Fear in the Air: Terror and the Airlines
08-12-2006, 09:44 PM
#1
Fun Officer
Thread Starter
Joined APC: Feb 2005
Position: Dallas, Texas
Posts: 515
Fear in the Air: Terror and the Airlines
Technology
By Michael Arndt and Peter Elstrom
BusinessWeek Online
Fear in the Air: Terror and the Airlines
A foiled plot puts travelers and carriers in a September 11 state of mind. Again, security and industry upheavals may be the result
It's back to 2001 for airline passengers and, some worry, the airline industry, too. In airports from London's Heathrow to Los Angeles International, passengers on Aug. 10 faced heightened security and lines stretching to impatience, after British authorities arrested more than 20 people who were allegedly planning to blow up several planes scheduled to fly from Britain to the U.S.
Shampoo, suntan lotion, toothpaste, and even makeup piled up at checkpoints, as travelers suddenly had to dump any liquids (save baby formula and prescription meds) from their carry-on luggage to comply with new heightened safety regulations. Airlines are warning people it could now take up to three hours to get from curbside through security and onto a plane. "It was complete, complete chaos," says William Federman, an attorney who had a flight out of Newark International Airport on the morning of Aug. 10.
Britain's Home Secretary, John Reid, said the people involved in the plot planned to smuggle liquid explosives onto planes bound for New York, Washington, D.C., and California, and then set them off simultaneously. He said the people arrested included the "main players" in the alleged plan. In the U.S., Michael Chertoff, Homeland Security chief, said the government is raising its color-coded threat levels in a number of areas, including for all aviation. "We believe that the arrests in Britain have significantly disrupted this major threat," he said. "But we cannot assume that the threat has been completely thwarted or that we have fully identified and neutralized every member of this terrorist network."
The news comes at a tricky time for the airlines. After years of deep losses following the September 11 terrorist attacks, U.S. airlines have finally regained a bit of stability. Many have tangled with their workers and suppliers to lower costs, and trimmed flights to push up the percentage of seats that are filled. United (UAUA ), Delta (DALRQ.PK ), Northwest (NWACQ.PK ), and US Airways (LCC ) all filed for bankruptcy, although US Airways and United have since reemerged from Chapter 11.
IMPACT ON AIRLINES. That has helped most airlines fight their way back to profitability and propel their stocks northward. Despite record-high fuel costs, all of the major carriers made money in the second quarter, except Delta and Northwest. AMR's American Airlines (AMR ), the world's largest airline with revenues of $20.7 billion in 2005, earned $291 million in the second quarter and is expected to turn a profit this year, after losing more than $8 billion since 2001. Its stock has doubled in the past year, to about $20 (see BusinessWeek.com, 5/8/06, "AMR: Making Every Gallon Count").
Now, however, travelers and the airlines will have to contend with renewed fears of terrorism in the sky. Jim Corridore, airline equity analyst at Standard & Poor's (which, like BusinessWeek.com, is part of the McGraw-Hill Cos.), downgraded the airline sector on Aug. 10, after Britain announced the foiled plot. "It was the straw that broke the camel's back," he says. He doesn't think that the latest news alone will result in a significant decline in air travel, but he says it's much more likely airlines will see a negative development before a positive one. That could come from higher oil prices or from another terrorism plot. "Now, you have to focus on terror again," he says.
There are some experts who believe the impact could come sooner, rather than later. Travelers have endured long lines at ticket counters and security checkpoints for years, and the prospect of even more hassles may persuade some to simply stay home. Kevin P. Mitchell, chairman of the Business Travel Coalition, says that at Newark and other airports, passengers to Britain have been barred from bringing onboard any electronics, including laptops and cell phones. "What business traveler is going to check a $2,000 laptop?" he says. "Worst-case scenario is that you can no longer bring on a laptop. A week ago, that would have been unthinkable. Additional security could be onerous."
UNITED UNCERTAINTY. If there is a decline in travel, in the coming weeks or in the more distant future, not all of the airlines will be affected equally. Since Delta and Northwest are already in bankruptcy, they are unlikely to see much additional downside. American looks to be the most stable financially. It forced its workers to swallow wage cuts and has carefully controlled other costs by, for instance, shutting off its air conditioning on taxiing aircraft. Thanks to the penny-pinching, AMR is sitting on $5.4 billion in cash and equivalent investments, up 25% since the end of 2005.
The Fort Worth-based airline still gets most of its revenues from domestic flights, although it has been shifting its attention to international routes, where ticket prices and profits are higher. In July, its domestic operations were down 7.6% from a year earlier, while its overseas flights were up 1.3%. Even so, its top foreign market is Latin America, not Europe or Asia.
United may be more vulnerable. The No. 2 carrier has been recovering financially and reported a surprise $119 million profit in the second quarter, as revenues surged 16% to $5.11 billion. Yet United has been struggling with higher fuel costs, which surged 31% in the second quarter from a year earlier, to $1.25 billion. Even after slashing its payroll by tens of thousands of dollars during its three years in bankruptcy, United recently acknowledged its expenses were still too high and announced it would cut 1,000 more white-collar jobs. United, too, has shifted its attention to international routes, both to Asia and to Europe, to avoid the intense competition domestically with low-cost carriers like Southwest Airlines (LUV ) and JetBlue Airways (JBLU ).
