DEL.ICIO.USSECTOR WATCH: AIRLINES
Economic slump extra drag for ailing airline industry
The Atlanta Journal-Constitution
Sunday, November 09, 2008
The Sept. 11 attacks. Bankruptcies. Skyrocketing fuel prices.
Atlanta’s airline industry, which has been a key driver of the metro area’s growth for decades, has faced one challenge after another.
RICH ADDICKS / raddicks@ajc.com
An airline passenger leaves a rental car company van and walks to the terminal at Atlanta Hartsfield-Jackson International Airport. The airline industry, already reeling from high fuel prices, now faces the challenge of reduced consumer spending.
Now, with the unraveling of America’s financial system, the industry’s three main local players — Delta Air Lines, AirTran Airways and Hartsfield-Jackson International Airport — must confront another major challenge, perhaps its biggest one yet.
Delta CEO Richard Anderson said the economy is forcing the world’s largest carrier into “uncharted waters” just as it closed its merger with Northwest Airlines and embarks on a two-year process of combining operations.
In a message to employees, Anderson said, “We’re moving into an unprecedented time in all of our lives in terms of the financial crisis around the world, and we just don’t know what it’s going to do to our demand.”
Delta management will need to undertake the monumental task of combining fleets, reservation systems and other operations, while also keeping a close eye on the economy and reacting to shifts in its business.
Even more challenging could be combining work forces totaling 75,000 employees and the prospect of union elections. If Delta needs to make cutbacks in a recession, it could influence how employees vote on whether to unionize and how smoothly the work forces combine.
Earlier this year, $147-a-barrel oil was Delta’s biggest problem. But oil prices have retreated, saving Delta about $60 million for every $1 the price of a barrel falls.
Now, Anderson said, “the high cost of fuel is being replaced by a softening economy and perhaps recessions around the world.”
“The economy is in tough shape,” echoed Delta President Ed Bastian. “What you want to do is to be able to manage down your capacity so you don’t have to lower your prices.”
For travelers, the airlines’ struggle to get through tough times could mean fewer flights and limited relief on fares.
Delta has 60 aircraft on order, including orders inherited from Northwest Airlines. But the deliveries are already financed, and the company does not expect to have to tap tight credit markets to acquire the planes.
Already, Delta’s finances have been affected by the credit crisis because it had an $818 million investment in the Reserve Primary money market fund, which failed after taking losses related to debt issued by bankrupt Lehman Brothers. Delta has taken a $13 million charge against earnings, but Anderson expects the airline to recover most of its investment as the fund liquidates.
‘Somewhat hedged’
Luckily for Delta, AirTran and other carriers, the economic downturn is occurring after they already made significant cuts in their flight schedules because of higher oil prices earlier in the year.
“We’re somewhat hedged against the economic downturn,” Anderson said when the company reported its third-quarter results last month. “When you think about what you would rather manage at an airline, you would rather deal with demand cessation rather than $150 fuel.”
But it’s unclear how big the drop in demand could be and what it could mean for fares.
Calyon Securities analyst Ray Neidl expects that demand will “sharply weaken as the slowing economy further takes hold, especially for the high-yielding business traveler,” according to a research report.
Delta has indicated that it is prepared to further cut domestic flights and slow international growth if conditions worsen. The airline already plans to make another cutback to its much-ballyhooed Atlanta-Shanghai route, reducing it to four days a week as it cited worsening economic conditions.
And more changes could come.
In a memo to employees last month, Bastian wrote, “We have a great deal of work ahead of us, against a backdrop of significant economic uncertainty.”
While Delta said one of the main advantages it would gain through the merger was a stronger international network, the airline has recently said it plans to slow its growth in international markets as economic weakness spreads.
“There is significant risk that they’re going to have too much capacity at a time when demand is falling,” said Jim Corridore, a Standard & Poor’s equity analyst.
Anderson contends the merger “becomes even more important as we face uncertain economic times, that we have available to us a lot of opportunity, a lot of resources and a lot of tools to weather the financial difficulties that we have.”
In a conference call on Delta’s financial results last month, he said the company is committed to cutting out fixed costs. Delta has pledged not to close any hubs or lay off any frontline employees as a result of the merger. But some employees and industry observers expect frontline job cuts if the economy continues to deteriorate.
‘Watching our expenses’
Orlando-based AirTran Airways, which has its main hub in Atlanta with about 6,000 employees, faces its own set of difficulties.
AirTran has had “a pretty good run the past six or seven years, but right now, it’s different and in many ways an even more challenging environment for us than after
9-11,” AirTran Chief Executive Bob Fornaro told employees during meetings last month, according to the company’s newsletter. “We’re in for a very tough next six months as an airline and 18 tough months as an industry.”
AirTran has already sold jets and delayed aircraft orders, and it plans to shrink for the next 12 to 18 months to cut costs and conserve cash. The company expects to face “a more formidable competitor,” now that Delta and Northwest have merged, Fornaro said.
Analyst Corridore, in a memo downgrading AirTran shares to hold, expressed concern about AirTran’s financial position and its need to raise cash.
AirTran is also more exposed to declines in leisure traffic in a sustained downturn, Corridore said.
The economic weakness “makes us very mindful that we need to be careful about where we’re spending our money,” Fornaro said. “We’re going to be cautious about how we manage our expenses, and we’re going to be biased toward having fewer airplanes.”
The company has already delayed construction of a new system operations control center in Orlando for at least six months.
“We’re watching our expenditures,” Fornaro said. “We’re only at the beginning of the cycle. We don’t know whether we’re going to see a big impact or a small impact. It’s still way too early to tell.”
Also closely watching how the economy affects the airline industry is Hartsfield-Jackson International Airport, which has already cut more than $250 million from its capital program for next year.
Among the projects affected is a 600-space parking garage, which will be deferred. Hartsfield-Jackson officials expect passenger traffic at the airport to be flat this year, but it could decline slightly next year.
That would mean less revenue for the airport from parking, concessions, car rentals and passenger taxes.
The airport is continuing with plans for a new $1.6 billion international terminal and is completing a new car rental facility.
But looking forward, “we are being very conservative,” airport General Manager Ben DeCosta said. “We try to remain flexible and watch it carefully.”
Services »
