Global Trade , Transportation , and Logistics ( 502 ) The Economic Impact of September 11 , 2001 on the Aviation Industry Team Members Naveen

September 11, 2001 will always be considered a turning point in the history of America. Terrorists attacks in New York City and Washington D.C. with aircrafts, were proved to be a major catastrophe for American as well as world airline industry. The North American airspace was completely shut down for four days and airline industry faced an unprecedented decline in demand for air travel immediately after the attack. As a result, the airline companies started facing deterioration in their financial positions and the number of flights. The current market for airline industry hasn’t fully recovered since that time. It’s really hard for airlines to balance their finance and get profits at this moment. The aim of this article is to explore the economic impact of September 11 from two aspects: airline and airports. An insight into the decline in air passenger demand due to September 11 is provided and how airlines responded to the crisis with immediate and large capacity reductions. Some of the strategic measures, for example, new regional jet orders, aggressive cost cutting etc, taken by the airline industries will also be discussed. Specifically, we focus on the impact of September 11 and consequent strategic measures in terms of revenue generated by airlines industries. Airlines and airports seem to be an integral part of each other. Therefore, the airline activity strategies may directly implicate the airport operation. In this project we report about the increased load on the airports due to increase in security measures. What airports can do in this changed market, and discuss the current airports financial situation. As we know, the higher security cost has already been added to airport operation process. Who should pay for the extra airport costs and what is the implementation for airports in the next coming years will be our main concerns in this subtopic. Finally, conclusions and recommendations will be provided based on the data collected and analyzed. 2 1. Airline Industry The airline industry is one of the adversely impacted industries by the September 11, 2001 (abbreviated as 9/11) tragedy. Just after the attack, nation’s aviation system was shut down and produced a cash “burn rate’ for the industry in excess of $330 million per day for the duration of the stoppage. It has been estimated that just in the first week after the tragedy the US airline industry lost between $1 billion and $ 2 billion [1]. The effects of 9/11 attacks continue to harm the industry significantly to this day. The fear of reoccurrence of 9/11 tragedy cause public avoids the air travel. From Figure 1 we can clearly see the trend of decline in demand; the passenger traffic is still well below 2000 level. The new security checks, random searches and new airline ticket fees cause more individuals take road trips, which again prevent the recovery of the demand. The enactment of new security policies incurs additional cost. Declined passenger demand results combined with the increased cost lead the industry to face accumulated net losses. From the Figure 2, (data source: ATA), it can be realized that the net loss for 2001-03 will exceed net profit for 1995-2000. Figure 1: Airline passenger demand (in millions): Source ATA 3 The Airline "Earnings"$23.00$0.00$10.00$20.00$30.001995-200020012002E2003F2001-2003The Airline "Earnings" Figure 2: Airline earnings (in dollars): Source ATA 1.1 The Response of the Airline Industry To respond to the crisis, the airline industry has taken several cost cutting measures. Capacity is matched more closely with decreasing customer demand (Figure 3) by removing aircraft from the airline fleet and reducing the aircraft utilization. ($7.70)($10.00)($6.70)($24.40)($30.00)($20.00)($10.00)• Removing aircraft from the airline fleet: Before June 30, 2001, the airline fleet has increased by 69 units. However after 9/11 the situation has been reversed, sizable reduction starting. Based on the data from ATA, between December 31, 2000 and December 31, 2002, the airlines fleet has shrunk by 298 aircraft. Although in the beginning most of the reduced aircraft was focused on the least efficient units, later on more and more new efficient aircrafts have been removed from the fleet. For example, in 2002 November, American Airlines (AMR) parked five 767s and US Airways (UA) parked eight 737s in the desert [2]. This is because although the air travel had begun to return from the sharp decline following 9/11, the numbers appear to be softening again. The scheduled flights and available seats for the first quarter of 2003 show no improvement and thereby forcing the companies to decommissioned their highly efficient planes too. 4 Figure 3: Passenger Traffic vs. Capacity (RPM, Revenue Passenger Mile, ASM: available seats miles) • Reducing aircraft utilization: Reducing the aircraft utilization is another strategy widely used by airline industry. Many aircraft now operate four flights per day instead of five. • Reducing