SECURITY: WHO WILL PAY? One of the key questions is how much additional security will cost and who will bear the burden. Aviation authorities are likely to boost their use of new technologies for detecting things like liquid explosives (see BusinessWeek.com, 8/11/06, "Airport Security Goes High-Tech"). There will probably also be a need for more staff to screen travelers and inspect their bags. "This is going to cost the industry an absolute fortune," says Tim Stevens, managing director of consultant Aviation Solutions. "The airlines are frankly not in a position at the moment to absorb any more costs. Any extra security costs will have to be passed on to the customer."
But will travelers put up with both additional headaches and higher security costs? Certainly, some will. But others may look for alternatives, such as driving, taking the train, or teleconferencing (see BusinessWeek.com, 8/11/06, "Tomorrow's Business Traveler"). "Short-haul travel may be impacted," says Peter Morris, chief analyst with Airclaims, a London consultancy. "It could be substituted by train travel."
Federman, the attorney who was at Newark on Aug. 10, is certainly considering alternatives. The 48-year-old travels frequently because his Oklahoma City firm, Federman & Sherwood, handles class-action lawsuits around the country. For trips to places like Dallas, he says he may now opt to drive the three hours or so, rather than endure long airport waits. "Business travelers are going to have to think twice about flying," he says.
PRIVATE JET SET. Private jets will almost certainly get a boost. Companies may find that it makes sense to foot the higher bill for private travel for their executives, rather than have them tied up for hours at airport security. "If the measures implemented in the coming weeks make it much harder to travel, that could push a few fence-sitters over the line between public and private air travel," says Richard Aboulafia, vice president of analysis at Teal Group, an aviation consultancy.
Even for people like Federman, private jets may make more sense in the future. He says the cost for him to use one now is "ridiculous." But he says taking a private jet to a place like Austin, Tex., can make a big difference in his personal life. If he flies commercial for a trial in the morning, he has to leave the night before and miss his kids' events. If he takes a private jet, he can spend the night at home and fly down in the morning. "Everybody is looking at these new, smaller jets," he says.
Homeland Security Secretary Chertoff made his remarks about the British terror plot during a joint appearance with Attorney General Alberto Gonzales and FBI Director Robert Mueller. At the event, Gonzales said, "Every day is Sept. 12 for those of us tasked with protecting America." Travelers and the airlines certainly hope that's not the case for them, too.
By Michael Arndt and Peter Elstrom
BusinessWeek Online
Fear in the Air: Terror and the Airlines
A foiled plot puts travelers and carriers in a September 11 state of mind. Again, security and industry upheavals may be the result
It's back to 2001 for airline passengers and, some worry, the airline industry, too. In airports from London's Heathrow to Los Angeles International, passengers on Aug. 10 faced heightened security and lines stretching to impatience, after British authorities arrested more than 20 people who were allegedly planning to blow up several planes scheduled to fly from Britain to the U.S.
Shampoo, suntan lotion, toothpaste, and even makeup piled up at checkpoints, as travelers suddenly had to dump any liquids (save baby formula and prescription meds) from their carry-on luggage to comply with new heightened safety regulations. Airlines are warning people it could now take up to three hours to get from curbside through security and onto a plane. "It was complete, complete chaos," says William Federman, an attorney who had a flight out of Newark International Airport on the morning of Aug. 10.
Britain's Home Secretary, John Reid, said the people involved in the plot planned to smuggle liquid explosives onto planes bound for New York, Washington, D.C., and California, and then set them off simultaneously. He said the people arrested included the "main players" in the alleged plan. In the U.S., Michael Chertoff, Homeland Security chief, said the government is raising its color-coded threat levels in a number of areas, including for all aviation. "We believe that the arrests in Britain have significantly disrupted this major threat," he said. "But we cannot assume that the threat has been completely thwarted or that we have fully identified and neutralized every member of this terrorist network."
The news comes at a tricky time for the airlines. After years of deep losses following the September 11 terrorist attacks, U.S. airlines have finally regained a bit of stability. Many have tangled with their workers and suppliers to lower costs, and trimmed flights to push up the percentage of seats that are filled. United (UAUA ), Delta (DALRQ.PK ), Northwest (NWACQ.PK ), and US Airways (LCC ) all filed for bankruptcy, although US Airways and United have since reemerged from Chapter 11.
IMPACT ON AIRLINES. That has helped most airlines fight their way back to profitability and propel their stocks northward. Despite record-high fuel costs, all of the major carriers made money in the second quarter, except Delta and Northwest. AMR's American Airlines (AMR ), the world's largest airline with revenues of $20.7 billion in 2005, earned $291 million in the second quarter and is expected to turn a profit this year, after losing more than $8 billion since 2001. Its stock has doubled in the past year, to about $20 (see BusinessWeek.com, 5/8/06, "AMR: Making Every Gallon Count").
