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Emergency Landing: Terrorism critically damaged an already crippled airlines industry

plane
Diana L.C. Nelson

When American Airlines Flight 587 crashed in Queens, N.Y., the reaction from many Americans spoke volumes about the health of the U.S. airlines industry. As the grim news filtered into homes and offices, there were sighs of relief the tragedy that claimed 265 lives was “just an accident” — and not the work of terrorists.

It’s amazing, really, that in just two short months the airlines industry, and people’s perceptions of it, had fallen to such a point that a fatal crash caused by apparent mechanical or pilot error could be considered a good thing. True, there was much wrong with the air travel business before the September 11 terrorist attacks. But that event heaped unprecedented additional misery on an economic sector that already was operating on razor-thin margins: a two-and-one-half-day shutdown of the nation’s airspace that contributed to the airlines’ billions in financial losses in 2001, a new sense of panic about air travel among thousands of casual flyers and a global economic tailspin that forced many companies to cut travel budgets.

This is bad news for the Chicago metropolitan area, which gets an annual economic boost from air travel worth an estimated $35 billion — and even worse news for much of the rest of Illinois, where regional airports have long struggled to stay afloat.

Unlike a doomed plane, the airlines will rise again — eventually — perhaps by late this year, some experts predict. But the fundamental changes, including heightened security, reduced availability of flights and loss of service to smaller cities, that have sprung from these troubled times will stay with air travelers for much longer.

“There’s hardly a bright spot in the sky,” laments Sam Peltzman, professor of economics at the University of Chicago’s graduate school of business. “[That sector] will bounce back, but it will be down. It’s going to stay down for awhile.”

If the industry was temporarily knocked out on September 11, in the months before it had been looking like a rubber-legged boxer stumbling in the ring. Chicago’s O’Hare International Airport, where United and American airlines operate hubs and before September 11 directed a combined 790 departures a day, already was feeling the pinch.

Many factors had conspired to make life difficult for commercial airlines, including higher fuel costs, which leaped to more than $1 per gallon in November 2000, nearly twice the long-term average price of 60 cents to 65 cents per gallon; widespread customer dissatisfaction; and signs the American economy was slowing. 

But a major headache for many of the airlines, especially United Airlines, was labor strife. At Elk Grove Village-based United, this problem came to a head in the summer of 2000, when pilots, upset about a proposed merger with US Airways Group Inc., initiated a “slowdown” that caused maddening delays at O’Hare and other airports throughout the country. Their supporters believed a contract with big wage increases was long overdue. The pilots had taken a large pay cut and gone almost six years without a raise — in exchange for a controlling amount of United stock, which proved to be a bad bargain.

United ultimately settled with the pilots, giving them wage increases of 24 percent to 28 percent on top of restoring the pay cut. But the airline set itself up for similar demands from its other unions — and raised the bar for competitors. “It made them a pariah in the industry,” says Aaron Gellman, a professor at Northwestern University’s Transportation Center.

Meanwhile, United and its pilots both managed to get the short end of the stick. The pilots, and the machinists, took a hit because their stock in the employee-controlled company nosedived in value. Capt. Herb Hunter, a spokesman for the Chicago office of the Air Line Pilots Association, estimated in November that his stock had dropped from $391,000 to $50,000 in just 15 months. “I’ve always called it Monopoly money,” he says. 

And the company’s proposed merger with US Airways failed. Despite negative signals early on from federal antitrust regulators, negotiations had limped along until last summer, when United was forced to pay US Airways $50 million to back out of the deal.

Now $50 million looks like chump change. Fueled by the terrorist attacks on New York City and Washington, D.C., the airlines lost an estimated $10 billion last year.

Those losses have had a ripple effect. An estimated 100,000 airline workers have been laid off. And countless others in businesses that depend on air travel are joining them in the unemployment lines, including up to 30,000 employees of Chicago-based Boeing Co., though most of those workers live in Seattle. 

And American taxpayers will be on the hook for $15 billion in federal money aimed at bailing out the industry with cash and loan guarantees.

After the nationwide grounding of planes, commercial airlines resumed flying, but with steep cuts in service: Several are operating only about 80 percent of their pre-September 11 flights, and the bargain-basement fares offered to bring travelers back haven’t helped the airlines’ bottom lines.

