a

GAO

United States Government Accountability Office

Report to Congressional Committees

August 2004 COMMERCIAL 

AVIATION

Legacy Airlines Must 

Further Reduce Costs 

to Restore Profitability

GAO-04-836
www.gao.gov/cgi-bin/getrpt?GAO-04-836.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact JayEtta Z. 

Hecker at (202) 512-2834 or 

heckerj@gao.gov.

Highlights of GAO-04-836, a report to 

congressional committees 

August 2004

COMMERCIAL AVIATION 

Legacy Airlines Must Further Reduce 

Costs to Restore Profitability 

U.S. airlines, particularly major network or “legacy” airlines, have faced an 

unprecedented set of challenges since 1998 that are reshaping the industry 

and demand for air travel. The decline in business travel, followed by the 

September 11, 2001, attacks, caused a significant loss of operating revenue 

for many airlines. In response to these new challenges, the legacy airlines 

reported a goal of $19.5 billion in cost-cutting measures to restore their 

profitability through 2003. As a group, legacy airlines actually reduced their 

operating costs by $12.7 billion over the last 2 years. For legacy airlines, cost

cutting was greatest in labor and commission costs. Meanwhile, low cost 

airlines, which as a group grew 26.1 percent during the last 2 years, reported 

little cost cutting. 

Since 2000, legacy airlines financial performance has deteriorated 

significantly, while low cost airlines have used their comparative cost 

advantage to expand their market share. Low cost airlines maintained their 

unit cost advantage over legacy airlines between 2000 and 2003, despite 

concerted cost cutting efforts by legacy airlines (see fig. below). For several 

of the legacy airlines, their weakened financial condition combined with 

significant future financial obligations makes their recovery uncertain. 

Unit Costs for Legacy and Low Cost Airlines, 2000 and 2003 

Competition in the domestic airline industry has increased since 1998, 

primarily owing to the growth and expansion of low cost airlines. 

Between 1998 and 2003, low cost airlines expanded their presence from 

1,594 to 2,304 of the top 5,000 domestic markets and now have a 

presence in markets that serve about 85 percent of passengers. Legacy 

airlines, despite financial problems and reduced capacity, continued to 

serve nearly all of the markets in 2003 as in 1998, but carried fewer 

passengers as they lost market share to low cost airlines.

Since 2001, the U.S. airline industry 

has confronted financial losses of 

previously unseen proportions. 

From 2001 to 2003, the industry 

lost $23 billion, and two of the 

nation’s biggest airlines have gone 

into bankruptcy. To assist airlines, 

the Congress provided U.S. airlines 

with $7 billion of direct financial 

assistance—most recently in the 

form of $2.4 billion of financial 

assistance under the 2003 

Emergency Wartime Supplemental 

Appropriations Act. Under the Act 

and its accompanying conference 

report, the conferees directed GAO 

to review measures taken by 

airlines to reduce costs, improve 

revenues and profits, and 

strengthen their balance sheets. 

The Congress also tasked airlines 

receiving assistance to report their 

cost-cutting plans to GAO. GAO 

was also required to report on the 

financial condition of the U.S. 

airline industry by Vision 100—

Century of Aviation 

Reauthorization Act, which became 

law in January 2004. In 

consultation with the Congress, 

GAO agreed to satisfy these 

directives and report to the 

Congress on (1) the major 

challenges to the airline industry 

since 1998, (2) measures airlines 

report taking to remain financially 

viable, (3) the current financial and 

operating condition of the industry, 

and (4) how the competitiveness of 

the domestic airline industry has 

changed since 1998. 

GAO is making no 

recommendations. 
Page i GAO-04-836 Airlines Financial Condition

Contents

Letter 1

Results In Brief 2

Background 4

Airline Industry Facing Serious Challenges 6

In Response to Challenges, Legacy Airlines Reduced Costs and Cut 

Capacity, While Low Cost Airlines’ Total Costs Increased Due to 

Capacity Expansion 17

Legacy Airlines’ Financial Condition Has Deteriorated Relative to 

Low Cost Airlines 23

Low Cost Airline Growth Has Created Greater Competition in Many 

Domestic Markets 40

Concluding Observations 47

Comments 49

Appendixes

Appendix I: Airline Cover Letter 52

Appendix II: Airline Enplanements and Government Assistance 

Received Pursuant to P.L. 108-11 61

Appendix III: Regional Airline Financial and Operating Statistics, 1998 

through 2003 63

Appendix IV: Scope and Methodology 64

Appendix V: GAO Contacts and Staff Acknowledgments 67

GAO Contacts 67

Acknowledgments 67

Tables Table 1: Distribution of $2.3 Billion in Federal Aid From P.L.

108-11 23

Table 2: Financial Plans Reported to GAO 63

Table 3: Regional Airline Financial Data, 1998 through 2003 63

Table 4: Regional Airline Operating Data, 1998 through 2003 63

Figures Figure 1: Average Airline Bookings Per Distribution Method, 1999 

and 2002 8

Figure 2: Airline Group Market Share of Industry Capacity (ASMs), 

1998 through 2003 9

Figure 3: Airline Industry--Change in Capacity (ASMs), 1998 

through 2003 10
Contents

Page ii GAO-04-836 Airlines Financial Condition

Figure 4: Percentage Change in GDP and Airline Industry 

Passenger Demand, 1979 through 2003 12

Figure 5: FAA Demand Forecasts (System traffic) 14

Figure 6: Cost of Oil Per Barrel, 1998 through the 1st Quarter of 

2004 15

Figure 7: Average Quarterly Business Fares, 2001 through 2004 16

Figure 8: Airline Cost Savings Reported to GAO 18

Figure 9: Change in Component Costs for Legacy Airlines, October 

1, 2001, through December 31, 2003 20

Figure 10: Change in Component Costs for Low Cost Airlines, 

October 1, 2001, through December 31, 2003 21

Figure 11: Distribution of $2.3 Billion of Direct Assistance Under P.L. 

108-11, by Airline Type 22

Figure 12: Airline Stage Length Adjusted Unit Costs, 2000 vs. 

2003 25

Figure 13: Unit Cost Differential, 1998 through 2003 26

Figure 14: Labor Productivity, Legacy Airlines vs. Low Cost 

Airlines 28

Figure 15: Asset Utilization: Legacy Airlines vs. Low Cost 

Airlines 29

Figure 16: Airline Revenues, 1998 through 2003, By Airline Group 30

Figure 17: Revenue Collected Per RPM (Yield), 1998 through 2003, 

By Airline Group 31

Figure 18: Percentage Change in Airline RPMS, Since 2000 32

Figure 19: Airline Profitability (In unit operating margin), 1998 

through 2003 34

Figure 20: Airline Profits and Losses, 1998 through 2003 35

Figure 21: Liquidity of Legacy Carriers vs. Low Cost Carriers, 

Moving Average 1998 through 2003 37

Figure 22: Liabilities as Proportion of Total Assets, Moving Average 

1998 through 2003 38

Figure 23: Out-Year obligations, Legacy Airlines vs. Low Cost 

Airlines 40

Figure 24: Top 5,000 Markets Were More Competitive in 2003 42

Figure 25: Low Cost Airlines Had Expanded Service to Additional 

Markets by 2003 43

Figure 26: Low Cost Airlines Gained Market Share (Passengers) 

from Legacy and Other Airlines 45

Figure 27: The Majority of Markets in the Top 5,000 Were Dominated 

from 1998 through 2003 46

Figure 28: Dominated Markets Tended To Be Smaller Than 

Nondominated Markets 47
Contents

Page iii GAO-04-836 Airlines Financial Condition

Abbreviations

ASM Available seat mile

ATA Air Transport Association

ATSB Air Transportation Stabilization Board

BTS Bureau of Transportation Statistics

CASM Cost per available seat mile

DOT Department of Transportation

FAA Federal Aviation Administration

GDP Gross domestic product

RPM Revenue passenger mile

SARS Severe Acute Respiratory Syndrome

SEC Securities and Exchange Commission

TSA Transportation Security Administration

This is a work of the U.S. government and is not subject to copyright protection in the 

United States. It may be reproduced and distributed in its entirety without further 

permission from GAO. However, because this work may contain copyrighted images or 

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reproduce this material separately.
Page 1 GAO-04-836 Airlines Financial Condition

United States Government Accountability Office

Washington, D.C. 20548

A

August 11, 2004 Letr

Congressional Committees:

Since 2001, the U.S. airline industry has confronted financial losses of 

previously unseen proportions. Over the last 3 years, 2001 through 2003, 

the airline industry reported losses of $23 billion, and two of the nation’s 

largest airlines went into bankruptcy. Following the tragic terrorist attack 

of September 11, 2001, the U.S. government has provided struggling airlines 

with $7 billion in direct assistance and many billions of dollars more in 

indirect assistance in the form of loan guarantees, a tax holiday, and 

pension relief. In April 2003, under the 2003 Emergency Wartime 

Supplemental Appropriations Act (P.L. 108-11) the federal government 

provided $2.4 billion of direct financial assistance to the airline industry. 

The Congress, in the conference report accompanying the act, also directed 

that we review measures taken by airlines to reduce costs, improve their 

revenues and profits, and strengthen their balance sheets. Subsequent to 

the Supplemental Appropriations Act, in January 2004, the Congress 

required under the Vision 100—Century of Aviation Reauthorization Act 

that we report on the financial condition of the U.S. airline industry. In 

consultation with the Congress, we agreed to answer the following key 

questions to help satisfy these mandates: (1) What have been the major 

challenges to the airline industry since 1998? (2) What measures have 

airlines reported taking to remain financially viable? (3) What is the current 

financial and operating condition of the airline industry? (4) How has the 

competitiveness of the domestic airline industry changed since 1998?

To help answer these questions, the Congress, in the conference report 

accompanying the 2003 Emergency Wartime Supplemental Act, directed 

the 64 U.S. commercial airlines that received assistance under the act to 

provide us with a plan demonstrating how they would reduce their 

operating expenses by 10 percent. Working with airlines, we devised a data 

collection template for airlines to submit their financial plans (see app. I). 

