The hijacking of four airliners, their use in attacks on Manhattan's World Trade Center and the Pentagon and the on-board resistance that brought one flight down in a Pennsylvania meadow, set off a sharp down-cycle, but one that did not fundamentally change an industry that was already changing.
Business traffic, the highest-yielding category of airline passenger, had already begun a sharp fall early in 2000, when the internet- and dot.com-business bubble burst, just as two of the largest airlines - United Airlines, followed by Delta Air Lines - signed record-setting labour contracts with their pilots. Much like the masters of a large steamship of old, management did not shift course quickly, failing to recognise the importance of the changes, and instead saw a cyclical blip.
So 2001 ended up as one of the two years in history that US airline industry revenues fell, dropping about 12%, a sharper decline than in 1991. Traffic fell by almost 6%, the sharpest decline in revenue passenger miles in US airline history. The Air Transport Association estimates that in 2001 business traffic plummeted by 24% in the final four months. In hindsight, it is clear that drop was a pre-attack trend, one so dizzying that it outpaced analysis. The drop in airline yields had begun in earnest in early spring 2001, reaching a double digit free-fall of 13% the month before the 9/11 attacks it remained in the double digits until June of 2006, when the average yield for the seven major US airlines was just 8% below the February 2001 base average medium-haul fares, which fell from $177 in the final quarter of 2000 to $154 in the months after the attacks, were at $162 at the end of 2005, according to the Inspector General Department of Transportation.
But by first quarter 2006, the airlines were on track to set a record surpassing the pre-attack records. This comes only after intense cost-cutting, the most dramatic and deep retrenchment in decades. At the two big reorganisers, Delta and Northwest, both in Chapter 11 since 14 September 2005, the cuts totalled more than 1,000 flights a day, with Delta trimming 14% and Northwest 15% of pre-bankruptcy levels.
125,000 fewer seats
By one estimate, the industry has taken more than 125,000 seats off the market since late 2004. Domestic flights for the collective autumn months of September-November will average 191,421 per week, down 0.5% from the same period of 2005, says American Express.
An equally if not more definitive event reshaped the industry four years after the attacks and just a year ago when Hurricane Katrina and the other storms of August and September 2005 led to the sharpest and most sustained increase in fuel costs the airlines have seen.
Before the 2001 attacks, fuel was about 78¢ a gallon, for an industry total bill of $14.8 billion, a figure that barely rose, hitting $15.2 billion or 85¢ a gallon in 2003. By the end of 2005 fuel costs of about $1.66 a gallon totalled $33.1 billion and for the year the gas bill will be $38.4 billion or $1.95 a gallon, estimates John Heimlich, chief economist of the Air Transport Association.
And just as revenues were tanking, costs were spiralling upwards, and the two combined to make major changes in the way we fly and what we fly, says Teal Group analyst Richard Aboulafia. He says: "The intense focus on cost-cutting after 9/11 was uniquely focused on increasing aircraft utilisation, and that has led to basic changes in the commercial aircraft inventory."
The single greatest change that the five years have distilled is this: airlines are flying fewer flights, and those that they are flying are on smaller aircraft that are more crowded. In summer 2000, just 10% of scheduled flights were in regional jets by summer of 2005 it was 32% and in 2006 it was a full one-third. Load factors in general went from 70% in 2000 to almost 82% in 2005. Between September 2001 and early 2004 alone, the regional jet fleet rose by 27%, Aboulafia estimates.
Managing capacity down as a way to manage yields up is a fundamental of the industry, but this change is different because it accelerated a more subtle change already under way at the lowest end of unit sizes: it hastened the end of the 50-seat jet, a new paradigm for air travel. In 2001, the 50-seater was still a novelty, still welcomed as replacement for the turboprop. But as the crisis pushed carriers to schedule so that load factors rose continuously, a 50-seat revolution began. Driven in part by travellers who discovered that even though the small jets were jets and not turboprops, they were still small jets and so limited how much work, reading or even basic comfort was possible on board.
The revolt was also driven by legacy carriers' realisation that if they were to battle the low-cost carriers, they could not match them solely on low fares on small jets a 50-seat jet filled with low fares simply could not pay its own way, as the short-lived Independence Air proved so dramatically. A side-effect has been the survival or even renaissance of the turboprop, especially since cabin noise-cancelling technology has matured.
Aboulafia says: "The 50-seat regional jet, with its high costs, could only work in the superheated economic environment of the 1990s. Airpcraft with 13¢ per seat-mile cost don't work well, whether they are feeders for someone else or on their own." Meanwhile, the artificial limitations of airline labour contracts - the scope clauses that restricted how many larger regional jets could be flown and by whom - were disappearing. This has hastened the airline appetite for and consumer welcoming of larger and larger regional jets, the up-to 100-seat category - the next frontier.
The quest by US legacy and network carriers has also led to new horizons, literally: they are flying more and more on overseas routes where yields are higher, premium service is still demanded and low-cost, low-fares competition is so far a minimal factor, notes Cathay Financial analyst Susan Donofrio.
At some carriers such as fast-expanding Continental Airlines, international capacity has grown by 40% since 2000 for more than 47% of its total capacity this year. And international flights for the collective months of September-November 2006 will average 24,701 per week, up 2.7% from the same period last year, according to the AmEx forecast.
This has had the effect of all but ceding much of the domestic field to the low-cost segment, which has increased its share of the US airline capacity by nearly 75% between 1998 and 2006, to just over 28%, according the inspector general. Their growth may now be slowing, says Donofrio.
|The collapse of Independence Air was an early sign that the 50-seater had had its day|
Killing the 757
Aboulafia notes that these changes also meant that the Boeing 757 ended its life early because it was built to respond to so-called peaking hubs, hubs where hundreds of passengers are gathered from banks of incoming flights for the next outbound bank, often at significant waste of valuable flying time - having to sit and wait to gather the 200 or so passengers that a 757 can accommodate requires expensive time on the ground. "The 757 was designed as maximum bang for the buck high payload in a time of high yields," he says.
As airlines turned to a focus on revenue, it also brought extreme focus on the very high-end, high-yield super-premium market - the business traveller - and that has led to a growth in private aviation. Private aviation here covers the entire general aviation sector including traditional charter and fractional providers, which were seeking new sources of revenue after the corporate-spending collapse in the wake of the recession of 1990-1. This focus has led to such developments as the all-premium transatlantic operators that are now developing. Whether or not the super-premium model of Eos or something like the all-business approach of MaxJet will work is not the issue: it is that airlines and entrepreneurs saw that this market could after all go away. ■