Research reveals impact of 9/11 attacks on US airline industry

Ongoing impact from terrorist attacks

The US airline industry has been in financial turmoil in recent times, with many airlines entering Chapter 11 bankruptcy protection, and staff suffering cuts in pay and benefits. The airline industry reduced its' domestic capacity in 2005 in response to financial troubles. Now a paper published in Applied Economics by Blunk et al. shows the continuing contribution of the terrorist attacks in 2001 on the US domestic airline industry.

Prior to 2001, the US airline industry enjoyed 24 consecutive profitable quarters, says the paper by Blunk et al. Net profits in 2000 totalled $7.9 billion dollars, and Federal Aviation Administration figures show average daily seat availability in 2000 of 2.64 million.

Economic recession started to impact airlines in early 2001, but the 9/11 attacks pushed the industry into financial meltdown when air travel dropped 20% in September-December 2001 compared with the same period in 2000. Domestic boardings fell to 575.5 million in 2002 compared with 641.2 million in 2000.

Blunk et al. analyse whether the detrimental impact of the 9/11 attacks was temporary or permanent. Boardings recovered to 627.2 million in 2004 and an estimated 655 million in 2005 (FAA forecast), but how do these compare with what would have happened without the attacks? Blunk et al. use econometric and time-series forecasting models to generate a counter-factual forecast of air travel volume in the absence of the terrorist attacks, and the findings suggest that domestic air travel did not return to the levels that would have existed in the absence of the attack.

Despite a recovery in US domestic boardings in 2005, average daily seat availability fell from 2.44 million in 2004 to 2.31 million in 2005, according to figures published in USA Today in December 2005. For some carriers, the cutbacks are "a matter of survival," says John Heimlich, economist for the Air Transport Association, the airlines' main trade association. Capacity reduction cuts expenses and improves airlines' pricing power by constricting the supply of airline seats.

Airlines have cut the number of daily flights on some routes, and also shifted to smaller planes. Fewer flights mean reduced fuel and staff costs, and fuller planes increase efficiency and enable airlines to push up prices as demand rises.

As a result, global airline losses are forecast to reduce in 2006, leading to profits in 2007. Forecasts issued on 22 March 2006 by the International Air Transport Association (IATA) predict that airlines globally will lose US$2.2 billion in 2006 and post profits of US$7.2 billion in 2007. The quarterly revision is a significant improvement on the previous forecast of a US$4.3 billion loss in 2006 and a profit of US$6.2 billion in 2007. Forecasts suggest that profitability in European and Asian airlines will counterbalance projected reduced losses in the US. Asian airlines benefit from labour costs around 20% of operating costs, compared with 38% in the USA.

Giovanni Bisignani, IATA's director General and CEO said, "There is a new cautious optimism emerging in the industry. Improved economic prospects in Europe and Asia combined with an improving situation in the US will lead to reduced losses in 2006 and strengthened profitability in 2007. While the trend is positive, we are nowhere near sustainability. A profit of US$7.2 billion is only a 3% return on capital invested. Improved cost efficiency should be at the top of the agenda for everyone in the airline industry."

Bisignani forecast that U.S. airlines will lose $5.4 billion in 2006, assuming world oil prices average $57 a barrel. In 2005, U.S. carriers lost some $10.8 billion (excluding United's $16.7 billion fourth-quarter restructuring costs) on average oil prices of more than $56 a barrel.

Bisignani said the industry's break-even oil price has climbed to about $48 a barrel - up from $22 a barrel in 2003 - thanks to several years of aggressive cost-cutting by airlines, often in bankruptcy court. He also credited carriers with keeping a lid on their carrying capacity, which has helped to boost the percentage of seats filled and thereby facilitate price increases. Oil prices at present, however, have just topped $69 per barrel.

An article in the Economist in 2005, Vol. 377, forecast that the airline industry is poised for a future boom as new generations of planes combine with better business models and high volume growth in new markets. IATA figures show that international passenger traffic grew by 6.8% and international freight traffic by 5.4% in February 2006.

North American carrier growth of 3.6% was significantly below the high levels recorded in 2005 as US carriers re-allocated domestic capacity to higher-yielding international markets.

The Washington-based Air Transport Association estimates that U.S. carriers took in 12.87 cents of revenue per passenger for each domestic mile they flew in February. That is up 12 percent from a year earlier.

Calyon Securities airline analyst Ray Neidl attributes this rise in so-called revenue per available seat mile to a higher percentage of seats filled. Neidl said in a report that 76.2 percent of seats were filled on major carriers' domestic flights in February, compared with 73.2 percent a year earlier.

IATA