Airlines: Straining to Pay for Tomorrow

The most consistent phenomenon of U.S. airlines has long been their remarkable expansion. The industry has grown an average of 14% a year since 1950, nearly twice as fast as runner-up electric utilities. In the year just ended, the airlines outdid themselves. Operating revenues rose 23% to $7 billion, and traffic gained 25% to 100 billion revenue passenger miles (the number of paying passengers multiplied by the distance flown). Yet the faster the airlines grow, the more they must strain for funds to finance tomorrow. Pan American World Airways last week obtained $180 million through 25-year notes placed with 50 institutional investors; at the same time, United Air Lines arranged to borrow $200 million from eight life-insurance companies until 1990; two weeks ago, Trans World Airlines negotiated $324.6 million of new loans from banks and insurance companies as part of a record $800.2 million package that includes refinancing $475.6 million of outstanding debts. Thus within a fortnight, three of the nation's four largest trunk carriers tapped the tightening money market for some $700 million in fresh funds. Cost Squeeze. Almost all of that bundle will go to pay for stretched jet transports, jumbo jets and supersonic aircraft already on order. Scheduled U.S. airlines last year took delivery of 388 new jet planes—a rate of more than one a day—at a cost of $2.1 billion. They are committed to buy $10.5 billion worth of new jets (including options) by the end of 1971. That is enough equipment to accommodate the 300 million passengers they foresee by 1975, a 140% increase from last year's 125 million.

The airlines must borrow to finance most of their growth because their profits, though expected to rise from $430 million in 1966 to about $450 million in 1967, are being squeezed by costs that are climbing faster than revenues. Airline mechanics won a 16% pay increase (over three years) after a crippling six-week strike a year and a half ago. Airport landing fees are increasing. The new jumbo jets will require vast outlays for new terminal facilities. Air-traffic delays have mounted beyond expectations; during July alone, they cost Eastern Air Lines $1,200,000 more than had been budgeted.

The industry's return on its invested capital has now fallen from the 11% ceiling set by the Civil Aeronautics Board to about 10%, and some analysts expect it to dip lower. That, of course, could complicate its future borrowing. "We are in no current crisis," says President Stuart Tipton of the Air Transport Association, "but all of us have got to pay major attention to our problems."