Airline Adjustments Due to September Hi and its Aftermath

The combination of adverse effects due to Sep­tember 11 and its aftermath bore down heavily on the airlines. The domestic air carrier industry was in for five years of negative profitability beginning in 2001. Through 2005, the airlines lost $35.1 billion just for that five-year period. The airlines were also deeply in debt.

Labor

Aside from low passenger traffic counts, the plight of the airlines was complicated by increased labor costs that were the result of protracted negoti­ations with their labor groups from the period
of profitability during the late 1990s. Labor had pushed to make up for some of the concessions that had been granted management to keep the air­lines afloat during the dark days of the early 1990s, and now the cost of those new labor agreements were coming due. Labor costs have traditionally been the largest single expense factor faced by air­lines, historically amounting to some 35 percent of total operating costs. The average airline employee in 2002 made $73,000 a year, including pension and insurance benefits. Because airlines require the services of highly skilled employees, their employ­ees historically are highly paid. Airline wages were 53 percent higher than national averages.

Following September 11 the airlines were forced to reduce their workforces significantly, on average among the 13 largest carriers by 14 percent, although at United the reduction was 20 percent and at US Airways it was an even greater 24 percent. In numbers, there were over

80,0 layoffs immediately. By 2003, that num­ber was 140,000. See Figures 35-7 through 12 and Table 35-1.

Fuel

Fuel prices are inextricably interwoven with overall economic conditions. A close correlation

can be observed between periods of recession and increased energy prices. (See Figure 35-13.) In spite of advances in fuel-efficient aircraft engines (the aircraft fleet in 2002 was twice as fuel effi­cient than 30 years before), fuel prices continued to contribute heavily to the airlines’ financial

woes. During the first 11 months of 2002, jet fuel prices rose 27 percent, and from December 2002 to February 2003, those prices rose an additional 55 percent. Jet fuel prices more than doubled in the one-year period February 2002 to February 2003. Crude oil prices increased by 60 percent in

2004, and in 2005 the airlines’ fuel costs doubled over that in 2003. (See Figure 35-14.)

Southwest Airlines, exhibiting another facet of original thinking, began hedging its fuel costs.9 In 2004, Southwest’s fuel costs were much lower than its competitors’ costs for this reason. South­west continued to demonstrate profitability even under these trying circumstances.