Those travelers who aren’t too scared to board a plane are required to get to the airport two hours early to stand in snaking security lines. That wouldn’t be so bad if people felt safer. But every new breach of security, like the Richard Reid shoe-bombing attempt in December, chips away at any confidence that’s been rebuilt. 

“The other shoes haven’t dropped yet,” says Michael Boyd, president of The Boyd Group/Aviation Systems Research Corp. and a Colorado-based consultant, speaking of the patchwork security “solutions” that have gone into effect. “People know it’s not better security, so they’re going to travel less.”

Businesses aren’t afraid to fly — they’re just too poor. Many companies are slashing travel budgets for economic reasons and opting instead for teleconferences and e-mail. With a last-minute fare from Chicago to Los Angeles running at more than $1,200, it’s not surprising business travel is dropping.

“It was really a dire situation by September 11,” says Joseph Schwieterman, director of the Chaddick Institute for Metropolitan Development at DePaul University and a former pricing and marketing specialist at United. “In a way, September 11 just hastened what was going to happen anyway.”

Yet, even with the economic rumblings, it would have been unthinkable before September 11 to say “United Airlines” and “bankruptcy” in the same breath. And though it’s not likely, the possibility that United, once the world’s largest airline, could file for Chapter 11 has been raised in media reports several times in recent months.

What’s bad for United and American airlines is bad for O’Hare and for Chicago’s Midway Airport. 

It’s bad, too, for Meigs Field, the city’s tiny lakefront airport. But it’s worse for Illinois’ other 120 airports, nine of them “primary” airports with commercial air service, many of which were struggling even in good economic times.

MidAmerica Airport near the Metro East city of Belleville, for example, lost its only passenger airline, Pan Am, after the September 11 attacks — the latest in a string of bad luck for the new facility. 

Southern Illinois already is what Boyd calls “air service blighted” and, with the big airlines all paring down, that’s not likely to improve. “It’s going to get worse before it gets better, and it may never get better” in that part of the state, Boyd says. “They have virtually no air service. They have to drive to St. Louis. What does that do when they’re trying to attract a factory?”

Also stung have been the players in the state’s general aviation sector, including manufacturers of private and corporate planes, air taxis and flight schools.

Just how important a healthy air travel system is to Illinois can’t be overstated. The $35 billion a year that Chicago’s O’Hare and Midway pump into the region includes direct employment in airport activities, transport, tourism and the like, along with the trickle-down on other businesses and the commerce that’s attracted by the airport system. That’s according to a 1998 study by the Booz-Allen & Hamilton management consulting firm that was commissioned by the Chicagoland Chamber of Commerce. 

Backers of the proposed $6 billion expansion of O’Hare call the world’s busiest airport the engine that drives the entire state’s economy. And the numbers can be eye-opening, even for Chicagoans accustomed to seeing jets in the skies at all hours of the day. O’Hare is responsible for an estimated 365,000 to 455,000 direct and indirect jobs, with the northwest suburban area around it rivaling downtown Chicago as a prime business location. An estimated 130,000 of those jobs are directly tied to the airport, including ticket agents or car rental clerks. 

So what can we expect this year - and beyond? Barring another terrorist attack, things will get better. It will take nine months to two years, depending on which economist is speaking - but people will fly again and the airlines will rebuild their schedules.

Imagine O’Hare in the bull’s eye of a series of concentric circles and the impact is clear. Besides the businesses that directly serve the airport, there are companies that depend upon on-time deliveries, such as seafood shippers or overnight mail deliverers. Then there are the hotels, convention halls and other facets of tourism. Keep going and eventually there’s the professor at the University of Illinois wanting to fly a colleague in from Beijing, or a downstate farmer seeking markets for soybeans or a Rockford manufacturer needing parts from Asia.

“Your connection to the world is O’Hare,” says Paul O’Connor, executive director of World Business Chicago, a not-for-profit economic development corporation chaired by Chicago Mayor Richard Daley.

Illinois’ other airports generated more than $2 billion in 1998 through direct activities and trickle-down impacts, including about 23,000 jobs, according to an analysis in a 2000 report by the University of Illinois at Urbana-Champaign’s Regional Economic Applications Laboratory for the Illinois Department of Transportation. That includes everything from the fees paid by cargo plane companies to the dollars spent on hotels to the cash that is recycled by hotel employees at local stores.

