telegraph reported the court upheld a claim by eight residents of the Heathrow area that the sleep disruption resulting from night-time operation violated their right to "respect for private and family life" under the European Convention.

Environmental campaigners hope it may stop flights between 11.30 pm and 6 am at all British airports. The court stopped short of advocating a ban but said the Government had "failed to strike a fair balance" between the economic value of flights and their impact on local people.

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