Because of the amount of information and proprietary nature of these 

plans, for the purposes of this report, we focused our analysis on the 30 

largest domestic airlines and aggregated the financial information 

contained in these plans into one of three airline categories—legacy 

airlines, low cost airlines, and regional airlines (see app. II for a list of these
Page 2 GAO-04-836 Airlines Financial Condition

airlines by category).1 The body of this report focuses on the cost-cutting 

activities and financial condition of the largest seven legacy and largest 

seven low cost airlines (in terms of passenger volume). Although regional 

airlines have carried more passengers over the past several years, they 

have done so largely under contract with legacy airlines. Hence, we present 

their results in appendix III. We also used airline financial and operating 

data as reported to the Department of Transportation (DOT) to examine 

airline financial condition and changes in competition in the largest 5,000 

airline markets in the U.S. To assess the reliability of those data, we 

reviewed the quality control procedures that DOT applies and subsequently 

determined that the data were sufficiently reliable for our purposes. We 

also met with airlines and their trade associations, airline equity and credit 

analysts, government experts, and academics to discuss airline cost-cutting 

efforts and the current financial condition of airlines. We had sufficient 

information to make informed judgments on the matters covered by this 

report. We performed our work between December 2003 and August 2004 

in accordance with generally accepted government auditing standards.

Results In Brief U.S. airlines, particularly legacy airlines, have faced an unprecedented set 

of challenges since 1998. These challenges were both internal factors that 

are reshaping the airline industry and external events that sharply reduced 

the demand for air travel. Within the airline industry, even before the events 

of September 11, the growth of the Internet as a means to sell and 

distribute tickets, the growth of low cost airlines as a powerful market 

force, and the shifting role of regional airlines were all transforming the 

industry. Coincidently, a series of largely unforeseen events—among them 

the September 11 terrorist attacks, war in the Middle East, and associated 

1

While there is variation in the size and financial condition of the airlines in each of these 

categories, there are far more similarities than differences for airlines in each group. Each of 

the legacy airlines predate airline deregulation of 1978 and all have adopted a hub-and-spoke 

network model that can be more expensive to operate than a simple point-to-point service 

model. Low cost airlines have generally entered the market since 1978, are smaller, and 

generally employ a less costly point-to-point service model. The seven low cost airlines 

(AirTran, America West, ATA, Frontier, JetBlue, Southwest, and Spirit) had consistently 

lower unit costs than the seven legacy airlines (Alaska, American, Continental, Delta, 

Northwest, United, and US Airways). Regional airlines generally employ much smaller 

(under 100 seat aircraft) and provide service under code sharing arrangements with larger 

legacy airlines for which they are paid on a cost-plus or fee for departure basis to provide 

capacity. Many regional airlines are owned by a legacy parent while others are independent. 

While 64 airlines received assistance under the Act, we focused our analysis on the 30 

largest airlines, which enplaned 96 percent of passengers in 2002 and received over 97 

percent of the assistance provided under the Act. 
Page 3 GAO-04-836 Airlines Financial Condition

security concerns; the Severe Acute Respiratory Syndrome (SARS) 

epidemic; global recession; and a steep decline in business travel—

seriously disrupted the demand for air travel. 

To meet the many challenges of the last several years, airlines sought to cut 

costs, enhance revenues, and obtain the assistance of the federal 

government. Legacy airlines collectively reported to us a goal of $19.5 

billion in cost-saving initiatives between October 1, 2001, and the end of 

2003—and actually achieved $12.7 billion in cost-savings, or about a 14.5 

percent reduction in operating expenses over the same period. These 

airlines reported cuts from a variety of measures, including reduced 

employee pay, a 12.6 percent reduction in capacity, and productivity 

measures. Conversely, low cost airlines reported very little cost-cutting, 

and their total operating expenses as a group increased about $1 billion, or 

about 10 percent. However, low cost airlines’ capacity increased even 

faster, 26.1 percent. Both legacy and low cost airlines reported relatively 

modest amounts of revenue enhancement initiatives due to the weak 

demand for air travel and limited pricing power that airlines held during the 

period. Legacy airlines operating revenues actually declined 14.5 percent, 

while low cost airlines revenues increased 9.4 percent. 

Since 2000, as a group, the financial condition and viability of legacy 

airlines has deteriorated significantly. Despite the cost-cutting efforts of 

legacy airlines over the last couple of years, legacy airlines’ unit costs have 

not been reduced and low cost airlines still enjoy a cost-competitive 

advantage. After adjusting for differences in the average distances flown 

(“stage length”), low cost airlines have a 67 percent unit cost advantage 

over their legacy airline competitors, as compared to 45 percent in 2000. 

Meanwhile, neither legacy nor low cost airlines have been able to 

significantly improve their unit revenue, owing to weak fare growth and 

overcapacity in the system. As a result of their weak performance and 

mounting losses, legacy airlines liquidity and solvency have also 

deteriorated, and they face considerable debt and pension obligations in 

the next few years. At least one other legacy airline may enter bankruptcy 

before the year is out and all legacy airlines remain vulnerable to potential 

future industry shocks. 

Since 1998, competition in the domestic airline industry has increased, 

primarily due to the growth and expansion of low cost airlines. On average, 

the largest 5,000 domestic markets were more competitive in 2003, 

compared with 1998, although total passenger traffic remained about the 

same. Low cost airlines, which have been found to reduce fares in markets 
Page 4 GAO-04-836 Airlines Financial Condition

they enter, expanded their presence from 1,594 to 2,304 of the top 5,000 

markets and had a presence in markets that served 84.6 percent of all 

passengers. Legacy airlines, despite financial problems and reduced 

capacity, continued to serve nearly all of the top 5,000 markets from 1998 to 

2003, but they carried fewer passengers as they lost market share to low 

cost airlines. Legacy airlines continued to dominate many of the largest 

5,000 domestic markets in 2003, but most of those were relatively small 

local markets to or from their hubs. 

Background In 1978, under the Airline Deregulation Act, the United States deregulated 

its domestic airline industry. The main purpose of deregulation was to 

remove government control and open the air transport industry to market 

forces. Prior to the Act, the Civil Aeronautics Board regulated all domestic 

air transport, controlling fares and setting routes. In this regulated market, 

airlines competed more through advertising and onboard services than 

through fares. Similar to other highly regulated industries, the airline 

industry was heavily unionized with a highly trained and stable workforce.

In the years since deregulation, many studies, including ours, have found 

that fares measured in real terms have fallen since 1978. For example, in 

1999, we reported that overall airfares had fallen 21 percent in constant 

dollars between 1990 and the second quarter of 1998.2

 However, while 

deregulation led to lower fares, it did not bring about the full measure of 

competition envisioned by its creators. Legacy airlines created unique huband-spoke networks that increased service for consumers but kept local 

market fares high at their dominated hubs. Generally, the legacy airlines 

earned a premium for operating their hub and acted in a highly competitive 

fashion (e.g. substantially increasing scheduled service and aggressive 

pricing) against intruders, including low cost new entrant airlines. In many 

ways, however, these legacy airlines continue to compete based on service 

rather than fares.

The U.S. commercial airline industry is capital-intensive, labor-intensive, 

and has high fixed costs with revenues and profits closely tied to the 

nation’s business cycle. Fixed costs, including labor union contracts that 

are in effect for several years at a time, comprise a large portion of airline 

expenses and airlines must anticipate their capacity needs several years in 

2

U.S. General Accounting Office, Airline Deregulation: Changes in Airfares, Service 

Quality, and Barriers to Entry, GAO/RCED-99-92, (Washington, D.C.: Mar. 4, 1999).
Page 5 GAO-04-836 Airlines Financial Condition

advance. As a result, airlines tend to place orders for aircraft during 

profitable years, but deliveries tend to occur during down years. This has 

contributed to the cyclic nature of industry profitability. For example, in 

the 1990s, the industry recorded historically high profits of $47.4 billion 

from 1993 through 1999, during which time several airlines signed new 

agreements with their contract work force and ordered new aircraft. 

However, the industry has also experienced downturns at the beginning of 

each decade since deregulation. The airline industry reported losses of 

$2.5 billion from 1980 through 1982, $7.7 billion from 1990 through 1992, 

and $23 billion from 2001 through 2003. It is during these lean times that 

legacy airlines such as Braniff and Eastern failed, and others—such as US 

Airways and United more recently—filed for bankruptcy protection. It is 

also during these lean times that new entrant low cost airlines emerged. In 

the past, many of those new airlines quickly disappeared. In response to the 

latest downturn, the Congress provided several forms of financial relief, 

including direct grants and a 4-month security fee holiday, and it set up the 

Air Transportation Stabilization Board to provide up to $10 billion in loan 

guarantees.3

The U.S. airline industry is principally composed of legacy, low cost, and 

regional airlines; and while it is free of economic regulation, it remains 

regulated in other respects, most notably safety and operating standards. 

Legacy airlines are essentially those airlines that were in operation before 

deregulation and whose goal is to provide service from “anywhere to 

everywhere.” To meet this goal, these airlines support large, complex huband-spoke operations with thousands of employees and hundreds of 

aircraft (of various types) with service to domestic communities of all sizes 

as well as international points at numerous fare levels. To enhance 

revenues without expending capital, legacy airlines have entered into 

domestic (and international) alliances that give them access to some 

portion of each other’s network. Legacy airlines contract with or separately 

operate regional airlines to provide service to smaller communities; 

regional airlines typically operate turboprop or regional jet aircraft with up 

to 100 seats. Low cost airlines entered the marketplace after deregulation4

and primarily operate point-to-point service from “focus cities” using fewer 

3

The ATSB was created under P.L. 107-42, and as of June 3, 2004, had issued $1.56 billion in 

guarantees supporting loans of $1.74 billion, including guarantees for several of the airlines 

included in this study: America West, US Airways, ATA, and Frontier.

4

Southwest is the obvious anomaly in this discussion as it operated within Texas before 

deregulation.
Page 6 GAO-04-836 Airlines Financial Condition

types of aircraft. These airlines typically offer a simplified fare structure 

that was originally aimed at leisure passengers, but is increasingly 

attractive to business passengers because they do not have restrictive 

ticketing rules that make it significantly more expensive to purchase 

tickets within 2 weeks of the flight or make changes to an existing itinerary. 

