Flying low

Just as the airline industry thought the worst was over with the swift conclusion to the Gulf war, the Sars virus has struck with devastating consequences.

Pictures of passengers returning to Heathrow from Hong Kong wearing face masks are nothing short of a public relations disaster. Coming on top of a pile of other problems from slow economic growth and high fuel prices, Sars completes a dismal picture of misery for the airline business.

Cathay Pacific, formerly regarded as one of the world's most financially stable carriers, says passenger numbers have plummeted by about two-thirds and losses are running at $3m (£1.9m) a day. Flight schedules have been cut four times since the outbreak of Sars, and 45% of its services are now suspended.

At least Cathay Pacific is not on the verge of bankruptcy. American Airlines, the world's largest carrier, is desperately trying to win wage concessions from its flight attendants to avert financial collapse.

Earlier this week, American reported a $1bn (£628,615m) loss in the first quarter of 2003, after the largest loss in airline history last year.

Late last night, Donald Carty resigned as chairman and chief executive, his credibility shattered after it emerged American had arranged bonuses and pension privileges for top management at a time when it was seeking pay cuts from the rank and file.

Should American slide into bankruptcy, it would be the biggest airline failure in history, surpassing that of UAL's United Airlines collapse in December.

The global airline industry was already struggling as the world economy started slowing down in 2000, when the attacks of September 11 2001 piled on the agony.

As people shunned air travel, many of the established airlines were forced to cut back schedules, reduce capacity and lay off staff.

Early casualties included Sabena, the Belgian flag carrier, and Swissair, Switzerland's national carrier. British Airways was forced to retrench, laying off 13,000 workers. The drastic surgery appeared to work as the carrier reported a £25m profit for the last three months of 2002.

Losses in the airline industry are a recurring theme. The business suffers from desperately thin profit margins and is at the mercy of fluctuating fuel prices. It is a marvel that anyone wants to enter an industry that has lost more money than it has made, ever since the Wright brothers first made their powered flight at Kitty Hawk in 1903.

But the past three years have marked the gravest crisis in its history, with US airlines at the epicentre of the storm. The main European carriers, such as BA and Lufthansa, have already made deep cuts in order to return to financial health.

The big US carriers, suffering from a combination of overcapacity, high labour costs, recession, the explosive growth of low-cost carriers and internet distribution, have been tardy in pushing through such measures because of fierce resistance from powerful trade unions.

But as the industry crisis deepens, the big carriers have had little choice but to negotiate unpalatable measures such as pay cuts.

It may be too late. After the first Gulf war, several big names in the US airline industry went under - Pan American, Midway and Eastern. It is quite possible that more established carriers will drop from the sky after the second Gulf war.

It is not all doom and gloom, however. In the US, Southwest, the pioneer of discount flights, still manages to flourish, while its European counterparts, Ryanair and EasyJet, are also still growing. But they run counter to a pretty dismal trend.