Despite the recent economic problems, up until September 11 the marketplace was building a thriving post-deregulation air transportation system. Before the airlines industry was deregulated in 1978, the government decided which communities would get service. This was good for the underserved small towns of the nation, not so good for consumers who paid exorbitant ticket prices. With deregulation, the airlines built upon a more efficient “hub-and-spoke” system, in which such key cities as Chicago became changing points for trips between far-flung places and ticket prices got much lower.

In recent years, a parallel system of smaller airlines with more focused short-haul service has sprung up — with widely varying degrees of success. Southwest Airlines and JetBlue are two that have made money targeting specific routes with lower prices than the older, bigger airlines — and they’ve weathered September 11 relatively well.

“The industry still really hasn’t shaken out to where it’s going,” says the U of C’s Peltzman. “At the end of the day, there’s going to be opportunity.”

So what can we expect this year — and beyond? Barring another terrorist attack, things will get better. 

It will take awhile — anywhere from nine months to two years, depending on which economist is speaking — but people will fly again and the airlines will rebuild their schedules.

That sector’s economy could be touch and go for awhile, though. 

After the Richard Reid incident in December, the stock of every major airline plunged, proving again the negative power of security fears combined with industry revenues already 20 percent below where they should have been.

And tension between labor and management at some of the airlines could last for a while. There is still deep resentment among many employees at United, where former CEO James Goodwin resigned in October after issuing a much-criticized warning that the airline would “perish” because it was “hemorrhaging money,” a statement that pushed the company’s stock into a freefall. The pilots are angry because they’ve been made to look like the bad guys. As of mid-January, the machinists were in a federally ordered cooling-off period in their two-year-old contract dispute. Many employees are still bitter about the previous management’s forays into the failed US Airways merger and into a separate venture to provide private business jet service. All of United’s unions are bracing for management to ask for wage or work rules concessions.

As for airline consumers, they’ll continue to deal with what President George W. Bush called our “new culture of being vigilant.” Increased security and decreased convenience are part of a “normal” air trip now. Business travelers, who were once able to choose their flights almost to a specific moment of the day, won’t have that convenience because of pared-down flight schedules. And travelers at some of the regional airports will be in worse trouble if the airlines believe it isn’t worth their while to pick up 15 people.

Beyond the next five or even 10 years, things look considerably rosier. Those who aim to chart Illinois’ course over the next decade or more say it’s important to look beyond September 11 and this slump in the airlines industry. In the big picture, air travel will continue to grow — it must — especially in a state like Illinois that is so adept at providing services to the rest of the world. Architectural firms, engineering companies, management consultants, software developers, advertising and public relations firms — these are abundant in Illinois, and all depend greatly on air travel. And, because Chicago and Illinois are in the middle time zone for North America, it’s the most logical place for international companies from Asia and Europe to base their U.S. operations. This, too, requires an efficient air transportation system.

Backers of the proposed expansion of O’Hare have made these arguments their mantra. Despite opposition from nearby residents who complain about noise, pollution and congestion, those who want O’Hare to grow bigger — and nearly double its capacity to 1.6 million annual flights — say that’s essential to the economic future of the state. Not expanding O’Hare could cost the region $8 billion to $10 billion a year by 2015 because air traffic eventually would be lost to other cities and Chicago would become a less hospitable place to do business, estimated the 1998 Booz-Allen & Hamilton study. Expanding O’Hare, the same study predicted, would generate up to $26 billion a year in new wealth.

If anything positive can be found in the chaos that followed the terrorist attacks, it’s that businesses really need a healthy airlines industry. “It’s literally the exception that proves the rule,” says O’Connor of World Business Chicago. “It shows how dependent the economy of the United States and the world is upon air travel.”

That dependency will eventually make the airlines rise again. And that’s good to remember in the short term, as the industry continues to weather the effects of September 11. 

 

In memory of Mike Hudson

Michael H. Hudson was vice president of public affairs at Illinois Tool Works Inc. and chairman of the Illinois Issues board at the time of his death in 1992. 

In his memory, fellow board members established an annual essay to examine a significant economic trend in Illinois and its relationship to public policy. This feature was funded by a donor who asked to remain anonymous.

The Editors

 


Stephanie Zimmermann is a reporter at the Chicago Sun-Times.

Illinois Issues, February 2002

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