By ANN Correspondent Pete Combs

Go ahead: blame 9/11 for the airline industry's financial free-fall; but don't stop there.

So said Don Carty, CEO of AMR Corp., parent to American Airlines. As we previewed last week, Carty prepared remarks delivered to the Senate Commerce Committee on Capitol Hill Thursday, Carty said the industry would have been faced with fundamental changes even if the terror attacks on the US never happened.

"In recent years, the growth of discount airlines has reached critical mass, and the upstarts -- unconstrained by and uninterested in the old rules of the game -- now compete on roughly three quarters of the routes we fly," Carty told the committee. "This, along with the explosion of e-commerce -- which has made airline pricing completely transparent to anyone with a PC -- preceded, and accelerated the airline revenue decline driven by 9/11 and the sluggish economy. Coincident with our revenue struggles, we've seen rapid increases in our labor, distribution, and tax costs."

Add it up, along with the September 11 attacks, Carty told the Senators, and "in this industry's 75 year history -- a history long on distress and short on economic success -- these are the most challenging times we've ever faced."

Hub And Spoke

American, of course, is the biggest airline in the world. Carty, however, indicated that the carrier's glory days are over for the foreseeable future. "Given the bursting of the economic bubble, the rise of discount carriers, and the rapid growth of online travel distribution-- it will be a long time, if ever, before airline revenues approach the levels reached in the late 1990s and 2000. Which means, we must attack our expenses. We must find new and inventive ways to deliver value to our customers at a lower cost."

To that end, American plans to cut $4 billion a year from its permanent costs. Carty's strategy is a relatively simple one: to return to profitability, American (and, coincidentally, any other classic air passenger carrier) will have to fundamentally change its business model, transforming into something cheaper and more efficient. In 2001, US carriers lost a record $7.7 billion. For 2002, analysts expect that number will top $9.5 billion. Those disastrous numbers have led to bankruptcies at several carriers, including the world's second-biggest, United, and another world top-ten, US Airways.

"As we witness the downsizing and layoffs taking place at most major carriers, including our own, it is clear that we will emerge a smaller airline with fewer people," said AMR Corp's Carty.

That does not mean an end to the current hub-and-spoke system, where regional carriers flying from small- and medium-sized markets into big international airports and back again, said Carty. That might fly in the face of conventional wisdom, given the number of bankruptcies among hub-and-spoke carriers versus the continued profitability of regional and point-to-point airlines. After all, Southwest Airlines, a low-cost, no-frills carrier based in Dallas (TX) actually made a profit of almost $75 million last year. JetBlue, which follows the same model, is also profitable.

"From an American Airlines perspective, dramatic change really just represents more of the same, since our 75 year history has been marked, for the most part, by a continuous change imperative," Carty testified on Thursday. "But while 'evolve or perish' has long been a way of life, I'd like to put to rest the notion that the large, hub-and-spoke network model is no longer viable or important.

"The ability we enjoy in this country to move from virtually any medium to large community -- and many small communities -- on one side of the country to a counterpart on the other side, as well as dozens of international destinations -- at a reasonable cost and with a reasonable level of convenience -- is a by-product of the hub and spoke system. The large airline network model must remain viable, as the mobility of people and cargo it creates has become a fundamental pillar of our nation's economic infrastructure," he said.

What About War?

What does Carty expect from Washington? He admitted Thursday, a lot of that depends on what happens in Iraq over the next several months. Carty told the committee an American-led war in Iraq would make the situation all the worse. Just look at the figures for air travel during the first Gulf War: down dramatically during late 1990 and much of 1991. Fuel prices, spurred not only by the situation in the Gulf, but by a strike that has virtually shot down the oil industry in Venezuela -- a major US supplier -- have already started to rise. If coalition troops march on Iraq, oil industry experts say the cost of Jet-A will skyrocket.

While citing the profitability of JetBlue and Southwest, some senators on the Commerce Committee weren't unsympathetic toward airlines like American, United and USAirways. "The moral of the story," said US Senator John McCain (R-AZ), "is that every airline does not have to be unprofitable."

Even Carty admitted, what Congress can do for the industry "depends largely on whether or not we have a war in Iraq."

The committee members agreed to investigate several issues, such as the raising the amount of foreign investments allowed among US-based airlines, or increasing government subsidies to airplane manufacturers like Boeing. But members also pledged to look at issues like the competitiveness of cooperative booking arrangements between carriers. Many lawmakers are worried that such agreements will end up costing air travelers more money.
[If, after all the efficiencies and cost-cutting are implemented, and if these fail to yield profits, there's only one more place from which the money can come: those who use the airlines. No one should overlook lousy management; but conversely, no one is entitled to low-cost air travel, either --ed.]

FMI: www.amrcorp.com