More Terror in the Heart of the Airline Sector

Whether Monday's crash was an attack or an accident, AMR still loses.
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Did the terrorists strike again?

Speculation is running rampant in the wake of Monday morning's crash of

AMR's

(AMR)

American Airlines Flight 587. The Airbus A300, with 264 people on board destined for the Dominican Republic, hurtled to the ground in a fiery blaze just minutes after taking off from John F. Kennedy International Airport.

The first thought for many of us was, "The second shoe is dropping." The coincidences immediately began to pile up: It was a long-haul flight that had just taken off from New York. The carrier was once again American Airlines. It was Veterans Day, only two months and a day since Sept. 11.

Terrorist attack or accident, it doesn't spell good news for the airline sector, particularly for AMR.

Sector Under Siege

This crash was a massive blow to the industry's still-struggling efforts to recover from the Sept. 11 attacks. It happened a week before the traditionally busy Thanksgiving travel period -- a time when the American Automobile Association already has predicted the number of people traveling by air, bus and rail will be down by more than 27% from last year.

People who were afraid to get on an airplane because of the Sept. 11 attacks just had a chilling reinforcement of their fears. Traffic levels for the industry, which had been slowly inching upward, will no doubt be pushed back down by the crash.

And forget about airline advertising. Strong holiday bookings were seen as crucial for many airlines, which already were struggling with dwindling amounts of cash in the bank.

The loss of yet another aircraft is also certain to push base insurance rates for the industry ever higher for next year. Insurers are now looking at record losses -- having lost five hulls in the U.S. in only two months. That's not to mention the already higher "war-risk" insurance premiums, which the federal government has agreed to cover for the industry for the short term.

American's Woes

For American Airlines specifically, this is dreadful. Of the major airlines, it was the last to suffer a loss of life before Sept. 11, when one of its MD-80s crashed in a blinding thunderstorm in Little Rock, Ark., in June 1999, killing 11 people. In its report, the National Transportation Safety Board cited American for having provided "insufficient guidance to assist pilots in performing a stabilized approach" once that approach becomes destabilized. The NTSB also cited pilot fatigue -- an ongoing hot-button issue between the airline and its pilot union -- as a contributing factor because both pilots had been on duty for an extended period of time the day of the crash.

Given the current financial condition of the industry and AMR's struggle to absorb the assets of TWA, American can ill afford another crash stemming from something the airline had some control over, but failed to contain. Nor can it afford to be tagged as one of the terrorists' favorite targets.

Flight 587 may have gone down because of a maintenance-related problem, some freak mechanical collapse or an explosive device on board. At this point, all three are equally dismal.

What Might Have Happened

It's too soon to jump to conclusions about the cause of this tragedy. The evidence so far -- while still not conclusive -- points to a massive mechanical breakdown. Nonetheless, NTSB officials said Tuesday morning that they're still not ruling out sabotage.

The only thing the cockpit recordings revealed to NTSB investigators Monday night was that no third parties were in the cockpit when the jet went down. This still doesn't rule out a terrorist act or sabotage. Altimeter bombs, for instance, are built specifically to detonate at a specific altitude. Had one of those gone off in the baggage compartment and blown a hole in the aircraft's side, the pilots wouldn't have known what happened.

A troubling part of this crash was the large section of the aircraft's tail that was pulled out of Jamaica Bay. It was undoubtedly the vertical stabilizer, bearing the distinctive red-and-blue AA logo.

An engine also fell off the plane before it crashed. While engines can seize and self-destruct, they're deliberately designed to shear off in a way that avoids tearing away part of the wing. While this particular type of engine has had problems in the past, you still have to wonder why the tail separated from the plane before the plane crashed.

That doesn't quite seem to fit the scenario of a sole engine failure. While the NTSB sifts the scene with help from the FBI, we're left with doubt and worry -- and without answers.

Holly Hegeman pilots the Wing Tips column for TheStreet.com. At time of publication, Hegeman held no positions in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. You can usually find Hegeman, publisher of PlaneBusiness Banter, buzzing around her airline industry Web site at

www.planebusiness.com. While she cannot provide investment advice or recommendations, she welcomes your feedback at

Holly Hegeman.