A Snapshot of the Commercial Aircraft IndustryQuestion: In light of what has happened to the commercial aviation manufacturing and transportation industry that has sunk into a prolonged and, perhaps, the most painful slump in aviation history, why does the City of Panama City and Bay County authorities accept Panama City-Bay County International Airport authorities contention that a new airport is required at a remote location to accommodate increased passenger travel and form a base for aerospace industrial expansion? What are the specifics that justify such a move and the $200 million plus cost in light of today’s events?As I studied the airport relocation issue by accessing
various sources such as: The Wall Street Journal, Business Week,
Washington Post, other periodicals, the Internet, FAA Polices on Risk
Analysis, and Benefit Cost Analysis, FDOT cost data, airport relocation
studies, other airports operational performance data, environmental
issues, and population growth projections, I developed another view
based on my research of past and current events that have had and will
have a continuing impact on the commercial aviation industry for years, if
not decades, to come. I’ve tried to avoid what I call glittering
generalities and emotional appeal; and, I urge the reader to consider the
issue in light of today’s circumstances and not those of 1999 when the
Airport Authority began their quest for a new airport and the aviation
industry, like the high tech industry, was on a roll and the roof had yet
to fall in. Introduction. The attached study
contains a post 11September 2001 synopsis of commercial aircraft industry
that includes commercial and general aviation and the commercial aircraft
industry. The introduction gives the reader an abbreviated review of those
events leading up to the Update of events subsequent to my 6August
2002 update. Initially, some 800 commercial airline aircraft have been withdrawn from service and placed in storage. Of the 3,358 aircraft used by the top five air carriers approximately 670 aircraft were initially taken out of service. There are approximately 2,068 aircraft in storage, about half of which are older aircraft with 90% of these aircraft destined for destruction. Only aircraft such as the Boeing 757and 767 and the MD 80 will likely make it back into service. Along with this initial cut back the industry reduced employment from 442,800 to 354, 000 working in the commercial airline industry. The airlines lost $7 billion in 2001 and have blown $5 billion in US Govt. loans and face a major restructuring. Following 11September several airlines developed severe cash problems with revenue drops of 45% in September and October 2001 and the worse is yet to come. In the 4thQuarter 2001 Delta posted a $734 million loss, United lost $640 million; and, Continental and American Airlines reporting nearly $1billion in losses. In light of the financial crisis in the airline industry, Standard & Poor lowered bond rating on the five major airlines, Continental, Northwest, Delta, United, and American. Why? Smith Barney reported that Northwest and Continental Airlines were trying to renegotiate their long term debt because their net debt to total capitalization – a measure of final strength – was 96.4 % for Northwest, 87.6% for Continental, with American at 59.2 %, United at 68.5% and Delta at 58.3%. The ratings change classified the bonds as “junk” bonds and was a prophecy for the bankruptcies that followed the collapse of the airline industry The Update. The collapse of the commercial airline industry is evident in the bankruptcies that have occurred since 11September 2001. To date the following airlines have entered bankruptcy proceedings. US Airways United Airlines Air Canada Hawaiian Airlines Sabena Swissair Ansett Australia In addition American Airlines is flirting with bankruptcy and refuses to renegotiate tentative contracts agreements with the unions before ratification voting closes with the unions in spite of the fact that union leaders have told the company employees may vote against the agreements and take their chances in bankruptcy court. Midwest Airlines may file for bankruptcy and Northwest and Delta could follow if a turnaround doesn’t occur in the economy, the cessation of hostilities, and the American public’s reluctance to travel. The news on the downtrend of commercial airline industry is a daily news item with changes in within functions, capacities, financial worthiness and route changes occurring on almost a daily