Low cost airlines do not yet offer service outside Canada, Central America, 

and the Caribbean. DOT oversees industry competition and safety,5

including the air traffic control system. The Department of Homeland 

Security’s Transportation Security Administration (TSA), which was 

formed after the September 11, 2001, terrorist attacks and was originally 

part of DOT, oversees industry security, including passenger and baggage 

screening.6

Airline Industry Facing 

Serious Challenges

Although the airline industry was deregulated 26 years ago, during the last 

several years, airlines have been presented with a sweeping set of 

challenges. These challenges stem from the internal restructuring of the 

airline industry and from external factors affecting the demand for air 

travel. Internally, the impact of the Internet on how tickets are sold and 

how consumers can search for fares, the emergence of low cost airlines as 

a powerful market force, and the growth of regional airlines have had a 

major impact on the airline industry. Coincidently, a series of largely 

unforeseen events—among them the September 11, 2001, terrorist attacks, 

war in Iraq, and associated security concerns; the SARS crisis; economic 

downturn; and a steep decline in business travel have seriously disrupted 

the demand for air travel.

Structural Changes Have 

Altered Historical Industry 

Trends 

Since 1998, the U.S. airline industry has faced internal changes that have 

fundamentally altered the domestic airline industry. Among the most 

significant factors affecting this change are the emergence of the Internet 

and a new breed of low cost airlines, and the growth of regional airlines 

have spurred the industry to reevaluate how it conducts business. 

5

49 U.S.C. 41712 and 49 U.S.C. 40103.

6

Aviation and Transportation Security Act, P.L. 107-71.
Page 7 GAO-04-836 Airlines Financial Condition

The Increased Use of the 

Internet Has Lowered Airline 

Distribution Costs but Created 

Price Transparency and 

Downward Pressure on Airfares

Since the mid-1990s, partly in response to increasing costs of global 

distribution systems, airlines have increasingly sold and processed tickets 

through Internet-based applications, such as airline Web sites, Orbitz, and 

other internet-based travel agencies.7

 Through various incentives, airlines 

have encouraged some passengers to book a growing portion of tickets this 

way (see fig. 1). This distribution method is less expensive to airlines than 

traditional travel agencies, but it has also increased the ability of 

consumers to compare airline ticket pricing and scheduling and often gives 

consumers access to special low fares available only on the Internet. This 

increased price transparency has been a significant factor in the downward 

pressure on airfares, creating a real decline in airline passenger revenues at 

the same time that airlines are incurring cost savings.

7

For more information on this topic, see U.S. General Accounting Office, Airline Ticketing: 

Impact of Changes in the Airline Ticket Distribution Industry, GAO-03-749 (Washington, 

D.C.: July 31, 2003).
Page 8 GAO-04-836 Airlines Financial Condition

Figure 1: Average Airline Bookings Per Distribution Method, 1999 and 2002

Low Cost Airlines Have Emerged 

to Challenge Legacy Airlines

Another major factor in the internal restructuring of the U.S. commercial 

aviation industry is the growth of low cost airlines. Low cost airlines have 

increased their share of available seat miles (ASM)—an industry measure 

of supply—from 10.8 percent in 1998 to 17.5 percent in 2003 (see fig. 2). 

Low cost airlines typically rely upon fewer types of aircraft and offer 

simpler fare structures than legacy airlines. Unlike earlier low cost airlines, 

many of which quickly disappeared, these airlines are well-capitalized and 

offer a good overall product. As relative newcomers in the industry, these 

airlines do not yet suffer from what is commonly know as “legacy costs,” 

costs that older airlines incur simply due to their longevity. These include 

the labor costs of a more senior workforce as well as retirees, aircraft costs 

from maintaining several fleet types as well as older aircraft, and the costs 

of maintaining networks.
Page 9 GAO-04-836 Airlines Financial Condition

Figure 2: Airline Group Market Share of Industry Capacity (ASMs), 1998 through 

2003

Note: Regional airline available seat mile capacity is provided under code share arrangements with 

legacy airlines.

Regional Airlines Have Grown 

and Remained Profitable 

During this period of turmoil for the legacy airlines, their regional affiliates 

have increased capacity and maintained profitability. Regional airlines, 

which operate in affiliation with one or more legacy airlines, may be wholly 

or partially owned by the partner airline or completely independent. 

Regional airlines primarily serve smaller communities with regional jet or 

turboprop aircraft through contractual arrangements with legacy carriers. 

Many of these contracts are risk free for the regional airline because the 

legacy partner pays a fee for the regional airline’s service. From 1998 

through 2003, the 16 largest regional airlines included in our study earned 

an operating profit of $3.3 billion. At the same time, regional airlines 

increased seat capacity 140.6 percent between 1998 and 2003 (see fig. 3). 

This growth and profitability of the regional airlines came about because 

legacy airlines transferred routes to them. Recently, two low cost 

carriers—AirTran and Frontier—also partnered with regional airlines for 

0

10

20

30

40

50

60

70

80

90

100

1998 1999 2000 2001 2002 2003 

Calendar year

Legacy airlines

Low cost airlines

Regional airlines

Source: GAO analysis of DOT data.

Percentage
Page 10 GAO-04-836 Airlines Financial Condition

regional jet service. In contrast, JetBlue plans to introduce 100-seat 

Embraer 190 regional jets into its own fleet for service in late 2005. 

However, changes are looming for regional airlines. Legacy airlines are 

seeking less expensive contracts with their regional partners. In the case 

of one of United Airline’s former regional partners, Atlantic Coast Airlines 

decided to reinvent itself as a low cost carrier, Independence Air, instead of 

operating under a new contract with United or another airline.8

 This may be 

the first of several shake-ups in the legacy-regional airline partnerships, as 

Delta Air Lines contemplates a bankruptcy filing and US Airways struggles 

to avoid a second bankruptcy. (App. III contains additional financial 

information on the regional airlines.)

Figure 3: Airline Industry--Change in Capacity (ASMs), 1998 through 2003

8

Atlantic Coast also operates as Delta Connection and will terminate its Delta service later 

this year (2004). Atlantic Coast began operating as Independence Air on June 16, 2004.

-20

0

20

40

60

80

100

120

140

160

 Regional

 airlines

Low cost

 airlines

Legacy

 airlines

Source: GAO analysis of DOT data.

Percentage
Page 11 GAO-04-836 Airlines Financial Condition

External Shocks Have 

Depressed Demand for Air 

Travel

Demand for air travel began weakening in 2000 due to a number of external 

changes in the aviation environment. An economic downturn that began in 

2000 precipitated a decrease in demand for air travel, while the terrorist 

attacks of September 11, the Iraq War, and the outbreak of SARS have 

compounded this trend. These events have accelerated the structural 

changes in the demand for air travel that is likely to suppress revenue for 

the foreseeable future, including the inability of airlines to charge premium 

business fares. 

Airlines’ financial problems of the past 4 years began with an economic 

downturn in 2000. As illustrated in figure 4 below, industry experts have 

long recognized a relationship between the nation’s economic performance 

and the demand for air travel. The growth in the nation’s gross domestic 

product (GDP) most recently peaked in 1999 before falling to 0.5 percent in 

2001, and then rebounding in 2002. This coincided with a drop in demand 

for air travel from a high of 691 billion revenue passenger miles (RPM) in 

2000 to a low of 641 billion RPMs in 2002.9

 While this time period includes 

September 11, quarterly year-over-year data reveals a clear downward 

trend in RPM growth prior to September 11; RPM growth reached a peak of 

8.9 percent in the second quarter of 2000, with a recession in air travel 

beginning in the second quarter of 2001.

9

Demand is commonly measured in revenue passenger miles (RPMS)—this is the number of 

miles paying passengers are transported.
Page 12 GAO-04-836 Airlines Financial Condition

Figure 4: Percentage Change in GDP and Airline Industry Passenger Demand, 1979 through 2003

The terrorist events of September 11 compounded the decline in demand 

for air travel in the United States. Compared to the Federal Aviation 

Administration’s (FAA) June 11, 2001, forecast of passenger demand (the 

last forecast made before the terrorist attack of September 11): 

• actual full year 2001 demand, as measured in RPMS, turned out to be 

about 4 percent less; and

• actual demand for 2002 was about 17 percent less compared with FAA’s 

June 2001 forecast.

Percentage

Source: GAO analysis of DOT and Bureau of Economic Analysis data.

-10

-5

0

5

10

15

RPMs

GDP

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

Calendar year

GDP

RPMs
Page 13 GAO-04-836 Airlines Financial Condition

After September 11, FAA revised its forecasted demand downward 

considerably relative to its June 11, 2001, estimates.10 FAA’s March 2002 

demand forecast predicted RPMS would be an average of 11.5 percent per 

year less from 2002 through 2012. FAA’s March 2003 forecast (prior to the 

Iraq War and SARS), predicted demand would be an average of nearly 19 

percent per year less from 2003 through 2012, compared with FAA’s 

estimates of June 2001.11 Figure 5 presents FAA forecasts of RPMS for June 

of 2001 through March of 2004, and actual RPMS for 1998 through 2003. 

10Precise estimates quantifying the effects the terrorist attacks of September 11 and 

subsequent events had on demand for air travel are not possible since no one can know in 

fact what the demand may have been absent these events. Nonetheless, we decided to 

examine changes in FAA aviation forecasts as an indicator of changes in demand as a result 

of these events because FAA forecasts are generally quite accurate; FAA 1-year RPM 

forecasts had an average absolute error rate of 1.6 percent from 1995 through 2000.

11FAA staff stated that the agency’s March 2003 aviation forecasts did not account for the 

war in Iraq or SARS.
Page 14 GAO-04-836 Airlines Financial Condition

Figure 5: FAA Demand Forecasts (System traffic)

The effects of the war in Iraq and the outbreak of SARS on demand for air 

travel were relatively minimal compared with the effects of September 11. 

Actual demand in 2003 was about the same as it was in 2002. FAA’s demand 

forecast after the Iraq War began and the SARS outbreak was revised 

upward an average of 8 percent for 2004 through 2012. FAA staff we 

interviewed thought that the SARS effect, while significant, was limited to 

Pacific air travel; year-over-year RPMs dropped 33 percent for the second 

quarter of 2003 in the Pacific sector. 

