Five years ago the airline industry was fat, and now it is thin.
Much of that change results from the terrorist attacks of Sept. 11, 2001. The attacks choked off industry revenue at a time when a growth cycle was ending and low-cost carriers were gaining critical mass, forcing drastic changes when the changes might have been more gradual.
Since August 2001, about 155,000 airline industry employees have lost their jobs, a reduction of 29%. Most of the lost positions were at legacy airlines, which cut 816 mainline jets from their fleets, a reduction of 23%, according to Air Transport Association figures.
Bankruptcy court became the preferred avenue for downsizing, as four of the six legacy carriers sought Chapter 11 protection. The six shed $16 billion in annual operating costs between 2001 and 2005, excluding fuel expenses and payments to express partners, the ATA said. Labor costs accounted for more than half the cuts.
Delta Air Lines
, continue to operate in bankruptcy and to cut labor costs, shed airplanes and pare other expenses as well.
"Sept. 11 forced structural change in the industry, which was happening anyway, to happen much faster," said Ben Baldanza, CEO of privately held Spirit Airlines, in an interview. "The attacks put the whole trend on afterburner, because revenues dropped so precipitously. A lot of carriers used bankruptcy, or the threat of bankruptcy, to create higher productivity, lower costs and a flattening of the
price differential between legacy carriers and low-cost carriers."
The attacks also forced a massive and expensive reorganization of aviation security. Ticket fees now produce $1.9 billion that is turned over to the Transportation Security Administration for airport security, and airlines pay another $1.3 billion annually for security operations such as cargo screening, airfield protection and first-class seats for air marshals, according to ATA figures. At times, security-line delays have hampered travelers.
Despite the inconvenience, the industry is on a roll; for many carriers, second-quarter results were the best since 2000. The improvement has a simple explanation. "The industry is doing well right now because of capacity reductions," said Doug Parker, CEO of
, at a July earnings conference. "It's not great management. It's because a bunch of seats went away.
And as seats have gone away, you have seen the ability to raise fares."
Capacity declined for two reasons: Fuel prices rose, making it unprofitable to operate older, inefficient airplanes. And bankruptcy made it easy to shed airplane leases.
US Airways has been the poster child for industry improvement since the attacks. The airline was a high-cost legacy carrier that by 2000 was under assault in its Eastern markets, where
had just started flying and
was expanding rapidly. Their growth was encouraged by easy fare comparisons made widely available by the spread of the Internet.
US Airways was also the airline most affected by the attacks. Short-haul traffic in the Northeast, the carrier's major source of profits, was diminished by security delays that made driving more practical. Washington's Reagan National Airport, which US Airways dominates, was temporarily shut down. The airline filed for bankruptcy protection in 2002, emerged in 2003, and filed again in 2004 because it had not anticipated the extent of the pricing breakdown forced by low-cost carriers.
Last year, US Airways merged with America West Airlines, becoming the first legacy carrier to be taken over by a low-cost carrier. The merger, so far wildly successful, was accompanied by a 15% reduction in the two carriers' capacity, as 60 older airplanes were abandoned in bankruptcy court.
Before Sept. 11, 2001, US Airways had been planning a far different sort of merger.
The combination of legacy carriers
and US Airways collapsed two months before the attacks, rejected by regulators who viewed it as anticompetitive. Even so,
unit American Airlines was permitted to take over failing TWA, a deal that American now openly regrets.
The two legacy mergers, unveiled in 2000, marked the end of a "take on any cost" expansion phase, said consultant Robert Mann. The phase was stimulated by six straight profitable years from 1995 through 2000, when the industry earned $23 billion, including a record $5.4 billion in 1999, according to ATA figures. Profits declined to $2.5 billion in 2000.
"Things got out of control at the end of the 1990s," Mann said. Airlines were spending heavily to differentiate themselves, "throwing layers of people and money at the product." The two biggest carriers also decided to spend billions on mergers that would extend the reach of their networks at the expense of competitors.
When the attacks came, "you were running the expense clock at full speed, and suddenly you were running the revenue clock at zero," Mann said. Between 2001 and 2005, the industry lost $35 billion.
Morningstar analyst Chris Lozier said the attacks "accelerated the process of natural selection in the industry," paring the weakest branches from every carrier and leading to the US Airways merger and possibly to other mergers to come. In that sense, he said, the industry benefited.
But the cost of slimming down was high. "Sept. 11 was a devastating incident that changed the world forever," said Robert Roach, general vice president of the International Association of Machinists. "The victims and their families were the first to get hit, and transportation workers were the second to get hit."