basis. Capacity/Traffic. Here is a summary of changes in airline capacity since 1August 2002 21Aug 2002: Continental said it would cut capacity 4% in 2003 27 Mar2003: UAL cuts capacity by 8% due to wartime contingency 31 Mar2003: US Passenger traffic is down 10% since from year earlier with outbreak of war Continental reports bookings down 20% domestically and 40% domestically US Airways says it may have to ground 279 mainline jets if travel demand continues to struggle AirTran said bookings were down 10% below forecast 4April 2003: Delta’s traffic in March down 8.1% American Airlines March traffic down 4.8% Continental Airlines march traffic down 8.1% 8April 2003: American permanently cut international travel 13%and domestic travel 2%. Continental Airlines suspended five flights per day to Hong Kong until June. 10April2003: US passenger traffic was down 17.4% last week from a year earlier. Included in these numbers are Northwest, American,
Delta, Continental and US Airways The Air Transport Association estimates the airlines may cut 2,200 daily flights systemwide this year. The goal is to get rid of costly empty seats using computerized tracking to predict where people want to fly, reduce slow time periods such as Saturday nights, redundancy, probably with code sharing and paring back nearly twice as many short hops as nonstops, and. fewer early morning flights and seats for the business traveler. The Financial Disaster. Almost immediately following the 11September 2001 terrorist attack, the airlines began looking for a way to cut costs. Delta, for example, lost $1.2 billion in 2001. Cost per available seat mile is one measure and the major airlines have real problems. For the quarter ending 30June 2002, the cost per seat mile was as follows for the below listed airlines, their 2001/2002 Combined Income/Loss and earnings per share: Cost per Available Set Mile 2001/2002 Combined Income/Loss Current Earnings/Share US Airways: 12.25 cents -$3.76billion -$24.20/sh United: 11.41 -$5.36 -$53.55 American: 10.78 -$5.27 -$22.57 Delta: 9.69 - $2.49 -$10.44 Northwest: 9.34 -$1.22 -$ 9.32 Southwest: 7.48 $0.75 $ 0.30 Total -$17.32billion In order to get a handle on these costs the major airlines have to make “smart” decisions in reducing costs which includes more cost consciousness, employees salaries, healthcare benefits, low fare options, working with the unions to achieve greater efficiencies and introducing lower unit cost aircraft just to name a few. As noted above, success has not been that great in reducing the blood letting that is currently in progress. United is in bankruptcy, US Airways just came out of bankruptcy, American is on the verge of bankruptcy pending union approval of union wage reductions, and Delta and Northwest, our major carriers, have to address critical cost issues in the near term if they are to remain viable air carriers. The stock values of the companies in 2002 had dropped substantially. On 30June American Airlines had $2.6 billion in cash yet it stock market value was just $600 million; and the value of its municipal bonds has declined as much as 75%. Delta and Northwest were not much better off and Continental’s stock market value is so low that it is less than the cost of two Boeing 777s. Since then, the stocks have slipped further. Continental, Northwest and Delta have a combined loss $1.08 billion first quarter loss compared with a $734 million loss a year earlier. Northwest Airlines. Has nearly doubled its total debt during the past two years having added some $22billion in combined debt since 2000. To survive they need to cut annual operating costs by $1billion to $1.5 billion. This comes on top the $1billion already cut In the past two years Northwest has cut 12,000 employees, but with fewer people flying, especially business travelers that paid top dollar, flat airfares and depressed income, spending borrowed money has become the way to stay in business. If these major cost cuts don’t kick in soon, Northwest has 12 to 15 months before they face Chapter 11 bankruptcy. In the first nine months of 2002 Northwest burned $136 million in cash per month and total debt ballooned from $3.8 billion to $6.98 billion since 2000. To make matters worse, with the outbreak of the war in Iraq, some investment analysts figure bankruptcy will come sooner than later. Northwest paid $402 million in interest on debt in 2002, an 18% rise from 2001. From 2002 through 2006 Northwest has $6.77billion in debt and lease payments not counting debt added in 2002. Couple that with