The Iraq War and unrest in the Middle East also contributed to rising fuel 

costs for airlines. From the first quarter of 2002 through the first quarter of 

2004, the price of oil per barrel increased from $20.98 to $32.97; an increase 

of 57 percent. However, oil prices are volatile by nature, and many airlines 

hedge some portion of their oil and fuel costs to lock in these costs. Figure 

Billions of revenue passenger miles

Source: FAA.

Fiscal year

Actuals

June 2001 forecast

March 2002 forecast

March 2003 forecast

March 2004 forecast

600

700

800

900

1,000

1,100

1,200

March 2004 forecast

Actuals

June 2001 forecost

March 2002 forecast

March 2003 forcast

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

0
Page 15 GAO-04-836 Airlines Financial Condition

6 presents the cost of oil per barrel from 1998 through the first quarter of 

2004.

Figure 6: Cost of Oil Per Barrel, 1998 through the 1st Quarter of 2004

The decline in business fares is another factor that has contributed to the 

financial problems of the industry. During the late 1990s, legacy airlines’ 

profitability became increasingly reliant on a very small percentage of last 

minute business travelers that paid fares much higher than the average 

leisure fare. As the economy soured in 2001, business travelers became less 

willing to pay premium fares. According to Air Transport Association (ATA) 

data reported by the DOT Inspector General, the number of business 

travelers declined 26 percent from December 2001 through December

In 2000 dollars

Source: GAO analysis of ATA data.

Calendar year

0

5

10

15

20

25

30

35

Legacy airlines

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1

1998 1999 2000 2001 2002 2003 2004
Page 16 GAO-04-836 Airlines Financial Condition

2002.12 Moreover, the average one-way business fare also declined nearly 10 

percent, from $672 in the first quarter of 2001 to $607, in the first quarter of 

2004 (see fig. 7).

Figure 7: Average Quarterly Business Fares, 2001 through 2004

12Since airline ticket data do not indicate the purpose for which an individual is traveling, 

these data are based on the assumption that those passengers paying higher fares were 

traveling for business purposes, and those passengers paying lower fares were generally 

traveling for leisure. While this assumption may have been practical in the past for analytical 

purposes, it has become increasingly unrealistic over the past few years due to the 

introduction of simplified fare structures by low cost airlines. As a result, ATA no longer 

publishes these data.

Dollars

Source: Harrell Associates.

600

620

640

660

680

Q 1 Q 2 Q 3 Q 4 Q 1 Q 2 Q 3 Q 4 Q 1 Q 2 Q 3 Q 4 Q 1

0

2001 2002 2003 2004
Page 17 GAO-04-836 Airlines Financial Condition

In Response to 

Challenges, Legacy 

Airlines Reduced Costs 

and Cut Capacity, 

While Low Cost 

Airlines’ Total Costs 

Increased Due to 

Capacity Expansion 

To meet the many challenges of the last several years, airlines have sought 

to cut costs, enhance revenues, and obtain the assistance of the federal 

government. Legacy and low-cost airlines collectively reported to us $20.3 

billion in cost-saving initiatives from October 1, 2001, through December 

31, 2003. For the nine-quarter period ending December 31, 2003, legacy 

airlines collectively reported to us about $19.5 billion in cost-saving 

initiatives; actual operating costs decreased by about $12.7 billion dollars, 

or 14.5 percent, during that time. Collectively, legacy airlines cut their 

capacity by about 12.6 percent during the same period. Conversely, low 

cost airlines reported relatively little cost-cutting and their total operating 

expenses as a group actually increased 9.8 percent; however, their capacity 

increased even faster at 26.1 percent. Both legacy and low cost airlines 

reported relatively modest amounts of revenue enhancement initiatives in 

recognition of the weak demand for air travel during the period. From 

October 1, 2001, through December 31, 2003, legacy airlines revenues 

actually declined about 14.5 percent, while low cost airlines revenues 

increased 9.4 percent. Airlines used the $2.3 billion in security assistance 

provided under the 2003 Emergency Wartime Supplemental Appropriations 

Act to fund their security and operating costs, with 75 percent of the 

assistance going to the seven legacy airlines. 

Legacy Airlines Sought 20 

Percent Cost Reductions to 

Restore Profitability

Legacy airlines accounted for the vast majority of all cost-savings reported 

to us. The 14 legacy and low cost airlines in our study reported that they 

expected to cut a total of $20.3 billion from October 1, 2001, through 2003.13

Legacy airlines reported that they expected to reduce operating costs by 

about $19.5 billion through December 31, 2003, or 96 percent of this total. If 

achieved this would have amounted to a 22 percent reduction in costs for 

the legacy airlines. Low cost airlines, in contrast, reported $803 million in 

anticipated cost-savings through December 31, 2003, or just 4 percent of 

the combined total. Figure 8 presents expected cost-savings for each year 

by airline group.

13Airlines also reported expected cost-savings for calendar year 2004; legacy airlines 

reported they expected to achieve $16.8 billion in cost-savings in 2004, while low cost 

airlines legacy airlines reported they expected to achieve $500 million in cost savings in 

2004.
Page 18 GAO-04-836 Airlines Financial Condition

Figure 8: Airline Cost-savings Reported to GAO

It is difficult to disaggregate the cost-savings reported to us into cost 

categories because airlines lacked uniformity in their reporting. However, 

based on these reports, discussions with airlines and industry experts, 

airlines generally sought cost-savings from cuts in capacity, changes in 

salary and benefits, vendor concessions, and productivity improvements. 

In particular, United Airlines and US Airways were able to obtain 

concessions from their unions through the bankruptcy process or, in the 

case of American Airlines, through the threat of bankruptcy. Immediately 

following September 11, legacy airlines parked planes in the desert in an 

effort to reduce capacity and save costs. In recent months, some of these 

planes have been returned to service.14

14According to Lehman Brothers, as of March 2004, there were 534 parked planes, down 

from 595 in November 2003. This decrease represented 11.7 percent of the pre-September 

11 domestic fleet.

0

2

4

6

8

10

12

14

16

18

2002 2003 

Source: GAO analysis of airline data.

Billions of 2003 dollars

Calendar year

Legacy airlines

Low cost airlines
Page 19 GAO-04-836 Airlines Financial Condition

Actual Cost Cutting by 

Airlines Differed 

Legacy airlines cut operating expenses by $12.7 billion between October 1, 

2001, and December 31, 2003. This 14.5 percent reduction in operating 

expenses exceeds the percentage reduction in seat capacity of 12.6 percent 

during the same period. Unlike the plans submitted to us, actual financial 

results reported to DOT can be disaggregated. Notably, legacy airline labor 

costs were reduced $5.5 billion annually, or about 16 percent during this 

time period (see fig. 9). Legacy airlines also achieved $2.1 billion in annual 

savings from a 59 percent reduction in the commissions paid to travel 

agents, because those commissions were sharply reduced. Finally, legacy 

airlines reduced fuel costs by 18.7 percent during the period, although the 

recent upsurge in fuel prices has likely reversed these savings. The only 

cost category to increase for legacy airlines was transport-related 

expenses, which doubled during the period, an increase of $3.9 billion 

annually. Increases in transport-related expenses for legacy airlines are 

largely due to fees being paid to regional airline partners for providing 

regional air service. In the aftermath of September 11, legacy airlines 

shifted some of their capacity over to regional airlines in an attempt to 

reduce seat capacity and costs on these routes.
Page 20 GAO-04-836 Airlines Financial Condition

Figure 9: Change in Component Costs for Legacy Airlines, October 1, 2001, through 

December 31, 2003

Note: Annual change calculated by comparing the 4 quarters preceding October 1, 2001 (fiscal year 

2001) and the 4 quarters preceding December 31, 2003 (calendar year 2003). Transport-related costs 

include, but are not limited to, fees paid to regional airline partners for providing regional air service, 

extra baggage expenses, and other miscellaneous overhead. Service costs include advertising and 

promotions, insurance, outside flight equipment maintenance, and communications. Other costs 

include fees, taxes, and other charges; filing costs, membership dues, and losses.

Meanwhile, low cost airlines used legacy airlines retrenchment as an 

opportunity to expand. The seven low cost airlines increased seat capacity 

by 26.1 percent during the same period that legacy airlines cut capacity by 

12.6 percent, but total operating costs for low cost airlines increased by a 

more modest 9.8 percent, or a little more than $1 billion. Low cost airlines’ 

labor costs, these airlines’ largest single cost component increased over 

$750 million annually, or 21 percent (see fig. 10). Despite their growth, low 

cost airlines were able to achieve small reductions in some of their other 

costs, including commissions, passenger food, depreciation and 

amortization, and transportation related expenses.

-6

-4

-2

0

2

4

 Other

Service costs

Commissions

Passenger food

 Depreciation

Transport-r

and amortization

elated

Fuel and oil

Labor

Billions of 2003 dollars

Source: GAO analysis of DOT data.
Page 21 GAO-04-836 Airlines Financial Condition

Figure 10: Change in Component Costs for Low Cost Airlines, October 1, 2001, 

through December 31, 2003

Note: Annual change calculated by comparing the 4 quarters preceding October 1, 2001 (fiscal year 

2001) and the 4 quarters preceding December 31, 2003 (calendar year 2003). Transport-related costs 

include, but are not limited to, fees paid to regional airline partners for providing regional air service, 

extra baggage expenses, and other miscellaneous overhead. Service costs include advertising and 

promotions, insurance, outside flight equipment maintenance, and communications. Other costs 

include fees, taxes, and other charges; filing costs, membership dues, and losses.

Revenue Enhancement 

Measures Reported to Us 

Were Far More Modest Than 

Cost Savings

The revenue enhancement measures that were reported to us were small 

compared with the cost-savings reported by airlines. Legacy airlines 

reported $2.3 billion in expected revenue enhancement benefits for the 

period October 1, 2001, through December 31, 2004, with most of this 

amount ($1.6 billion) expected in 2004. Legacy airlines reported benefits 

from changes in ticketing policies and fare structures, schedule changes, 

and new code-sharing arrangements. From October 1, 2001, through 

December 31, 2003, legacy airlines actually saw a decline of about $11.9 

billion (14.5 percent) in operating revenue. Meanwhile, low cost airlines 

reported even less revenue enhancement, only $189 million for the same 

period, but actually increased their revenue for the period by about $1.1 

-200

-100

0

100

200

300

400

500

600

700

800

 Other

Service costs

Commissions

Passenger food

 Depreciation

Tra

and amortization

nsport-related

Fuel and oil

Labor

Millions of 2003 dollars

Source: GAO analysis of DOT data.
Page 22 GAO-04-836 Airlines Financial Condition

billion (9.4 percent), thanks to greatly increased volume. Airline officials 

and analysts indicated that fares have remained very weak during the 

period limiting revenue options for airlines.

