Winging It: If even one airline fails, its ripples will be far-reaching

Dire predictions by airline executives, analysts and consultants have been piling up recently about what a doubling of fuel costs over the last 12 months means for the business. No one seems to disagree: Oil at $135-plus a barrel has caused the worst crisis ever for an industry that is accustomed to severe ups and downs.

Topping all the ugly forecasts may be a report issued today by the Business Travel Coalition that paints a bleak picture of the economic pain many people - and not just airline employees - could face unless oil prices retreat.

Not everyone is so unhappy, of course. In the last few weeks, some Wall Street analysts have urged investors to take a look at how depressed airline share prices are. Note how fare increases and capacity cuts are helping raise revenue per available-seat-mile, a key measure of how the industry is doing, they say. Sure, some airlines may liquidate, but the analysts say others will survive and the trick is to figure out which is which.

But the travel coalition's chairman, Kevin Mitchell, thinks anyone who is sanguine about the industry these days is "whistling past the graveyard with a bounce in his step." He used the same line in the fall of 2001, when some of the same Wall Street types were dismissing the rise of low-cost airlines and expecting business travelers to again soon be willing to pay the obscenely high fares common in the late 1990s. The customers were not willing. The low-cost carriers gained substantial market share, and the bargains we've been enjoying until recently are the proof.

Mitchell's current analysis, titled "Beyond the Airlines' $2 Can of Coke: Catastrophic Impact on the U.S. Economy From Oil-Price Trauma in the Airline Industry," is clearly a worst-case scenario. At least we should all hope it is. (Look for the full report today as a link from the group's home page,

» READ MORE: www.businesstravelcoalition.com

.)

The analysis assumes that if oil keeps rising, higher fares, fewer seats and $2 for a soft drink won't be enough to save some carriers. If one or more large airlines fails, it would mean liquidation and not reorganization. The report makes no attempt to predict which airlines are most likely to disappear.

But if liquidations happen, and especially if oil prices continue to climb toward $200 a barrel, the report says to expect nine probable effects on the economy. Rather than try to restate or summarize them, they're lifted verbatim from the coalition's news release:

Direct Employment.

Between 30,000 and 75,000 would lose work immediately with just one airline failure, with payroll losses of $2.3 billion to $6.7 billion.

Indirect Community Impact.

Losses would ripple throughout communities given that each airline job creates large numbers of indirect local jobs, and other economic activity.

Reduced Purchases From Suppliers.

Airline purchases would cease at any failed carrier, affecting companies that rely on airlines to keep their businesses afloat as well as public entities such as airports.

Impact on Tourism.

The world's largest industry would be devastated in the United States, with locally severe effects in places such as South Florida, Hawaii, Las Vegas or Colorado, depending on which airline(s) fail.

Effects on Logistics and Supply-Chain Management.

Restaurants, pharmaceutical companies, manufacturers relying on just-in-time parts, florists, grocers and the fashion industry would be among those injured.

Decline in Business Activity.

Business travel - really the flow of human capital, which precedes or facilitates other flows - would be severely disrupted, with acute disruption in airline hubs and major cities.

Declining Tax Revenue.

Loss of income taxes paid by employees, coupled with the loss of excise, use and other airline-paid taxes would be bad news for governments already struggling with declining revenue.

Increasing Government Outlays.

Impacted individuals would immediately place demands on governments in the form of unemployment compensation, retraining, and the demand for other resources.

Weakened U.S. Competitiveness.

America competes with other countries for tourists, and with reduced air lift to the United States, travelers would be less likely to visit the United States and more likely to use non-U.S. carriers.

Pretty sobering, isn't it? As I said, this is probably as grim as it gets. If you or anyone you know wants to challenge Mitchell's assessment, send me an e-mail outlining your arguments and I'll give them full consideration.

A final note about why Mitchell is getting this much ink here. A few of you have criticized me in the past for giving his analysis too much credit and being too quick to value his opinion.

But like many airline reporters, I have listened to him for almost 15 years, and he's seldom been wrong. He sees what's coming in the airline business as early as anyone I know. Most important, the Business Travel Coalition is one of the few groups that represents the airlines' biggest customers, meaning the companies that provide most of their revenue.

So why shouldn't I take what he says seriously? This time, we should all hope that he gets it wrong for a change.