Airlines pushed to the brink

THE latest New York air tragedy could not have come at a worse time for a travel industry that has been decimated by the events of 11 September. Weaker European carriers such as Sabena and Swissair are all but down and out. The finances of major transatlantic carriers such as British Airways have been ravaged. But for a huge bail-out by Congress, most of the big US airlines would be in Chapter 11-style administration.

Two months back, instant analysis suggested that Europe's cut-price carriers easyJet and Ryanair would emerge from this mess as big winners as slots opened at previously- closed airports and the older flag carriers were weakened.

But the stock market's enthusiasm for the cut-price carriers, which allowed easyJet to place £93m of shares earlier this month, has almost certainly been overdone.

The cumulative damage of 11 September, quickly followed by the inferno in Queens, is certain to deliver long-term psychological damage to air travel that will not easily be repaired. The images of Sir David Frost quaffing the finest champagne aboard Concorde are unlikely to keep BA's proud aircraft in the sky until genuine steps are taken to toughen up all airlines' security and safety.

The £28bn financial package from Congress to the US carriers in the wake of the World Trade Centre attacks was largely intended to ensure greater security. By all accounts, however, the roll-out of sky marshals, secure cockpit doors and other measures has been slow.

There has been so much emphasis on getting America on the move again and keeping balance sheets healthy that security does not appear to have been given top priority.

Since September, I have travelled across the Atlantic to New York and traversed the Siberian wastelands to Japan. The only significant change to security arrangements that I spotted is that meals now come with plastic rather than metal cutlery. Spot checks of equipment and hand baggage at the gates are infrequent and haphazard.

The scale of the downturn on transatlantic routes was underlined by airport operator BAA, whose traffic fell 31%. Other long-haul routes fell 16.4%. Just as the final decision on building Heathrow's Terminal 5 is to be unveiled, BAA reports that traffic there is down 20.1% and Gatwick down 12.7%.

Most carriers operate on the narrowest of margins and security and insurance costs will climb even further in the light of the latest New York tragedy. Survival in the present grim conditions is almost certainly going to require huge cuts in capacity - both aircraft and staff - at the major carriers, as well as some much-needed consolidation.

If ever there were an emergency that justified an easing of the antitrust laws to allow BA to merge with KLM and to forge its full alliance with American Airlines, this is it. The £2bn loss of BA's market value, shown in the graph, points to the need for a new business model.

Without such consolidation, the now highly-subsidised US carriers will be able to wipe the floor with their European counterparts should any semblance of normality return to the skies.

As for the much-hyped discount carriers, no one should be lulled into thinking that they will be the main beneficiaries. These airlines depend on quick turnaround times to make their profits but, with more emphasis on safety and security, there are going to be long delays and more lost income.

Moreover, established carriers such as BA have now caught on to the idea that it is better to fill their planes with passengers on deeply-discounted tickets than to fly them empty. The competitive battle has been joined.

Until every carrier can offer El Al-style security - which will change the economic base of the industry - there can be no prospect of a bounce-back in traffic, earnings or stock market values.