Government Assistance 

Stemmed Airline Losses

Airlines also depended on federal assistance in 2001 and 2003 to counter 

their losses during the period. For example, in 2001 airlines received nearly 

$5 billion in assistance, and the industry was authorized up to $10 billion in 

loan guarantees under the Air Transportation Safety and System 

Stabilization Act, of which loans totaling $1.56 billion were extended to 9 

airlines. In 2003, the federal government provided another $2.4 billion in 

assistance, of which $100 million was reserved for reimbursement of 

cockpit door reinforcements and the remainder provided to help U.S. 

airlines with their security costs. Of the $2.3 billion, three-quarters went to 

legacy airlines, as shown in figure 11.

Figure 11: Distribution of $2.3 Billion of Direct Assistance Under P.L. 108-11, by 

Airline Type

75%

21% Low cost airlines

1%

Regional airlines

Legacy airlines

3%

Other airlines

Source: TSA.
Page 23 GAO-04-836 Airlines Financial Condition

The law did not establish how airlines were to use the assistance, but it did 

require TSA to certify that the 64 airlines that ultimately received 

assistance allocated the funds for security-related expenses or revenues 

foregone as a result of meeting federal security mandates.15 By accepting 

the funds, the airlines agreed to this certification requirement. As shown in 

table 1, most airlines reported to TSA that they used the funds for their 

ongoing security costs and core operations.

Table 1: Distribution of $2.3 Billion in Federal Aid From P.L. 108-11

Source: TSA.

Legacy Airlines’ 

Financial Condition 

Has Deteriorated 

Relative to Low Cost 

Airlines

The financial condition of U.S. airlines since 2000 has followed two very 

different paths. Despite significant cost-saving initiatives and industry-wide 

traffic volumes approaching pre-September 11 levels, legacy airlines 

continue to lose money. Legacy airlines’ unit costs (cost to fly one seat 1 

mile) have not decreased since 2000 while fares have declined; as a result, 

these airlines have yet to regain profitability. Meanwhile, low cost airlines 

continue to expand market share, enjoy a greater unit cost advantage over 

legacy airlines than they did in 2000, and in all but one quarter have 

collectively earned a profit. The weak performance of the legacy airlines 

over the last 3 years has significantly diminished their financial condition; 

as a result, some of these airlines are vulnerable to bankruptcy, especially if 

there are additional shocks to the industry. 

15Two airlines were eligible for assistance but refused it.

Expense category Amount Percent of total

Ongoing security related 

expenses and core activities $1,983,169,527 86.6

Passed on to code share partners 

and other affiliates 17,371,034 0.8

Liability reduction 8,278,794 0.4

Short term assets or investments 9,069,221 0.4

Other 271,374,057 11.9

Total $2,289,262,633 100.0
Page 24 GAO-04-836 Airlines Financial Condition

Legacy Airlines Have 

Significantly Higher Unit 

Costs Than Low Cost 

Airlines

Legacy airlines, as a group, have been unsuccessful in sufficiently reducing 

their costs to make them more competitive with low cost airlines. Unit cost 

competitiveness is key to profitability for airlines because airlines have 

found it extremely difficult to increase their revenues in the current 

environment. While legacy carriers reduced their overall operating 

expenses over the last 3 years, capacity reductions have made it difficult 

for legacy airlines to achieve meaningful unit cost reductions. Conversely, 

low cost airlines have been able to reduce their unit costs through 

expansion. Low cost airlines’ ability to maintain lower labor costs and 

lower asset-related costs accounts for the majority of the unit cost 

differences between low cost airlines and legacy airlines. 

Equity and credit analysts suggested that one of the best measures for 

examining airline unit cost performance is to compare airline unit cost 

curves. These curves illustrate the relationship between airlines’ unit costs 

and the distance flown (“stage length”). Figure 12 shows legacy and low 

cost airlines’ unit cost curves for 2000 and 2003 and suggests that the gap 

between legacy and low cost airlines’ unit costs has widened across all 

distances. For example, in 2000, at a 1,000-mile stage length legacy airlines’ 

unit costs were 45 percent higher than low cost airlines’; by 2003, legacy 

airlines’ unit costs were 67 percent higher. Some of the legacy airline unit 

cost increase is due to the capacity purchased from regional airlines—an 

increase in operating expenses (the numerator) but without a 

corresponding increase in available seat miles (ASM) (the denominator) in 

the unit cost calculation.16 However, this does not account for all or even 

most of the gap between legacy and low cost airlines’ unit costs.

16Beginning in the first quarter of 2003, DOT required airlines to report the amount they 

spent on capacity purchases from regional airlines as a transport-related cost but did not 

require airlines to report the corresponding amount of seat miles purchased.
Page 25 GAO-04-836 Airlines Financial Condition

Figure 12: Airline Stage Length Adjusted Unit Costs, 2000 vs. 2003

To account for this unit cost difference between legacy and low cost 

airlines, we also examined legacy and low cost airline unit costs over time 

and the various cost items that comprise total operating expenses. Overall, 

we found that the gap in aggregated (for all stage lengths) unit costs for 

legacy and low cost airlines has widened since 2000, from 2.1 cents per 

ASM to 3.8 cents at the end of 2003. The size of this gap may be somewhat 

overstated because of a change in the financial reporting requirements for 

airlines during this time. Beginning in 2003, airlines were required to report 

the cost of buying additional capacity from regional airlines under 

transport-related expenses. To calculate the legacy airlines’ unit costs 

correctly under this new reporting requirement, the ASMs that the legacy 

airlines buy from the regional airlines should also be included in calculating 

their unit costs. We could not incorporate this into our calculation because 

the exact amount of capacity purchased by legacy airlines and the amount 

of money spent on capacity purchased from regional airlines are not 

reported in sufficient detail to do so. However, to indicate legacy airlines’ 

minimum unit costs, we calculated legacy airlines unit costs excluding 

transport-related expenses (low cost airlines reported very little transportrelated expenses). Accordingly, the unit cost difference between legacy and 

low cost airlines grew from 1.6 cents per ASM in 2000 to 2.5 cents in 2003. 

Cost per ASM

Source: Unisys R2A, Transportation Management Consultants, based on data reported by airlines to DOT.

Stage length

0

2

4

6

8

10

12

14

16

18

20

22

Legacy 2003

Legacy 2000

Low cost 2003

Low cost 2000

250 500 750 1,000 1,250 1,500 1,750 2,000 2,250 2,500 2,750 3,000

Legacy 2003

Legacy 2000

Low cost 2000

Low cost 2003

¢
Page 26 GAO-04-836 Airlines Financial Condition

Figure 13 shows the gap between legacy and low cost airlines’ unit costs, 

including and excluding transport-related expenses.

Figure 13: Unit Cost Differential, 1998 through 2003

The two primary cost components that comprise the unit cost differential 

between legacy airlines and low cost airlines are labor costs and assetrelated costs. Legacy airlines have high labor costs owing to a highly 

tenured, unionized workforce. Low cost airlines are able to suppress unit 

costs by achieving higher levels of labor productivity than legacy airlines. 

Legacy airlines have higher asset-related costs than low cost airlines 

because legacy airlines generally have older fleets and different fleet 

structures than low cost airlines. Additionally, because legacy airlines 

generally operate hub-and-spoke business models in comparison to the 

point-to-point model generally operated by low cost airlines, legacy airlines 

are not able to achieve the same level of asset utilization as low cost 

airlines. Other costs that currently comprise the remaining unit cost 

Cost per ASM in 2003 dollars

Source: GAO analysis of DOT data.

Calendar year

0

2

4

6

8

10

12

14

Low cost

Unit cost gap

Unit cost gap

Legacy (exc 

Legacy airlines

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

1998 1999 2000 2001 2002 2003

Legacy (excl. transport-related expenses)

Legacy

Unit cost gap (excl. transport-related expenses)

Unit cost gap

Low cost

¢
Page 27 GAO-04-836 Airlines Financial Condition

difference between legacy airlines and low cost airlines include expenses 

for items such as fuel, passenger ticketing commissions, and passenger 

food.

Labor costs accounted for over 40 percent of the unit cost difference 

between legacy airlines and low cost airlines in 2003. Legacy airlines’ high 

labor costs are the result of a highly tenured workforce, higher pension 

costs, and work rules that differ from their low cost competitors. Low cost 

airlines have been effective at keeping unit labor costs down by achieving 

higher labor productivity and paying less. Legacy airlines have made 

progress in improving labor productivity since 2001, but they continue to 

trail low cost airlines, which have steadily improved labor productivity 

since 1998. As Figure 14 illustrates, in 2003 legacy airlines had improved 

labor productivity 8.3 percent, compared with 1998, by increasing the 

number of ASMs produced per employee.17 However, in 2003 they still 

produced 7 percent fewer ASMs per employee than low cost airlines.

17ASMs per employee are measured by dividing the number of ASMs flown by an airline in 1 

year by the average number of full-time equivalents employed by the airline during the year. 

Airlines with high labor productivity generate more ASMs per employee than airlines with 

lower labor productivity.
Page 28 GAO-04-836 Airlines Financial Condition

Figure 14: Labor Productivity, Legacy Airlines vs. Low Cost Airlines

Legacy airlines encounter higher asset-related unit costs than low cost 

airlines because legacy airlines have older fleets and more types of aircraft 

in their fleets than low cost airlines, and legacy airlines put their planes in 

the air fewer hours per day than low cost airlines. Legacy airlines own 

older aircraft than many low cost airlines; and older aircraft can be 

expensive to operate because they are less fuel-efficient than newer 

aircraft, and they have higher maintenance costs. Additionally, legacy 

airlines usually have more types of aircraft in their fleets, adding to 

maintenance costs and pilot training costs. Moreover, because legacy 

airlines generally operate a hub-and-spoke business model, they are not 

able to operate their aircraft for as many block hours per day as low cost

1.6

1.7

1.8

1.9

2.0

2.1

2.2

2.3

1998 1999 2000 2001 2002 2003

0

Millions of ASMs per employee

Calendar year

Legacy airlines

Low cost airlines

Source: GAO analysis of DOT data.
Page 29 GAO-04-836 Airlines Financial Condition

airlines.18 Low cost airlines typically operate a point-to-point business 

model that allows them to limit the amount of time a plane must spend on 

the ground from the time it lands until it is ready to take off again. Figure 15 

demonstrates the asset utilization differential that exists between legacy 

airlines and low cost airlines when measured in block hours per day per 

aircraft in service. Legacy airlines have improved asset utilization since the 

events of September 11; however, despite these improvements, they 

continue to trail low cost airlines with respect to asset utilization trends. 

