Carriers on brink
The key to airlines' ability to stay airborne after last week's attacks on the US will be the resilience of consumers, Joseph Lo reports
THE AIRLINE INDUSTRY is facing possibly the biggest crisis in its history. Few people in the developed have not by now witnessed the tragic events last week, the terrorist attack on the World Trade Centre towers in New York.
The fact that airliners, one each from United Airlines and American Airlines, slammed into the two skyscrapers killing thousands, and with one crash on live television, will have left many people with an overwhelming fear of commercial air travel. For the global air travel industry, the biggest question will be whether consumers' fears are short-lived or the beginning of a more radical undermining of consumer confidence in the airlines.
There is a danger that if United States consumers stay away from air travel for an extended period, the financial damage to the US airline sector will be catastrophic. One mid-sized regional carrier, Midway Airlines, has already gone bust. Investors fear that more airline failures will follow.
Continental Airlines, the fifth largest US carrier, said last weekend that it would consider filing for bankruptcy protection if federal funds were not allocated to help bail out the industry. Northwest Airlines and Delta Airlines are also believed to be at risk.
So far, the danger of collapse has been limited to the US carriers. Yet there is no doubt that shattered US consumer confidence could have a contagion effect on the rest of the world.
A Goldman Sachs report published yesterday in the US states that 'the impact of this terrorist action is likely to be more severe and prolonged than the Gulf War'.
'Near-term losses could bankrupt the entire industry,' it said.
In the coming weeks and months, questions about the viability of the US carriers will have to be answered as flight schedules are resumed.
But how will this affect the main Asian carriers? There are more questions than answers so far. Analysts say that with the situation so fluid from day to day, there is no way of knowing what the impact on Asian carriers will be.
The terrorist attacks could not have possibly come at a worse time, as the industry was already struggling prior to the attacks.
Passenger demand has been weak since the beginning of the year as a result of the struggling US economy.
For Cathay Pacific, which has also had to deal with a disgruntled pilots' union and passenger load factors have already fallen about 5.3 per cent during the first seven months of the year compared with last year. July saw load factors fall 13.9 per cent.
Singapore Airlines (SIA) has had to deal with similar falls in passenger numbers.
So far there is no indication that the devastation hitting the US carriers has carried into Asia.
'I believe that the European carriers will be hit next by a fall-off in consumer sentiment, since the tradition of terrorism has always been present there.
'By contrast, terrorism is still a relatively foreign occurrence in Asia. People here have yet to become really scared by the situation and life goes on as normal,' said an analyst with a European investment bank.
There are indications from the US that business travel - the bread and butter for airlines - will pull back until the terrorist threat diminishes and security is tightened.
If so, that will affect business travel to Asia.
The Business Travel Coalition conducted a survey of corporate travel managers in the US shortly after the attack and found 88 per cent believed that their company would cut back on travel in the coming weeks.
Fears that passengers will not return were a key reason for the beating that airline stocks around the world have taken in the past week.
British Airways extended Friday's 16 per cent fall with further declines in early London trade. In Asia, shares in Japan Airlines and Cathay both fell more than 10 per cent yesterday, while SIA's stock fell 7.34 per cent.
For investors, the near-term effect of the terrorist attack is well-defined and clearly negative.
All airlines, whether US or Asian, now face the double whammy of falling passenger levels and rising operational costs.
Insurance premiums, borrowing costs, fuel, landing fees and security costs are all expected to rise in the near future. This will further weigh on carriers' stressed bottom lines.
'The outlook for the aviation sector will become better defined in the next couple weeks. It all basically [depends] on how business and consumer sentiment in the US recovers as things return to normal,' said one analyst with a US brokerage.
He said recovery would hinge on a resumption of normal passenger demand for air travel.
'If passengers return in somewhat normal levels, you will see the industry return to normal quite quickly. However, there is a danger that consumers will choose to stay away,' he said.
This will be very much determined by whether consumers see the terrorist attack as a one-off event, or whether they believe that last Tuesday's attack only marks the beginning of a drawn-out terrorist war on US soil.
'If consumers believe that there will be more terrorist attacks, the entire global industry is going to be radically changed,' he said.
One factor differentiating airlines from most other industries is its reliance on turnover for its survival. By general rule of thumb, a two-week suspension of operations is generally enough to wipe an airline from existence.
Average industry margins are a scalpel thin 2 to 3 per cent, against huge fixed costs. The US airlines together spend US$350 million per day and, as a group, only had about US$10 billion in cash on hand before the troubles began.
Against this is the worrying fact that new bookings in the US are virtually non-existent.
The US airlines have now lost two full days of revenue and schedules are nowhere near recovering to pre-tragedy levels.
By contrast, the operations of the main Asian carriers have returned to normality. For SIA and Cathay, network disruptions were limited to their US services.
But Asian carriers will be hard hit by a drop-off in the amount of lucrative belly-hold cargo they carry to the US. Increased customs security and worries that US customs will be more strict with imports means some perishable items are being held off aircraft shipments for now.
'It will take a much longer period before air cargo returns to normal. The whole sector is now being left out of recovery forecasts for the US carriers,' one analyst said.
Still, Asia's airlines are not out of the woods yet, by any means.
There are three factors with the capacity to derail the industry.
The continued downward spiral of the US airline industry will be a drag on the world economy. If the US plunges into a deep recession, Asia will be hard pressed to recover.
If the US wages war on Central Asia, as it has threatened, Asia will likely be a key staging ground for US forces. Consumer travel in the region would ground to a standstill.
But the biggest concern is for a non-US carrier to be the next target for terrorist hijacks.
However distressing, New York's troubles are half a world away. Who knows what the effects on Asian consumers may be if those horrors begin occurring closer to home.