9/11’s impact on aviation industry

Marketplace Staff Sep 8, 2006

9/11’s impact on aviation industry

Marketplace Staff Sep 8, 2006

MARK AUSTIN THOMAS: As we mark the fifth anniversary of 9/11, we take a look at the impact that event had on the economy. Perhaps no business was more transformed by the terror attacks than the airline industry. Delta, United, US Airways and Northwest Airlines all declared bankruptcy following the tragedy.

Richard Aboulafia is an aviation analyst at Teal Group. I asked him to describe the airline industry prior to 9/11.

RICHARD ABOULAFIA: Well, at 9/11 the industry was very definitely in transition. There was obviously handwriting on the wall that the situation wasn’t going to keep going because you had a big business downturn when it came to business travel after the dot.com crash in late 2000, early 2001. So this was an industry in flux, but it was not an urgent situation.

THOMAS: So the airline industry was already facing serious challenges. What was the immediate impact of 9/11 on the industry?

ABOULAFIA: 9/11 had a tremendous accelerating effect. One, obviously, there was the shutdown. And you shut down an industry with high capital costs, high fixed costs, and razor-thin margins. You shut it down and all of a sudden they’re deprived of their life’s blood — cash. Next, of course, an awful lot of people have stopped flying. We’ve lost several years of traffic growth. And this is an industry that depends on some kind of increase in growth.

THOMAS: What’s the status of the industry today, five years later?

ABOULAFIA: The U.S. part of the airline industry is arguably the worst in the world, by far. Most of all, we need serious restructuring. We need fewer players. Everyone knows this. It’s just a question of the mechanics in making it happen.

THOMAS: If mergers are clearly the answer, why is it so difficult to have this happen?

ABOULAFIA: Mergers are very tough to engineer. For one thing, there is a lot of people who have a vested interest in keeping the existing capacity online. Then you have dramatic differences in the business practices between the established players. A lot of these airlines have been in business for many decades. They have a workforce that, well, has seniority as a way of life. And then very often, of course, you simply have too much directly competing capacity. So that mergers might actually require shrinkage. Nobody really likes to shrink. But, you look at the industry right now and all eyes are on US Airways-America West. Because, if it succeeds in creating a merged carrier — and it looks like it just might — it’ll be the first example in industry history of two equals actually merging and creating a successful larger carrier.

So, Delta, Northwest and all the other airlines might be heartened by the experience and might try to make a go of it.

THOMAS: What kind of adjustments do we, the consumer, need to make?

ABOULAFIA: The consumer is the market. And, of course, airlines, like any other business, need to be responsive to that market. But consumers also need to know that some of the fares they’ve been paying have sorta been a fantasyland. Some of these fares are basically subsidized by investors who’ve lost their shirt. In other words, you might have to see some slight increase on fares on some routes that have just been dramatically slashed.

THOMAS: OK, thank you so much for your time.

ABOULAFIA: Oh, pleasure, thank you for asking.

THOMAS: Richard Aboulafia is an aviation analyst at Teal Group.

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