Figure 15: Asset Utilization: Legacy Airlines vs. Low Cost Airlines

Other operating expenses that explain the unit cost difference between 

legacy airlines and low cost airlines include items such as aircraft fuel and 

18Block hours per day are defined as the number of hours per day that a plane is in service 

from the time it pulls away from its originating gate until it arrives at its destination gate. 

Highly productive airlines are generally able to achieve higher block hour utilization of their 

aircraft than less productive airlines.

Average block hours per day per aircraft in service

Source: GAO analysis of DOT data.

Calendar year

0

8.5

9.0

9.5

10.0

10.5

11.0

11.5 LCCs

Legacy carriers

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

1998 1999 2000 2001 2002 2003

Low cost airlines

Legacy airlines
Page 30 GAO-04-836 Airlines Financial Condition

oil, passenger food, and passenger commissions related to ticketing. 

Together these items comprise approximately 20 percent of the unit cost 

difference between legacy airlines and low cost airlines.

Depressed Fares and 

Declining Traffic Have 

Weakened Revenues for 

Legacy Airlines

Overall industry revenues have not returned to pre-September 11 levels 

despite a return in demand for air travel. In 2003, passenger demand for air 

travel (as measured in miles flown by paying passengers) returned to 95 

percent of the 2000 level. However, industry revenues only totaled $77 

billion in 2003, which represents just under 80 percent of the 2000 level. 

The revenue picture is significantly different when comparing legacy 

airlines with low cost airlines. Legacy airline passenger revenues are down 

28 percent from 2000 through 2003, while low cost airlines have increased 

passenger revenues over 12 percent. Figure 16 below presents the changes 

in total industry revenues from 1998 through 2003, as well as changes by 

the legacy and low cost groups. 

Figure 16: Airline Revenues, 1998 through 2003, by Airline Group

Billions of 2003 dollars

Source: GAO analysis of DOT data.

Calendar year

0

10

20

30

40

50

60

70

80

90

100

Industry revenues

Low cost airline revenues

Legacy airline revenues

1998 1999 2000 2001 2002 2003
Page 31 GAO-04-836 Airlines Financial Condition

Low airfares constrained revenues for both legacy and low cost airlines. 

Yields, the amount of revenue airlines collect for every mile a passenger 

travels, have fallen 19 percent industry-wide from the first quarter of 2000 

through the fourth quarter of 2003 for the 30 airlines examined in this study. 

Figure 17 presents the trends in yields for both legacy airlines and low cost 

airlines from 1998 through 2003. The trends are similar for both the legacy 

airlines and low cost airlines; legacy yields dropped about 19 percent, while 

low cost airline yields dropped about 17 percent.

Figure 17: Revenue Collected Per RPM (Yield), 1998 through 2003, by Airline Group

In addition, the gap between the legacy airline yields and the low cost 

airline yields has narrowed. Legacy carriers are often able to command a 

higher fare—or “revenue premium”—compared with low cost airlines 

because passengers will often pay more for the benefits of a network 

structure. Accordingly, legacy airline officials have stated that they do not 

need to lower their costs to the same levels as low cost airlines because 

they can command a revenue premium. This ability to command a revenue 

0

Yield in 2003 dollars

Calendar year

Legacy airline yield

Low cost airline yield

Source: GAO analysis of DOT data.

¢

10.5

11.0

11.5

12.0

12.5

13.0

13.5

14.0

14.5

1998 1999 2000 2001 2002 2003
Page 32 GAO-04-836 Airlines Financial Condition

premium, however, appears to be eroding. The revenue premium 

commanded by the legacy airlines has fallen from 9.8 percent to 6.4 percent 

from 1998 to 2003—a 45 percent decrease. Moreover, this revenue premium 

is less than half of the 15 percent to 16 percent revenue premium one 

legacy airline stated that they expected to be able to command.

The primary factor differentiating legacy and low cost airline revenue 

performance is the change in demand. Demand (as measured in RPMs) is 

down 11 percent for legacy airlines from 2000 through 2003, while demand 

for low cost airlines has risen nearly 37 percent (see fig. 18). Low cost 

airlines have expanded their operations and market share enough to 

increase revenues in a lower yield environment and can do so profitably 

because of their lower cost structure. Legacy airlines are simply flying 

fewer people at lower fares, which represent decreases in both factors of 

the revenue equation. Although nearly as many passengers are flying as 

before September 11, they are paying less to do so and choosing to fly on 

low cost airlines more often. 

Figure 18: Percentage Change in Airline RPMs, Since 2000

-15

-10

-5

0

5

10

15

20

25

30

35

40

Low cost airline RPMs

Legacy airline RPMs

2000 2001 2002 2003

Source: GAO analysis of DOT data.

Percentage

Calendar year
Page 33 GAO-04-836 Airlines Financial Condition

It appears low fares will continue to depress revenues during 2004 since 

airlines continue to add capacity. A year-over-year comparison of ASMs for 

the first quarter of 2004 indicates capacity is up over 7 percent from 2003. 

Airlines generally add capacity to compete for or defend market share. 

Legacy airlines are adding capacity because they possess excess capacity 

that can be added at relatively low marginal costs. Collectively, however, 

this strategy is problematic because the additional capacity depresses fares 

further. Credit and equity analysts we interviewed stated that the increase 

in capacity is likely to outweigh the increase in demand for air travel and 

continue to depress fare prices.

High Unit Costs and 

Depressed Fares Have 

Combined to Eliminate 

Profitability at Legacy 

Airlines

Weak revenues and the inability to realize greater cost-savings have 

combined to create unprecedented losses for legacy ailrines. At the same 

time, low cost airlines have been able to continue producing modest profits 

as the result of significantly improved cost performance. As figure 19 

demonstrates, the unit-operating margin (or difference between unit 

revenues and costs) for legacy airlines turned negative during the second 

half of 2000 and reached its trough shortly after September 11. While the 

operating margin for legacy airlines recovered in 2003 from its postSeptember 11 low, and losses in 2003 are not as great as in 2002, these 

airlines have experienced operating losses in all quarters but one since 

September 11, 2001.19Meanwhile, low cost airlines maintained a positive 

operating margin between 2001 and 2003, with the exception of the fourth 

quarter of 2001—the immediate aftermath of September 11. Further, an 

expected return to moderate profitability in 2004 for legacy airlines has not 

materialized due, in large part, to historically high oil prices. 

19The profitability of legacy airlines in the third quarter of 2003 coincides with the “security 

fee holiday” authorized by P.L. 108-11, which suspended collections of the passenger fee for 

security and the aviation security infrastructure fee for tickets sold during June through 

September of 2003. For further information, see U.S. General Accounting Office, Summary 

Analysis of Federal Commercial Aviation Taxes and Fees, GAO-04-406R, (Washington, 

D.C.: Mar. 12, 2004).
Page 34 GAO-04-836 Airlines Financial Condition

Figure 19: Airline Profitability (in unit operating margin), 1998 through 2003

As a result of the difference in operating margin, legacy airlines have lost 

$24.3 billion since the end of 2000, while low cost airlines have made a 

profit of $1.3 billion. Figure 20 presents airline profits and losses from 1998 

through 2003. One industry estimate indicates the airline industry, as a 

whole, will again be unprofitable in 2004, losing in excess of $3 billion. 

Cents per ASM in 2003 dollars

Source: GAO analysis of DOT data.

Calendar year

-3.0

-2.5

-2.0

-1.5

-1.0

-0.5

0

0.5

1.0

1.5

2.0

LCCs

Legacy airlines

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

1998 1999 2000 2001 2002 2003

Low cost airlines

Legacy airlines
Page 35 GAO-04-836 Airlines Financial Condition

Figure 20: Airline Profits and Losses, 1998 through 2003

Legacy Airlines’ Financial 

Condition Has Weakened 

Since 2000

Since 2000, the financial condition of legacy airlines has deteriorated. Both 

legacy airlines and low cost airlines built cash balances following the 

events of September 11; legacy airlines did so primarily through borrowing, 

while low cost airlines increased liquidity through borrowing and 

generating cash from operations. Since 2001, legacy airlines have taken on 

more debt, relying on creditors for more of their capital needs than in the 

past. Higher debt levels leads to greater interest expenses and can make 

raising additional capital more difficult. Low cost airlines also increased 

their debt levels, but not as much, and their solvency (or long-term 

prospects of repaying the debt) has not deteriorated to the same extent as 

legacy airlines. In the process of taking on additional debt, several legacy 

airlines have used all, or nearly all, of their assets as collateral, limiting 

their access to capital markets. 

Legacy airlines’ liquidity has deteriorated overall and relative to low cost 

airlines. Liquidity is a measure of a firm’s ability to meet short-term 

liabilities with cash or marketable securities. Both groups of airlines built 

-10

-8

-6

-4

-2

0

2

4

6

8

Legacy airlines

Low cost airlines

1998 1999 2000 2001 2002 2003

Billions of 2003 dollars

Source: GAO analysis of DOT data.

Calendar year

-4.8

0.8

-9.7

0.2

7.3

4.9

1.3

6.2

1.1

-9.8

1.2

0.3
Page 36 GAO-04-836 Airlines Financial Condition

cash balances immediately following September 11—for example, 

comparing cash and marketable securities to current liabilities, known as 

the cash ratio, rose for both types of airlines (see fig. 21). However, low 

cost airlines have built proportionally larger cash balances and did it 

primarily by generating cash from operations, as well as modest borrowing. 

