The Daily Interview: Checking In on the Future of Airlines

Though the industry may feel some short-term pain, analyst Dan Kasper predicts that travel will come back, but with a price.
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No doubt after Tuesday's terrorist attacks, airline travel will never be the same. And some wonder if the industry will be, either. Already beset by higher costs and decreased business travel, the airline industry now faces one of its toughest financial periods. Even though federal regulators began to lift their grounding of planes Thursday, the industry was left with millions in lost revenue, spooked airline travelers reluctant to fly again, higher oil prices and increased spending on security.

But Dan Kasper, airline analyst and managing director of LECG, an economic consulting firm, believes the attacks' effects on the industry will be short term. Airline travel will drop by only a third, and if behavior in other disasters proves true once again, travel eventually will return to normal, Kasper predicts. But not without a price, he adds: The costs for heightened security will translate into higher ticket prices.

TSC: How damaging will this disaster be to the U.S. and foreign airlines industries?

Kasper:

Although we have never had anything this big, or ever had the entire air-traffic-control system shut down in the United States, experience has shown that in the wake of a disaster like this, traffic inevitably goes down fairly sharply -- by a third. The short-term effect of the fear factor will be severe for both the U.S. and foreign airline industries.

The airlines will likely write off tremendous amounts of lost business this year. The airlines have announced that, in these two days of the air-traffic-control system being shut down, they have lost $300 million a day. As air travel resumes, the losses will be less.

The good news is that experience has shown us that travel and revenues come back.

TSC: With Midway announcing Wednesday that it was going to go out of business, do you expect other airlines to follow?

Kasper:

It's too early to tell if this tragedy could lead to other airlines going out of business. Midway was already in bankruptcy. Their competitive position was under severe stress to begin with. We will have to see how long the downturn in travel lasts.

TSC: How much do the airlines currently spend on security, how much could those costs increase and will these costs ultimately be borne by travelers?

Kasper:

We don't have figures on how much the airlines currently spend on security. But as to how much these costs will increase, we will have to see what the

FAA's

new regulations are. Eventually, those costs will be passed to consumers, but it will take a while for two reasons.

Airline prices are market-driven, and with air travel likely to decrease severely in the short run, the airlines will reduce ticket prices. Also, airlines do not bear the cost of security immediately up front. A lot of the tightening

in security will be borne by the airports, which are either city-run by a port authority, as in New York and Boston, or municipally operated. But they ultimately recover those charges from the airlines.

So, as travel begins to pick up and the airports ultimately recover those charges from the airlines, this will show up in the cost of travel.

TSC: Do you think we can ever again have a sense of security as travelers?

Kasper:

Yes, although you can never eliminate all of the risks. We will have to see what regulations the FAA comes out with.

TSC: Even if the FAA comes out with stringent safety measures, can we ever have faith in international flights originating from foreign airports where we have no control?

Kasper:

The FAA ranks the security of foreign airports for safety and security, and because the U.S. is such an important market for other markets, the foreign security in many places is much tighter than it is in the U.S. So it would be a mistake to lose faith. We need to figure out how they got on and pulled this off. It's premature to rush to safety conclusions.