In Debt and Inefficient, U.S. Airline Companies Are Experiencing a Structural Crisis

On Tuesday April 22, United Airline’s parent company, UAL, announced a 537 million dollar loss (336 million Euros) for the first quarter. Over the same period, AMR (American Airlines) lost 328 million dollars, and Continental 80 million. Analysts expect that the three other “Big Six” – Delta, Northwest, and US Airways – will also announce losses. The American airline companies, which have had chronic problems for years, are entering into what appears to be a systemic crisis, accelerated by the dramatic increase in the price of fuel (53% in on year) and the decrease in air-traffic linked to the recession.

In order to reinforce their financial power, and to finally be able to modernize, Delta and Northwest have announced their merger (Le Monde, April 16). This must gain the support of Congress and the two companies’ labor unions, which could attempt to impede upon or modify these conditions. Personnel must vote on Wednesday April 23.

For Richard Aboulafia, a Teal Group specialist in Washington, the “big maneuvers” have started. As soon as this merger “modifies the competitive landscape,” Larry Kellner, Continental’s owner, anticipates that his company “will do everything necessary to guarantee its position as a long-term competitor.” It is already negotiating a merger with United that would create a number one global company even larger than Delta-Northwest. United also is also canvassing US Airways. On its side, American Airlines has made contact with Continental. “Eventually, the “Six” will be no more than four, maybe three. But these mergers generate a lot of problems – differences in the fleets, for example, that they cannot resolve. Specifically, they will not change anything in regards to the sector’s structural difficulties,” says M. Aboulafia.

For a number of analysts, the solution to the American air transportation crisis can only be financial, as its infrastructure appears obsolete and outdated. According to a study by the transport minister unveiled on April 18, travel by air within the United States is longer today than it was twenty years ago. From the scheduled departure time to arrival, to get from New York to San Jose, in California, takes at least three hours longer. Constant delays, older fleets, outdated air control, full airports, increased flight cancellations, and security measures, this is the “landscape.”

“Rationalize the network”

Robert Crandall, American Airlines’ former CEO, published an article in the New York Times on Monday April 21: thirty years ago, he says, Congress adopted the law to deregulate air travel. “Since then, American air transportation has seriously deteriorated. Our companies were global leaders, and now they are behind in all areas.” He calls for “government intervention,” because “the approach through the market could not and will not be able to produce the system that we [the United States] need.”

Loren Thompson, a specialist at the Lexington Institute, believes that the government must be the authority “to rationalize the network” and to absorb “the unbridled competition” that has proven “catastrophic” for customer service as well for companies’ profitability.

While waiting, companies are taking measures to trim their costs or to find revenue. American Airlines is going to reduce its fights slightly be 3.6%, Continental 5%, and United 9%. AMR hopes to sell its subsidiary, American Eagle, and sold 90% of its financial management units for 480 million dollars. Continental is retiring from its fleet, in one year, 14 Boeing 737s that use too much fuel; United is retiring 30 old DC80s. Companies are raising their prices 4 to 50 dollars depending on the distance. They are taxing second bags and raising the cost of changing flights for clients. All of the companies are laying off employees. Continental has even put pressure on its pilots to economize fuel during transatlantic flights, which has provoked a large increase in emergency landings in 2007, according to a report from the transport minister.

The measures in effect are seen as insufficient by analysts. According to a recent study by Thomson Financial, American Airlines will not be in clear before 2011 at best.