In contrast, legacy airlines built cash balances after September 11, 

principally by borrowing. More recently, losses have depleted cash 

balances and legacy airlines’ ability to meet current obligations has not 

improved. During 2002 and 2003, low cost airlines built cash balances by 

generating cash from operations, while legacy airlines continued to lose 

cash from operations and compensated for operating losses by taking on 

additional debt. In 2003, low cost airlines generated approximately $2.2 

million in cash per day while legacy airlines depleted their cash reserves at 

a rate of approximately $682,000 per day. Low cost airlines maintain more 

favorable liquidity measures than legacy airlines, and the differential 

between the two groups of airlines is widening.20

20Adding an airline’s cash balance to its highly liquid, short-term investments and dividing by 

the airline’s total current liabilities produces an airline’s cash ratio. If an airline’s cash ratio 

is greater than 1, this indicates that the airline is financially liquid enough to cover all of its 

current liabilities.
Page 37 GAO-04-836 Airlines Financial Condition

Figure 21: Liquidity of Legacy Carriers vs. Low Cost Carriers, Moving Average 1998 through 2003 

Since legacy airlines have issued debt to cover operating losses, they 

continue to be more highly leveraged than low cost airlines, indicating that 

low cost airlines are more likely to be able to fulfill their long-term financial 

obligations than legacy airlines, and the gap between the airline groups is 

growing. Both legacy airlines’ and low cost airlines’ debt have increased 

since 1998. As figure 22 demonstrates, legacy airlines have financed 92 

percent of their assets by issuing debt (priced at book value), while low 

cost airlines have only financed approximately 50 percent of their assets by 

issuing debt. However, as the graph also illustrates, low cost airlines’ debt 

ratios21 have fallen since the end of 2002, and the gap between the two 

groups of airlines appears to be widening. In the process of taking on 

additional debt, several legacy airlines have used all or nearly all of their 

assets as collateral, limiting their access to capital markets. In addition, as 

legacy airlines’ financial condition has deteriorated, credit rating agencies 

Cash ratio

Source: GAO analysis of DOT data.

Calendar year

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

LCCs

Legacy carriers

Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3

1998 1999 2000 2001 2002 2003

Low cost airlines

Legacy airlines

Cash covers current liabilities

1.8

21“Debt ratio” is a measurement of an airline’s total liabilities divided by its total assets. As 

an airline’s debt ratio increases, the likelihood of that airline fulfilling its long-term financial 

obligations decreases.
Page 38 GAO-04-836 Airlines Financial Condition

have generally downgraded airline debt, further limiting their access to 

capital markets. 

Figure 22: Liabilities as Proportion of Total Assets, Moving Average 1998 through 2003

Legacy airlines face large debt repayment obligations and pension plan 

contributions during the next 4 years. Figure 23 illustrates the looming 

long-term debt and capital lease (a fixed obligation similar to long-term 

debt) payments that legacy airlines face in comparison with their low cost 

competitors. While legacy airlines had approximately $6.8 billion in cash at 

the end of 2003, they face a total of $19.2 billion in long-term debt and 

capital lease obligations during the next 4 years.22 In contrast, low cost 

airlines had a collective cash balance of approximately $3.5 billion at the 

end of 2003 versus long-term debt and capital lease obligations of $2.1 

Total liabilities/total assets

Source: GAO analysis of DOT data.

Calendar year

0.30

0.35

0.40

0.45

0.50

0.55

0.60

0.65

0.70

0.75

0.80

0.85

0.90

0.95

LCCs

Legacy airlines

Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3

1998 1999 2000 2001 2002 2003

Low cost airlines

Legacy airlines

0.00

1.00

22In addition, as noted in figure 21, legacy airlines must also meet considerable current 

liabilities.
Page 39 GAO-04-836 Airlines Financial Condition

billion coming due through 2007. A recently passed law postpones a 

portion of legacy airlines’ requirements to make payments to their defined 

benefit pension plans in 2004 and 2005,23 but these airlines are still required 

to fully fund these plans in future years.24 Current estimates indicate that 

legacy airlines’ defined benefit pension plans are underfunded by 

approximately $20.5 billion. Because legacy airlines’ future access to 

capital markets appears to be limited, these airlines will need to begin 

generating cash from operations if they intend to fulfill their future 

financial obligations and avoid bankruptcy. 

23Pension Fund Equity Act of 2004 (P. L. 108-218, April 10, 2004). The law temporarily 

replaces the interest rate on 30-year U.S. Treasury Bonds with an interest rate based on the 

average rate of return on high-quality long-term corporate bonds and allows airlines to 

postpone part of their necessary contributions for 2004 and 2005. Because not all airlines 

have disclosed their minimum pension funding requirements pursuant to this law, these 

obligations are not included in figure 23.

24Defined benefit plans promise a fixed payment amount in the future. In contrast, the 

defined contribution plans employed by low cost airlines fix the current contribution 

amount, but the future payment amount depends on returns on the pension assets.
Page 40 GAO-04-836 Airlines Financial Condition

Figure 23: Out-Year Obligations, Legacy Airlines vs. Low Cost Airlines

Low Cost Airline 

Growth Has Created 

Greater Competition in 

Many Domestic 

Markets 

Airline competition has increased in domestic markets since 1998 because 

of the growth and expansion of low cost airlines. Between 1998 and 2003, 

the number of effective competitors25 in many of the 5,000 largest domestic 

markets increased, even as the overall number of passengers remained 

about the same. Low cost airlines entered more of these markets and 

increased their share of total passengers, particularly in longer distance 

markets. Legacy carriers continued to serve nearly all of these markets, but 

0

1

2

3

4

5

6

7

8

Cash at 2004 2005 2006 2007 

the end

of 2003

0

1

2

3

4

5

6

7

8

Cash at 2004 2005 2006 2007 

the end

of 2003

Legacy Airlines: 2003 Cash Balance vs. Future

Obligations, 2004 through 2007

Low Cost Airlines: 2003 Cash Balance vs. Future

Obligations, 2004 through 2007

Billions of 2003 dollars Billions of 2003 dollars

Long-term debt and capital leases Long-term debt and capital leases

Source: GAO analysis of company Securities and Exchange Commission filings.

25The number of “effective competitors” is a numeric representation of the number of equalsized competitors in a market. The number is derived from the individual market shares of 

all of the participants in a market, and effectively adjusts for the varying market strength of 

airlines in each market. For example, one market served by three airlines, each of which 

carries one-third of the total traffic, would have three effective competitors. A different 

market, also served by three airlines, but where one airline carried two-thirds of the 

passenger traffic and the other two airlines equally divided the remaining passenger traffic, 

is calculated to have two effective competitors. For additional information on the 

calculation of this construct, see app. IV. 
Page 41 GAO-04-836 Airlines Financial Condition

they carried fewer passengers in 2003 than in 1998, and their overall share 

decreased. Legacy airlines continued to dominate many of the largest 5,000 

domestic markets in 2003, but most of those were relatively small markets 

to or from their hubs. 

The top 5,000 city-pair markets we analyzed accounted for about 92 

percent of all domestic passenger traffic in 2003.26 Within this group, 

markets differ greatly in size, with passenger traffic concentrated in 

relatively few of them. In 2003, almost 23 percent of all domestic 

passengers flew in the 52 largest markets. Each of these large markets had 

at least 840,000 passengers annually and on average, over 1.5 million 

passengers flew in each. The largest market in 2003 was Los Angeles—San 

Francisco, in which 5.1 million passengers flew. Throughout the remainder 

of this report, we define “large” markets as those 52 markets. Conversely, 

relatively few passengers flew in each of the smaller markets. At the 

opposite end of the spectrum from the 52 largest markets are the 4,157 

small markets, in which 24 percent of domestic passengers flew. Each of 

those markets had less than 85,000 passengers annually and had an average 

of 20,569 passengers annually. The smallest markets in this group, which 

includes Oklahoma City to Savannah, had 4,840 passengers (about 13 

passengers per day) in 2003. 

Competition Has Increased Most 

in Larger Markets as Low Cost 

Airlines Have Expanded Service 

Beyond Their Traditional 

Markets

Although most of the top 5,000 largest domestic markets were already 

competitive in 1998, many had become more competitive by 2003 as low 

cost carriers ventured into new markets, more directly challenging legacy 

carriers and taking a larger share of passengers. The number of monopoly 

markets decreased, and the number of markets with three or more airlines 

providing service grew by 8.9 percent. Overall, the average number of 

effective competitors in the top 5,000 markets rose from 2.20 in 1998 to 2.36 

26Air service markets are usually defined in terms of scheduled service between a point of 

origin and a point of destination. The markets in our analysis included airlines providing 

both nonstop and single connecting service. Connecting service is not a perfect substitute 

for nonstop service and, therefore, may not provide effective competition for certain classes 

of service (e.g., business travel). Our examination of the data reliability procedures for 

DOT’s top 5,000 market data indicated that they were sufficiently reliable for the purpose of 

discussing broad changes in competition in domestic aviation. Readers should note, 

however, that because this analysis uses the largest 5,000 markets, it excludes information 

on service to small communities (i.e., those often legislatively defined as being served by 

“nonhub” airports), because markets in which those communities would represent either a 

point of origin or destination are too small to be included. For more information on the data 

used in our analysis and overall changes in the top 5,000 markets, see app. IV. 
Page 42 GAO-04-836 Airlines Financial Condition

in 2003. Figure 24 illustrates the number of effective competitors in 1998 

and 2003 by market size.

Figure 24: Top 5,000 Markets Were More Competitive in 2003

Increased competition in domestic air service is largely attributable to the 

growth of low cost airlines, which increased the number of markets served 

from 1,594 in 1998 to 2,304 in 2003, an increase of 44.5 percent (see fig. 25).

In 1998, low cost airlines were generally serving large, short-haul markets 

such as Dallas to Houston or Atlanta to Orlando. By 2003, as they opened 

operations in new cities, low cost airlines expanded into smaller markets 

by making connections available that did not exist before. In addition, low 

cost airlines evolved from serving mostly short-haul markets to flying 

transcontinental (e.g., in 2003 JetBlue began service from Fort Lauderdale 

to Long Beach and Southwest began service between Baltimore and 

California). DOT has also observed that low cost airlines have been 

spreading service to smaller and longer-haul markets as well as competing 

more aggressively for business passengers. According to DOT, low cost 

airlines generate lower fares and an increase in passengers in the markets 

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

<85,000 85,000-289,999 290,000-839,999 840,000+ 

Source: GAO analysis of DOT data.