reluctant unions unwilling to negotiate concessions and lenders are going to get suspicious. Some analysts feel there is little to no prospect for the airline’s recovery. To save money and improve efficiency, Northwest and Delta airlines have entered into a code sharing agreement, which will let the two airlines, sell seats on each other’s aircraft and expand their travel offerings without adding more flights. This may well offer local based travelers more options. Time will tell what type consolidation may take place at our airport as both carriers look for ways too cut costs. ith a debt to capital ratio that has now reached 112% the airline could well find capital markets essentially closed with a dwindling asset base. Further with a heavy debt load, Northwest has a fundamentally higher cost structure. As Bette Davis once said in a movie, “Fasten your seat belt, it’s going to be a rough ride.” US Airways. Was cleared to proceed out of Chapter 11 bankruptcy and was allowed to access $1.24 billion in US Govt. financing. Announced on 31March, they advised employees that they would defer 5% of their salaries for up to 18 months. Emerging from bankruptcy with adequate liquidity and less debt, nevertheless, US Airways announced another 5% cut in flying capacity and indicated they may have to ground some of their 280 mainline jets if travel demand doesn’t improve as a result of the war. What did bankruptcy cost? The mainline
fleet was cut from 417 to 280 aircraft, the daily flight schedule was cut
from 1550 to 1350 flights, employees were reduced from 43,500 to 32,400,
passengers reduced from 60.6 million to 47.2 million per year, hoped for
revenues cut by 24.7 % to $6.98 billion per year, and expenses reduced
11.1% to $8.29 billion annually. Battles continue over hub operating costs
as flights are reduced. Further, with the aid of the US Pension Benefit
Guaranty Corp (PBGC), the airline was able to terminate its pilot pension
plan and substitute a cheaper plan instead thus avoiding a $1.7billion
funding liability. The PBGC will make up the difference. The company hopes to boost revenue by adding a large number of regional jets that better suit their destination structure and hopes to generate added income form a marketing alliance with bankrupt United Airlines. As one airline analyst put it, “the real challenge will be executing on the revenue front.” Delta Airlines. In 2001/2002, initially planned to layoff 16% of their work force, reduced their schedules operations by 15% (about 90 aircraft) suspended 50% of Delta Express capacity that was focused on leisure travel especially in Florida. For example, flight schedules to Orlando were reduced by 38% (32 mainline round trips daily) and Fort Lauderdale by 29% (15 mainline flights daily). Further, Delta slashed costs by phasing out all MD-11 aircraft by early this year and substituting smaller aircraft. Additionally, they postponed delivery of 29 aircraft from Boeing through 2004. This would result in a $1.3 billion capital expenditure reduction. To reduce costs further, Delta eliminated 10, 000 jobs and in Sept 2002 announced a reduction of 1,500 flight attendant positions. In March 2003 Delta reported steep declines in traffic as a result of the war. Its system wide traffic was down to 8.27 billion revenue passenger miles from 9.0 billion a year ago; and the load factor was down 3.8% to 72.3 %. The steepest drop came in its international traffic with a drop of 24% in March. As a result, Delta slashed its schedule by 12% of its domestic and international flights. In 2003 Delta began the phase out of the MD-11 aircraft and substituting a smaller aircraft on the routes. In addition the company announced the delay in the procurement of some 29 planes from Boeing until 2004. That will reduce capital expenditures by $1.3 billion over the two-year period. Further, Delta initiated an effort to compete with the Walmart Airlines. In 2002 Delta announced the creation of a wholly owned subsidiary, Song Airlines, as their new low-fare airline. Beginning this year the airline will be equipped with 36 Boeing 757s with a199 passenger all-coach configuration. And will service the Northeastern US-Florida markets; and , will, eventually expand to support cost-competitive service to other Delta destinations. Delta Express will be phased out and its Boeing 737-200 aircraft will be redeployed throughout its network. Delta has been closed mouth about its financial plans. However, with United Airlines in bankruptcy, US Airways just out of bankruptcy