Losing altitude

How badly are the airlines doing?

It’s a wonder most of them are still in business. Since 2000, U.S. carriers have lost a total of $30 billion. This year, the six biggest—American, Delta, United, Continental, Northwest, and U.S. Airways—are expected to lose billions more. U.S. Airways and United are already operating under the watchful eye of bankruptcy courts, and Robert Mann, an airline consultant in New York, says he wouldn’t be surprised if another major carrier went under in the coming months. “It’s like they’re all treading water, but they’ve got 100-pound weights around their necks,” he says. “You can only do it for so long.”

How did it all go so wrong?

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The attacks of Sept. 11, 2001, hit American carriers hard. First, the government shut down all commercial air traffic for four days. Then, despite costly security improvements, many Americans were too scared to fly. Waves of planes took off nearly empty. For weeks the industry lost as much as $370 million a day. The number of passengers finally returned to pre-9/11 levels last year—but then came a fresh blow: Fuel prices skyrocketed, peaking at $55 a barrel, double their average in 2002. The one-two punch of terrorism and oil prices pushed many companies to the brink of insolvency, but only because they were already in trouble.

Why was that?

Throughout the booming 1990s, commercial jets had been filled with business executives whose companies didn’t blink at paying from $600 to $1,500 for last-minute tickets and first-class seats. Business travelers accounted for about 40 percent of tickets sold, and provided the airlines with as much as 70 percent of their income. In 1999, when the economy suddenly faltered, corporations began cutting costs, and expensive trips were among the first items to go. Airline profits disappeared almost overnight. Today, even amid an economic rebound, leaner and meaner corporations are flying far less and letting only top executives fly first class. “The good times are over,” says Neil Bernstein of Washington University in St. Louis. “They’re not coming back.”

What are airlines doing to survive?

They are cutting expenses in every way possible. Since 2000, the six largest airlines have eliminated 100,000 jobs—roughly a quarter of their workforce. They have all but eliminated food service, abandoned their least lucrative routes, and told pilots and flight attendants to accept pay cuts and work longer hours or lose their jobs. These cutbacks have saved the companies billions—but it is not enough. U.S. Airways and United are asking bankruptcy courts to relieve them of their expensive pension programs; if the courts agree, taxpayers will assume billions of dollars in payments to retired airline workers. “It is the largest transfer of debt from the private to the public sector since Savings and Loan,” says Tim Baker, a U.S. Airways captain.

Are the airlines partly to blame for their troubles?

Yes. The old powerhouses—so-called “legacy” airlines, such as Delta, American, and United—were slow to adapt to changing times. They were created decades ago, when the federal government regulated fares and routes, and competition wasn’t as fierce. Back then, flying was a glamorous business, and pilots expected to be paid like the stars they were. They rapidly became the highest paid professionals in the nation, ahead of doctors. (Delta pilots still make as much as $300,000 a year.) Through their unions, flight attendants and mechanics shared in the wealth, and gained generous pension plans. To pay for this largesse, airline executives simply petitioned the government for permission to hike fares whenever money got tight. But when the airlines were deregulated, in 1978, they were left saddled with astronomical costs, as newer companies entered the market with leaner staffs and lower overheads.

How are the newer companies doing?

Surprisingly well. Southwest, JetBlue, and Alaska Airlines actually made profits last year. All three have attracted loyal customers with efficient service and low fares. Southwest now carries more passengers than any other airline in the U.S. JetBlue was launched in 2000, with just one New York to Florida route. It dispensed with expensive, first-class sections altogether, and gave everyone a cheap but roomy leather seat with free satellite television. It has made healthy profits from the start, and has now expanded to serve 30 cities.

Do the old airlines have a future?

It’ll be a struggle. With the new, low-fare airlines thriving, there are more jetliners in the air than the country needs. To compensate for half-empty planes, the old airlines need to charge higher fares—but the cost of their smaller competitors’ tickets is going down, not up. The price of the average transcontinental flight has halved in four years, to around $200, and now a new fare war is starting up. Delta, which narrowly escaped filing for bankruptcy last year, recently eliminated its priciest last-minute fares. American immediately followed suit. Industry analysts say this price war could cost the industry $3 billion this year, wiping out nearly half of what it had hoped to save with another round of pay cuts and 20,000 more layoffs. “We really have the tough part ahead of us,” says Gerald Grinstein, Delta’s chief executive.

How does Southwest do it?