capital budget: Reducing the capital budget, especially reducing the rate of new orders for new aircraft is another strategy used by airline industry. The Figure 4 shows the trend, sharp reduction of new orders for new aircraft compared with the orders amount before 9/11. Figure 4: Aircraft Orders and Options Backlog (Only include ATA U.S. Members) 5 • Other strategic measures: Reducing the capital budget, especially reducing the rate of Besides these methods, the airline industry also have taken other strategic measures such as reduced in-flight food service, closed reservation centers, eliminating stations and so on. All these methods greatly reduced the cost of the industry [Table 1]. The actions taken by the six global network airlines have reduced capital and operating costs by more than $10 billion (Data source: ATA). 1.2 Net Losses in the Airline Industry For normal market, such great cost cut could be expected to restore profitability. However the airline industry is still facing steep losses. This may be attributed primarily to two main reasons: the new additional cost and the reducing revenues. 1.2.1 New Additional Cost New additional cost rises mainly in three main areas as described below: a. Government policy decisions, which include new security policies in the post-9/11 environment and higher taxes and fees. b. Dramatic rise in fuel cost c. Interest cost Table 1: the cost reduction in six U.S. Global Network Airlines 6 a. Government policy decisions: On November 16 2001, the Aviation and Transportation Security Act is enacted. Then the Transportation Security Administration (TSA) was established. Working with the industry, TSA has developed vastly and improved security processes and procedures, which increases the security as well as causes additional cost, especially for airline industry, since most of the cost including new additional insurance and airport-security costs will be incurred by airline industry. According to ATA’s estimate, these costs are about $4 billion. Besides the new security costs, the industry taxation has been increased by 76 percent between 1992 and 2002. Once a small fraction now the federal taxes/fees now is a fourth of the ticket. The Figure 8 shows the increase in taxes and fees. b. Fuel cost: Fuel constitutes the industry’s second-largest operating expense. Every onecent increase in the cost of a gallon of jet fuel will cost the industry $180 million per year. The airlines have done everything to conserve the fuel. Unfortunately, by the end of February 2003, spot prices had increased from 57 cents in February 2002 to $1.20, a 108 percent jump. The great increase overwhelms the effort in conserving the fuel usage. c. The interest costs: To continue provide the service and due to increase in the net losses, after 9/11, the airlines have been forced to assume a massive amount of debt, now in the range of $100 billion. The increase in the net debts causes the sharp increase in the interest cost (Figure 9), which again increases the net losses of the industry. Figure 8: Percentage federal taxes and fees 7 Figure 9: Trend of quarterly interest expenses (in $ millions) 1.2.2 Declining Revenue Since the decreasing demand, the airlines lose the pricing power. They keep on reducing the airfare (Figure 10) in order to restore the demand. Decline in the price and the passenger demand make the industry’s revenue decline greatly. From Figure 11 it can be observed that the total revenue experience sharp reduction, the 2002/2003 revenues are nearly 25 percent below 2000 and running below 1995 level. Figure 10: Trend in Airfare (in $ millions) since 1988 8 Figure 11: Trend in Passenger Revenue (in $ millions) from 1995 to 2003 We can conclude that although the airline industry has greatly reduced the cost, the declining revenue and new additional cost make the airline industry still face steep net losses. To respond to the situation of lost revenue, some airline industries adopted some strategic measures to nullify the impact of September 11 and they got success to the extent that they are generating revenues. One example of such an airline is Southwest airlines. 1.3 Southwest Airlines A Case Study [3] Southwest Airlines Co. is the nation’s low-fare, high customer satisfaction airline. They primarily serve short-haul city pairs, providing single-class air transportation, which targets the business commuter as well as leisure travelers. The company, incorporated in Texas, commenced customer service on June 18, 1971, with three Boeing 737 aircraft serving three Texas cities – Dallas, Houston, and San Antonio. At yearend 2002, Southwest operated 375 Boeing 737 aircraft and provided service to 59 airports in 30 states throughout the United States. Southwest has one of the lowest operating cost structures in the domestic airline industry and consistently offers the lowest and simplest fares. Southwest also has one of the best overall customer service records. At Southwest Airlines, there was no loss of pay for employees from layoffs, furloughs, or unpaid leaves due to the events of September 11. Because Southwest had