Airline Outlook Improves, While Uncertainties Remain
This year could be a turning point for the airline industry. Two older established carriers, American and Continental, are about to make a profit for the first time in six years. But all of them face major challenges, from labor unrest to volatile fuel expenses.
RENEE MONTAGNE, host:
Now to the airline industry.
With yesterday's announcement that U.S. Airways wants to buy Delta for $8 billion, a lot of people are wondering what's next. Not long ago, the prevailing wisdom was that the old established airlines would vanish like dinosaurs, driven under by more nibble competitors like Southwest and JetBlue. But that hasn't happen. And in this second part of out reports on the state of the airlines, NPR's Jack Speer examines how some of the older carriers are defying the odds.
JACK SPEER: The proposed merger of Delta and U.S. Airways is far from a done deal. Despite a $7.2 billion financing commitment from giant Citibank, Delta appears to be downright cool to the idea. But it does show how far things have come in the airline industry. Michael E. Levine is a former airline industry executive who lectures at New York University. He says it was just last year that U.S. Airways was merging with America West.
Mr. MICHAEL E. LEVINE (New York University): You have an airline that is in the middle of a merger and has some of its more difficult parts yet to go. Turning around, as it were, while up in the air doing its basketball maneuver and saying, well, let's go the other way and accomplish this at the other end of the court too.
SPEER: And it's that kind of full-court press, analyst say, is turning things around for the older airlines. Many have been able to substantially reduce their cost in bankruptcy, something that's been a big factor behind the latest round of industry consolidation. And there's something else that's helping the established airlines, something the low-cost carriers don't have.
Mr. JEFF SMISEK (President, Continental Airlines): We're a global company and we have exposure to, and we benefit from, economies across the world - not just the U.S.
SPEER: Jeff Smisek is president and CEO of Houston-based Continental. He says the people who rode off the established airlines with their hub and spoke networks and international roots, were shortsighted. Though he admits Continental's turnaround did not come without some pain.
Mr. SMISEK: We didn't turn out to be quite the dinosaurs that the low-cost competitors thought we were.
SPEER: What do you think is the biggest factor behind that?
Mr. SMISEK: We never were. You know, we had developed, over time as network carriers, cost structures that were simply too bloated. And it took, unfortunately, some pretty severe events - not only 9/11, but the war and high fuel prices - for us to realize that and take the difficult actions that we needed to take.
SPEER: Continental reported profits of $237 millions for its latest quarter. Later this year, the airline is expected to post its first full-year profit in six years. American Airlines is also expected to end the year in the black. But to say the older established airlines are back on top would also be something of an overstatement. Fuel prices have come down lately, helping all the airlines. However, there are still big variables going forward that could hit the established carriers especially hard.
William Swelbar is a former aviation consultant, now with MIT. He looks at the airlines from the viewpoint of the overall economy.
Mr. WILLIAM SWELBAR (Former Aviation Consultant, MIT): This industry is barely breaking even when the macro-economy has been very, very strong. And the economy is typically a very strong predictor of airline industry performance.
SPEER: Leaving Swelbar and some other analyst to question what happens when organized labor demands its share of the increased industry profits. Still, there are those who believe in what is a highly cyclical industry, some of the gains achieved by the old-line carriers recently will stick. Analysts say, if the airlines can avoid falling back into some of their old patterns, this could mark a critical turning point for the industry.
Jack Speer, NPR News, Washington.
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