Now, however, travelers and the airlines will have to contend with renewed fears of terrorism in the sky. Jim Corridore, airline equity analyst at Standard & Poor's (which, like BusinessWeek.com, is part of the McGraw-Hill Cos.), downgraded the airline sector on Aug. 10, after Britain announced the foiled plot. "It was the straw that broke the camel's back," he says. He doesn't think that the latest news alone will result in a significant decline in air travel, but he says it's much more likely airlines will see a negative development before a positive one. That could come from higher oil prices or from another terrorism plot. "Now, you have to focus on terror again," he says.
There are some experts who believe the impact could come sooner, rather than later. Travelers have endured long lines at ticket counters and security checkpoints for years, and the prospect of even more hassles may persuade some to simply stay home. Kevin P. Mitchell, chairman of the Business Travel Coalition, says that at Newark and other airports, passengers to Britain have been barred from bringing onboard any electronics, including laptops and cell phones. "What business traveler is going to check a $2,000 laptop?" he says. "Worst-case scenario is that you can no longer bring on a laptop. A week ago, that would have been unthinkable. Additional security could be onerous."
UNITED UNCERTAINTY. If there is a decline in travel, in the coming weeks or in the more distant future, not all of the airlines will be affected equally. Since Delta and Northwest are already in bankruptcy, they are unlikely to see much additional downside. American looks to be the most stable financially. It forced its workers to swallow wage cuts and has carefully controlled other costs by, for instance, shutting off its air conditioning on taxiing aircraft. Thanks to the penny-pinching, AMR is sitting on $5.4 billion in cash and equivalent investments, up 25% since the end of 2005.
The Fort Worth-based airline still gets most of its revenues from domestic flights, although it has been shifting its attention to international routes, where ticket prices and profits are higher. In July, its domestic operations were down 7.6% from a year earlier, while its overseas flights were up 1.3%. Even so, its top foreign market is Latin America, not Europe or Asia.
United may be more vulnerable. The No. 2 carrier has been recovering financially and reported a surprise $119 million profit in the second quarter, as revenues surged 16% to $5.11 billion. Yet United has been struggling with higher fuel costs, which surged 31% in the second quarter from a year earlier, to $1.25 billion. Even after slashing its payroll by tens of thousands of dollars during its three years in bankruptcy, United recently acknowledged its expenses were still too high and announced it would cut 1,000 more white-collar jobs. United, too, has shifted its attention to international routes, both to Asia and to Europe, to avoid the intense competition domestically with low-cost carriers like Southwest Airlines (LUV ) and JetBlue Airways (JBLU ).
SECURITY: WHO WILL PAY? One of the key questions is how much additional security will cost and who will bear the burden. Aviation authorities are likely to boost their use of new technologies for detecting things like liquid explosives (see BusinessWeek.com, 8/11/06, "Airport Security Goes High-Tech"). There will probably also be a need for more staff to screen travelers and inspect their bags. "This is going to cost the industry an absolute fortune," says Tim Stevens, managing director of consultant Aviation Solutions. "The airlines are frankly not in a position at the moment to absorb any more costs. Any extra security costs will have to be passed on to the customer."
But will travelers put up with both additional headaches and higher security costs? Certainly, some will. But others may look for alternatives, such as driving, taking the train, or teleconferencing (see BusinessWeek.com, 8/11/06, "Tomorrow's Business Traveler"). "Short-haul travel may be impacted," says Peter Morris, chief analyst with Airclaims, a London consultancy. "It could be substituted by train travel."
Federman, the attorney who was at Newark on Aug. 10, is certainly considering alternatives. The 48-year-old travels frequently because his Oklahoma City firm, Federman & Sherwood, handles class-action lawsuits around the country. For trips to places like Dallas, he says he may now opt to drive the three hours or so, rather than endure long airport waits. "Business travelers are going to have to think twice about flying," he says.
PRIVATE JET SET. Private jets will almost certainly get a boost. Companies may find that it makes sense to foot the higher bill for private travel for their executives, rather than have them tied up for hours at airport security. "If the measures implemented in the coming weeks make it much harder to travel, that could push a few fence-sitters over the line between public and private air travel," says Richard Aboulafia, vice president of analysis at Teal Group, an aviation consultancy.
Even for people like Federman, private jets may make more sense in the future. He says the cost for him to use one now is "ridiculous." But he says taking a private jet to a place like Austin, Tex., can make a big difference in his personal life. If he flies commercial for a trial in the morning, he has to leave the night before and miss his kids' events. If he takes a private jet, he can spend the night at home and fly down in the morning. "Everybody is looking at these new, smaller jets," he says.
Homeland Security Secretary Chertoff made his remarks about the British terror plot during a joint appearance with Attorney General Alberto Gonzales and FBI Director Robert Mueller. At the event, Gonzales said, "Every day is Sept. 12 for those of us tasked with protecting America." Travelers and the airlines certainly hope that's not the case for them, too.
