A War in Iraq Could Take Heavy Toll on U.S. Airlines

What would an Iraqi war cost the airline industry?

Likely several billion dollars in financial losses, and tens of thousands of jobs. Or maybe United Airlines. Or the chance to successfully restructure the industry.

Should U.S. bombs start falling on Baghdad, the devastation will be swift and severe at U.S. airlines. If terrorism fears rise as fast as oil prices, and security hassles grow as international flying shrinks, then this war is likely to have several, if not many, airline

casualties.

The good news, if it can be called that, is that going to war could actually speed up the necessary restructuring of the airline industry.

As Pentagon generals play out different war scenarios, so, too, do airline executives, financial analysts, labor union chiefs and investment bankers. Anyone who holds a ticket for future travel is

nervously thinking about possible outcomes, as are the millions of people with frequent-flier miles on credit at bankrupt or near-bankrupt carriers. For airline employees, the drumbeat of war can be deafening. (Lest we forget, though, none of those has as much at stake as anyone

with military relatives prepared for combat.)

For airlines, the similarities to the first Gulf War, which lasted six weeks beginning in January 1991, are striking. Several carriers went into bankruptcy reorganization before the war, and more

after the war. Continental Airlines filed for Chapter 11 protection in 1990, while Pan Am World Airways and Eastern Air Lines both filed within days of the start of the war in mid-January 1991. High oil prices were crippling the industry, along with a significant recession. Confusing,

maddening pricing at legacy carriers was infuriating customers, and from the chaos, AMR Corp.´s American Airlines in April 1992 introduced its simplified, short-lived "Value Pricing" scheme.

Seems like dejà vu all over again. But the differences are striking, too. In the early 1990s, airline traffic and revenue closely tracked U.S. gross domestic product. That´s no longer the case, Deutsche Bank points out. Air travel is a more emotional decision now, not just an economic one. And alternatives to the big airlines are far more plentiful and attractive. The correlation between airline revenue and GDP has fallen sharply, and the correlation between airline traffic and GDP has dropped even more. Statistically, there has been no meaningful correlation with the nation´s conomy lately.

That means U.S. airlines could be in more peril from even a short war if the emotional drain and heightened fears lead to a bigger-than-expected drop in air travel. Domestic air travel fell by

less than 10% for January and February of 1991. International travel was much worse, with trans-Atlantic traffic down 44% in February 1991, compared with the year before, and it didn´t rebound to pre-war levels for almost a year. The total decline in traffic for U.S. airlines in the first quarter of 1991 was 8.5%.

This time will likely be worse. Airlines and analysts alike have talked of a 10% to 20% drop in traffic, and carriers plan capacity cuts of the same magnitude. Trans-Atlantic routes will see more flight cancellations, again, but the cutting will be widespread -- and swift.

Airline contingency plans call for quick action, not waiting to see how the public will react. If traffic stays depressed, even if the war goes well, and concerns rise over airport security and possibly terrorist attacks, carriers could be quickly pushed over the edge.

Mark Gerchick, a former Department of Transportation official who is now an aviation consultant, says terrorism fears and greater travel hassles could put airlines back to the dismal days of the final quarter of 2001 -- about 10% below last year´s depressed levels. That would translate into an industrywide revenue loss of about $2 billion a quarter. High fuel prices could add $2 billion in cost each quarter simultaneously. That double-whammy could go on for six months or more.

Ultimately, U.