and American Airlines near bankruptcy, Delta will have to confront face the cost issue with labor unions, over capacity, price structures, capital investment, etc. or have cash out flow that could lead to bankruptcy in the near future. To date, Delta’s municipal bonds have lost more than 50% of their market value. Overview. Can the airlines be fixed? As Steven Pearlstein, Washington Post writer, said, “ One of the defining characteristics of the airline industry is that, over its history, it has never made any money.” Why are they in such dismal shape? Are there too many airline seats chasing too few passengers? Why can’t costs be brought under control? Why can’t labor and management compromise on cost cutting measures? Can work rules be improved? Is the hub & spoke system part of the problem? Will major airlines cost cutting make them competitive with the Walmart Airlines? If you can answer these questions, you might be able to draw a timeline. The Aircraft Industry. Aircraft manufacturing is an integral part of the airline industry problem that provide. Two of the three principal companies are Boeing CO. and Bombardier Aerospace, providers of commercial and executive jet aircraft to the airlines and the business world. Today they are operating in an environment where aerospace employment is at its lowest level since 1953 with 689,000 jobs. Boeing Co initiated a 30,000-person work force reduction after 11September 2001 that was completed with an 820 people cut on 1January 2003. They have issued another call for a 5,000worker reduction for 2003 of which 50% will be attrition. Having delivered 527 aircraft in 2001, 381 aircraft in 2002, they expect to deliver 275 to 285 aircraft in 2003, most of which are the B-737. Production is expected to continue to decline as long as the airlines are in trouble. Further, Boeing could be badly hurt by an American Airlines bankruptcy, an all Boeing aircraft airline; and is seriously considering a new business course of action of futher diversity and, perhaps, drop a new plane from production consideration . With the Boeing 767 production line coming to a close unless a $17 billion DOD contract to buy or lease 100 B767 tanker aircraft is resolved, the only thing keeping the production line open is Americans buy of nine B767-300s and two B777s. American didn’t want to take the aircraft but Boeing, in addition to providing $381 million in leases for already purchased aircraft in American’s fleet is now looking for $575 million in 2003 for what the WSJ calls backstop financing. An American bankruptcy could create havoc for Boeing between renegotiating leases and reduced payments, lost orders for aircraft, and a collapse in used aircraft prices. If all goes well American isn’t scheduled, after planes are delivered this year, to accept any more of the 56 Boeing aircraft currently on order until 2006, a $4.6 billion purchase. Bombardier, manufacturer of the Regional Jet and business jets, has cut their work force by 4, 980 persons in Canada, US and the United Kingdom with 3,000 of that number announced in March 2003 is 10% of the work force. Their manufacturing of Regional Jets is keyed to United Airlines and an order for 47 RJs by Atlantic Coast Airlines that has been geared to a case-by-case basis as opposed to a block order contract due to the tenuous economic situation of the airline. Aircraft deliveries were down from 370 aircraft inFY2002 and 298 in FY2003(January). Their aerospace backlog dropped to $18.7 billion in the FY ending Jan 2003 from $23.7billion in FY 2002. Profits were cut by 40% as delivery of business jets sharply declined due to the downturn in the US economy. Raytheon Corp, non aircraft business has shown improvement; however, they have announced it might have to reduce its backlog of orders for its aircraft by $1.76 billion due to depressed market conditions. A $900 million order for their new business jet the Hawker Horizon, a ten passenger business jet may be cancelled or restructured an $850 million order by another company might have to be taken out of their “backlog” of orders. Conclusion. The entire industry is in turmoil with no reasonable forecast as to when it will end. Some Wall Street analysts call it “the most painful slump in aviation history” with over 200,000 workers laid off in the industry. The termination of the Iraq war could lead to a slight to modest turnaround, particularly international air travel. In the meantime, until the domestic economy makes a significant recovery. Some major airports indicate