TPT July 2008

From the Americas

Airlines As fuel prices reach record highs and a weak economy reduces air travel demand, cash-strapped US carriers struggle “Just months after reporting their highest annual profits in eight years, US airlines are in a nose-dive that could leave some major carriers in bankruptcy.” This stark assertion by Chicago Tribune reporter Julie Johnsson was prompted by a Standard & Poor’s research report that warns the ten largest US airlines they must boost revenues and restructure loans. If they do not, their cumulative cash could shrink 62 per cent to about $8.6 billion by year’s end. This amount is insufficient to cover even one month’s expenses at the carriers, S&P chief credit analyst Philip Baggaley told the Tribune ( ‘Fuel costs may thrust airlines into bankruptcy,’ 19 May). The report by the credit-ratings agency, released 16 May, calculates that gaining pricing power in a fragmented, overserved industry would require US airlines to cut as many as one-fifth of their domestic flights: the equivalent of grounding two major carriers. The Tribune noted that there can be no easy answers for executives in an industry in which mergers ‘are unwieldy and notoriously difficult to complete’, and in light of the volatility of global fuel markets. Crude oil prices have doubled over the past year, and in fact rose about 15 per cent in the two weeks before the Johnsson article was published. “Fuel is astronomically expensive, to the point of pushing the industry past the point of economic viability,” Henry Harteveldt, travel industry analyst with Forrester Research Inc, told the Tribune . Of the major American carriers, only Southwest Airlines is expected to earn a profit in 2008 – and it has mortgaged 21 aircraft to raise $600 million to bolster its cash reserves. Wrote Ms Johnsson, “United, American, and Northwest Airlines have all renegotiated covenants that would likely cause them to default on loans later this year if cash flows continue to decline. United also renegotiated an agreement with its largest credit card processor.” Again excepting only Southwest, every major US airline plans big cuts in its flying schedule after the summer travel season. American Airlines said on May 21 that it would cut jobs, retire old planes, and cut domestic capacity by 11 per cent to 12 per cent in the fourth quarter. The world’s largest airline also said that, as of mid-June, it would charge $15 for the passenger’s first checked bag in an effort to offset its fuel costs. American will take at least 75 mainline and regional aircraft out of its aging fleet, the biggest scaling-back of its services since the attacks of 11 September 2001. In March, Delta Air Lines said it would cut 2,000 jobs and reduce domestic capacity by 5 per cent, on top of a 5 per cent cut already planned, for a year-on-year decrease of about 10 per cent. In April, Northwest Airlines, which has agreed to be bought by Delta, announced its own plan to take some older planes out of service and cut domestic capacity by about 5 per cent. The Tribune reported that Chicago-based United plans to cut 52 flights, ground at least 30 planes, and trim its domestic network by

9 per cent during the fourth quarter. And, according to the hometown newspaper, the nation’s second-largest carrier is looking at a host of other ways to trim costs and raise revenues. • As financially squeezed airlines cut flights, nearly 30 cities across the United States have seen their scheduled service disappear in the last year, according to the Bureau of Transportation Statistics. Among them are New Haven, Connecticut; Wilmington, Delaware; Lancaster, Pennsylvania; Hagerstown, Maryland; and Boulder City, Nevada. As reported by Micheline Maynard in the New York Times , more than 400 airports in cities large and small have seen flight cuts over the same period. Citing the Official Airline Guide , Ms Maynard noted that, in May, the number of scheduled flights in the US dropped 3 per cent, representing 22,900 fewer flights than in May 2007 ( ‘Airlines’ cuts making cities no-fly zones,’ May 21) Railroads Fairly well insulated from high fuel prices, a moribund American industry prepares for a bright future Even as leading US airlines fight for their lives, the country’s railroads are enjoying a spectacular return to vitality. Rail traffic, revenue, and profit began to soar in 2002 and seem largely immune to the downturn affecting much of the rest of the economy. In a time of layoffs and cutbacks in aviation, the rail industry has been taking on workers: more than 5,000 new hires in 2006. According to the Transportation Department, freight rail tonnage will rise nearly 90 per cent by 2035, when shipping long since consigned to aircraft and big interstate trucks will have returned to the rails. The reason for the turnaround is twofold: growing global trade, which benefits airlines, truckers, and railroads equally, and rising fuel costs – which affect railroads much less severely. While movers by air and high road are hostage to soaring diesel prices, most of the nearly $10 billion that the railroads will spend in 2008 can go toward self-improvement: adding track, building switchyards and terminals, opening tunnels to handle the expected horde of customers. Some background offered by Frank Ahrens of the Washington Post compounds the irony: “In the 1970’s, tight federal regulation, cheap truck fuel, and a wide-open interstate highway system conspired to cripple the railroad industry, driving many lines into bankruptcy. The nation’s 300,000 miles of rails became a web of slow-moving, poorly maintained lines, so dilapidated in spots that tracks would give way under standing trains.” The Staggers Rail Act of 1980 largely deregulated the industry, leading to a wave of consolidation. More than 40 major lines were folded into the seven that remain, running on 162,000 miles of track. Now, of course, the changing global market has created a need to lay new track for the first time in 80 years ( ’A switch on the tracks: railroads roar ahead,’ April 21). A train can haul a ton of freight 423 miles on a gallon of diesel fuel, for an approximate 3-to-1 fuel-efficiency advantage over trucks [‘18-wheelers’]. Mr Ahrens plausibly calls this a ‘green gift’ dropped into the lap of the railway industry, now actively promoting itself as

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J uly 2008

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