Lessons from 9/11 for the post-COVID-19 airline industry

Lessons from 9/11 for the post-COVID-19 airline industry
© Greg Nash

President TrumpDonald John TrumpBiden campaign: Trump and former vice president will have phone call about coronavirus Esper: Military personnel could help treat coronavirus patients 'if push comes to shove' Schumer calls for military official to act as medical equipment czar MORE announced that the administration will be working on “backstopping the airline carriers” with potentially up to $50 billion in financial assistance. This follows the president’s March 11 announcement of a 30-day travel ban to Europe, which restricted travel via executive order for the first time since 9/11. Airlines subsequently have grounded many international flights. After 9/11, domestic flights were grounded for three days, but the effects from fear and speculation lasted much longer and eventually led to a period of bankruptcies, bailouts, layoffs, mergers and acquisitions for the airline industry.

Looking back to that time can serve as a lesson for policymakers and the public to understand the immediate and long-term effects on the airline industry once the COVID-19 pandemic subsides.

It is no surprise that the coronavirus pandemic has resulted in a severe decline in air travel. As universities and governments go on lockdown, companies switch to remote work, and individuals are encouraged to practice social distancing, both domestic and international air travel is being brought to a screeching halt. For example, United Airlines has announced it  would cut routes by 50 percent. While the airline industry has experienced numerous economic disturbances over the past two decades, none has been as immediate and detrimental as the impacts brought about by 9/11 — until now.

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Directly following 2001, losses from operating costs of major carriers, also known as legacy network carriers, plummeted by an estimated $9.1 billion, according to the Bureau of Transportation Statistics, while losses from 2001 until 2007 were estimated to total a whopping $40 billion. Profitability was not restored until 2007, and the sky-high oil prices in 2008, just before the Great Recession, only led to more trouble.

These severe declines in profitability resulted in numerous bankruptcies; most significantly, those of US Airways in 2002 and 2004, United Airlines in 2002, Delta Air Lines, Northwest Airlines and Comair in 2005, and American Airlines in 2011. Three major airlines, including America West, a major carrier at the time, filed for bankruptcy within 10 days of 9/11, as a direct result of declines in demand.

But even before a majority of these airlines filed for bankruptcy, Congress had passed a bipartisan financial package to mitigate losses that came as a result of the terrorist attacks. In other words, a bailout bill was passed to save those airlines that were considered “too big to fail.”

Overall, bailouts for America’s largest legacy network carriers from 2000-2015 added up to nearly $71 billion — and bailouts are far from a novel concept.

One of these bailouts, a $15 billion financial package for the entire airline industry, was passed by Congress just 11 days after 9/11. Two-thirds of the $15 billion went to major carriers, but bankrupt carriers such as Vanguard, Midway and Reliant also received a combined $20 million. The package was intended to aid airlines in making up losses from demand shocks and create compensation programs for victims of the tragedy. Throughout the following decades, major carriers were able to restructure under Chapter 11 of the U.S. Federal Bankruptcy Code and obtain an additional $35 billion. United received $26 billion in bankruptcy debt relief, Delta received nearly $8 billion in bankruptcy debt relief, and American Airlines, $1.5 billion in bankruptcy debt relief.

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Bankruptcy and bailouts were just the beginning of the transformation of the post-9/11 airline industry. What came next — mergers and acquisitions — has defined the industry to modern day.

Prior to 9/11, nine airlines held 80 percent of the market share. Today, the rapid consolidation of the industry has resulted in four legacy network carriers — Delta, United, American and Southwest — controlling nearly 80 percent of the market. The 15 mergers and acquisitions that characterized the period of 2005 to 2016 included the consolidation of some of the biggest players at the turn of the century: US Airways, Continental and Northwest, which all re-emerged under their legacy successors today known as American Airlines, United and Delta.

Just as the 9/11 attacks brought about new leaders in aviation, the shock from COVID-19 is likely to have a similar effect. Airlines such as Delta and Southwest may have an advantage, because their strong network effects mitigate much of the damage left by a decline in demand. If the past serves as a guide to the future, then we should expect layoffs and low ticket prices within the airline industry in the short run, but more lasting demand-side shocks that can provoke bankruptcies, bailouts and mergers in the mid-to-long term.

We are certain to see recovery once the coronavirus pandemic subsides, but are very likely to observe a similar post-pandemic airline market to that of the post-9/11 era. Travel restrictions are temporary, and unless a new, futuristic form of transportation emerges, the necessity of air travel will remain a key component of the economy.

Joseph M. Humire is executive director of the Center for a Secure Free Society (SFS) and a senior fellow at the Gatestone Institute and the Middle East Forum. Follow him on Twitter @jmhumire.

Allison C. Reichel is a graduate research fellow at the Center for a Secure Free Society. Follow her on Twitter @AllisonReichel.