that their recovery to pre 11September 2001 operations will be as long as a decade. Others have deferred expansion plans because of the reduction in air travel throughout most of the US. It is hard to believe, that in the current commercial air environment, the relocation of the Panama City-Bay County International Airport will bring commercial air carriers pounding on our door. For example, on 20June 2000, American Airlines indicated to Airport Authorities that a runway less than 8,000 ft could necessitate weight restrictions on their flights and they could not sustain commercial viability. Today, American Airlines is on the brink of bankruptcy, looking for $1.8 billion in pay cuts, reduce their pilot force by 20% (2,500 pilots), aircraft order cancellations and deferred or reduced payments, cut pilot salaries by 23% and recover from $5.27 billion in losses over the past two years. One can be skeptical of a three-year old offer to expand services into Panama City when you’re on the brink of a financial disaster. As to the airlines serving Panama City-Bay County International Airport, US Airways is just out of bankruptcy with a limited lease on life and facing more grounding of aircraft if traffic doesn’t improve; and, will no doubt be looking at the profitability of their existing route structures and reducing flights if they are losing money. Being out of bankruptcy doesn’t mean it’s clear sailing for the airline. Northwest Airlines has real cash flow problems, is burdened with debt that is of concern to those investors that lend money to airlines whose fortunes are in retreat, and a debt load that will be a nightmare for the next three to four years, If profitability doesn’t return soon, will they gamble on expansion to win market share or work to become more efficient with what they have to work with at the present time? Delta Airlines has expanded its operation by adding a DFW connection on weekends and has introduced the Regional Jet to PFN. We can only hope the RJ is more reliable inbound from ATL in the evenings than those ‘bug smashers” we’ve become accustomed to waiting for far into the night at ATL. Delta is also faced with cost reduction goals in the work force, especially if American gets the wage cuts there after whether it is in or out of bankruptcy. Delta is not immune to bankruptcy reorganization. Starting a Walmart Airline named “Song” will be the focus of their attention for the next year or two. With the introduction of the RJ’s, I was
amazed to receive on 27January 2003 an e-mail wherein FDOT indicated that
“The primary runway at Panama City-Bay County International Airport is not
adequate to handle the flight characteristics of regional jets ” Where did
FDOT get such an idea? The announced arrival occurred well before that
e-mail was written. Attached is a “Summary of Panama City-Bay County International Airport Operational Activities, 1999-2002” Also included is a synopsis of air activities for Tallahassee, Pensacola, and Okaloosa Regional Airports. An examination of the data reveals since 1999 PFN commercial air operations are down 14.8%, general aviation operations are down 18.2%, and overall passenger enplanements and deplanements peaked in 1999. Instead of comparing ourselves to Fort Myers, we ought to ask ourselves: How do we compete with the regional airports of our neighbors? Tallahassee, Okaloosa and Pensacola enplaned and deplaned passengers totaled 2,733,935 to our 341,797 in 1999 and 3,108,425 in 2002, an increase of 13.7 % versus our 343,154, a .004% increase? What’s our plan? The addition of the Dallas/Fort Worth
connection is a help but no panacea; and, if the recently announced
“record pace” set in the first quarter 2003 for passenger service is not
substantially exceeded in the next three quarters, we can expect no more
than the number of passengers carried in 2000. Where are the indicators
for record breaking and exponential growth? SUMMARY OF PANAMA CITY-Bay COUNTY INTERNATIONAL AIRPORT 1999 THRU 2002 OPERATIONS
Overall Airline Operations from 1999 (peak year) through 2002 dropped 14.8% Overall Military Operations from 1999 (peak year) through 2002 dropped 9.3% Overall General Aviation Operations from 1999 (peak year) through 2002 dropped 19.8%
PASSENGERS
Overall Deplanements from 2000
(peak year)through 2002 dropped 3.60% SUMMARY NORTHWEST FLORIDA REGIONAL AIRPORTS PASSENGERS TALLAHASSEE REGIONAL AIRPORT
PENSACOLA REGIONAL AIRPORT
OKLALOOSA REGIONAL AIRPORT
Attachment One(1)
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