Number of effective competitors (weighted average)

Market size (annual passengers)

1998

2003
Page 43 GAO-04-836 Airlines Financial Condition

they enter.27 Although legacy airlines have made large cuts in operating 

costs over the past few years, they were present in nearly all of the top 

5,000 markets each year. 

Figure 25: Low Cost Airlines Had Expanded Service to Additional Markets by 2003

Low cost airlines’ addition of more routes expanded the extent to which 

they competed directly with legacy airlines. In 1998, low cost airlines 

operated in 31.5 percent of the markets served by legacy airlines, and 

provided a low-cost alternative to 72.5 percent of passengers. By 2003, lowcost airlines competed directly with legacy airlines in an additional 698 

markets. They operated in 45.5 percent of the markets served by legacy 

27Domestic Airline Fares Consumer Report, Third Quarter 2002 Passenger and Fare 

Information, U.S. Department of Transportation, Washington, D.C.: July 2003. For example, 

between 2000 and 2002, in the New York-Los Angeles market, low-fare carriers grew their 

traffic by 171 percent on a 19-percent decrease in average fare. Other carriers’ traffic 

declined on a decrease in their average fare. As a result, low-fare carrier market share rose 

from 8.6 percent to 22.7 percent over the 2-year period. 

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

1998 1999 2000 2001 2002 2003

Source: GAO analysis of DOT data.

Number of markets

Fiscal year

Legacy

Low-cost
Page 44 GAO-04-836 Airlines Financial Condition

airlines and provided a low cost alternative to 84.6 percent of passengers in 

the top 5,000 markets. 

The entry of low cost airlines into new markets contributed to the shift in 

market share for legacy and low cost airlines. Overall, low cost airlines’ 

share of total passenger traffic increased from 23 percent in 1998 to 33 

percent in 2003, while legacy airlines lost market share, falling from 69 to 

65 percent (see fig. 26). Low cost airline total passenger traffic increased 

from 79.8 million in 1998 to 117.1 million in 2003. Low cost airline 

passengers also increased in all markets sizes and market distances over 

250 miles, with the largest increases in long haul markets. Legacy carrier 

passengers decreased from 242.2 million in 1998 to 231.6 million in 2003.28

28Though our focus in this study is on the legacy and low cost airlines, we recognize the near 

disappearance of “other” carriers” from the top 5,000 domestic markets. Other carriers are 

those that did not fit our definitions of legacy and low cost airlines and include currently 

operating airlines such as Hawaiian and Midwest as well as airlines such as Midway and 

National, which declared bankruptcy and ceased operations. As a group, these carriers 

showed dramatic declines in markets served and passenger traffic between 1998 and 2003. 

For example, other carriers’ overall passengers declined 73.7 percent, from 28.6 million in 

1998 to 7.5 million in 2003 as their market share declined from 8.2 to 2.1 percent. 

Additionally, these carriers served only 270 markets in 2003, which is a decrease from 1,901 

markets served in 1998.
Page 45 GAO-04-836 Airlines Financial Condition

Figure 26: Low Cost Airlines Gained Market Share (Passengers) from Legacy and Other Airlines

Note: “Other” carriers are those that did not fit our definitions of legacy and low cost airlines. Current 

carriers in this category are Hawaiian and Midwest. In 1998, this category also included Midway and 

National, which have since ceased operations.

Fewer Markets Dominated by a 

Single Airline

With the increase in overall competition, the number of dominated markets 

declined by 279 between 1998 and 2003 (7.7 percent). However, during the 

financially difficult years of 2001 through 2003, the number of dominated 

markets increased by 63 (see fig. 27). And although a single airline may 

have carried more than half of the total passenger traffic in those 

dominated markets, 31.2 percent of those markets had service from three 

or more airlines in 2003. 

69% 65%

23% 33%

8%

Low cost

airlines

Low cost

airlines

Legacy

airlines

Legacy

airlines

Other airlines

2%

Other airlines

Source: GAO analysis of DOT data.

1998 2003
Page 46 GAO-04-836 Airlines Financial Condition

Figure 27: The Majority of Markets in the Top 5,000 Were Dominated from 1998 

through 2003

As a group, dominated markets enplaned the majority of passengers from 

1998 to 2003, but individually they tended to be smaller than nondominated markets. In 2003, dominated markets enplaned an average of 

64,217 passengers each, while nondominated markets enplaned an average 

of 85,730 passengers each, a difference of 34 percent (see fig. 28).

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

1998 1999 2000 2001 2002 2003

Source: GAO analysis of DOT data.

Number of markets

Calendar year

Dominated

Nondominated
Page 47 GAO-04-836 Airlines Financial Condition

Figure 28: Dominated Markets Tended To Be Smaller Than Nondominated Markets

Nearly 85 percent of the markets dominated in 2003 were dominated by 

legacy airlines. Additionally, a large percentage of the total number of 

dominated markets were “hub markets” of legacy airlines (i.e., travel 

originated or terminated in one of the legacy airline’s hubs). In 2003, the 

2,854 markets that were dominated by legacy carrier. Each had an average 

of 48,375 passengers. Low cost airlines dominated 458 markets in 2003, and 

those markets tended to be significantly larger. On average, 158,378 

passengers flew annually in markets dominated by low cost airlines. This 

difference reflects the low cost carriers’ targeting of high-density markets 

and the nature of hub-and-spoke networks operated by legacy airlines. 

Concluding 

Observations

While the airline industry was deregulated more than 25 years ago, some of 

the most significant competitive changes are only now occurring, brought 

about by the unprecedented challenges of the last 4 years. Before 2000, 

large legacy airlines, all of which predated deregulation, dominated the 

domestic airline industry. These airlines competed on the basis of their 

0

20,000

40,000

60,000

80,000

100,000

120,000

1998 1999 2000 2001 2002 2003

Source: GAO analysis of DOT data.

Average passengers

Calendar year

Dominated

Nondominated
Page 48 GAO-04-836 Airlines Financial Condition

networks and onboard amenities as well as fares; profits were earned by 

maximizing revenues from high-value business travelers. While low cost 

airlines competed in some markets, as a whole, they never accounted for a 

significant segment of the industry and rarely took on a legacy airline 

directly. In the past, new entrant low cost airlines rarely survived an entire 

business cycle. However in recent years this pattern has changed, perhaps 

permanently. Significant structural change combined with severe demand 

shocks has presented unprecedented challenges to the airline industry, 

especially for legacy airlines. Legacy airlines, burdened by significant costs 

of labor contracts and pension plans negotiated during profitable years and 

an extensive and costly network infrastructure, have found it difficult to 

reduce costs quickly enough to restore profitability. The scale of costcutting reported to us by legacy airlines was not fully achieved and, most 

importantly, legacy airlines were no more cost competitive with low cost 

airlines in 2003 than they were in 2000. 

Meanwhile, low cost airlines are using their cost advantage to expand their 

market share and challenge legacy airlines like never before. While 

industry traffic has recovered to pre-September 11 levels, profitability for 

legacy airlines has not, owing to higher costs and weak fare growth. Three 

years of losses have left legacy airlines in a weakened financial condition 

with large debt and pension obligations looming in the next few years. The 

potential for airlines to earn large profits during up-cycles to cover losses 

during down-cycles, as they did during the 1990s, appears to have come 

undone this decade. Whether legacy airlines can effectively compete with 

low cost airlines and regain profitability will depend on their ability to 

further reduce their unit costs and gain a revenue premium associated with 

network service that connects smaller U.S. communities with international 

destinations—a service that low cost airlines do not now offer. The 

survivability of legacy carriers may well depend on their ability to do so—

certainly, they cannot continue to sustain losses like those incurred over 

the past few years. The growth of low cost airlines in recent years has 

benefited most consumers through increased competition, but the 

structure of the U.S. domestic airline industry remains very much in flux.
Page 49 GAO-04-836 Airlines Financial Condition

Comments We provided a draft of this report to DOT for its review and comment. DOT 

officials provided some clarifying and technical comments that we 

incorporated where appropriate. We also provided selected portions of a 

draft of this report to the ATA to verify the presentation of factual material. 

We incorporated their technical clarifications as appropriate.

We provided copies of this report to the Secretary of Transportation and 

other interested parties and will make copies available to others upon 

request. In addition, this report will be available at no charge on our Web 

site at http://www.gao.gov. If you have any questions about this report, 

please contact me or Steve Martin at 202-512-2834. Other major 

contributors are listed in appendix V.

JayEtta Z. Hecker

Director, Physical Infrastructure
Page 50 GAO-04-836 Airlines Financial Condition

List of Congressional Committees

The Honorable Ted Stevens

Chairman

The Honorable Robert Byrd

Ranking Minority Member

Committee on Appropriations

United States Senate

The Honorable John McCain

Chairman

The Honorable Ernest Hollings, Jr.

Ranking Democratic Member

Committee on Commerce, Science, and Transportation

United States Senate 

The Honorable Richard Shelby

Chairman

The Honorable Patty Murray

Ranking Minority Member

Subcommittee on Transportation, Treasury, and General Government

Committee on Appropriations 

United States Senate 

The Honorable Thad Cochran

Chairman

The Honorable Robert Byrd

Ranking Minority Member

Subcommittee on Homeland Security

Committee on Appropriations

United States Senate 

The Honorable Trent Lott

Chairman

The Honorable John D. Rockefeller 

Ranking Democratic Member

Subcommittee on Aviation

Committee on Commerce, Science, and Transportation 

United States Senate 
Page 51 GAO-04-836 Airlines Financial Condition

The Honorable C.W. Bill Young

Chairman

The Honorable David R. Obey

Ranking Minority Member

Committee on Appropriations 

House of Representatives

The Honorable Don Young

Chairman

The Honorable James L. Oberstar 

Ranking Democratic Member

Committee on Transportation and Infrastructure

House of Representatives

The Honorable Ernest J. Istook, Jr.

Chairman

The Honorable John V. Olver

Ranking Minority Member

Subcommittee on Transportation and Treasury, and Independent Agencies

Committee on Appropriations

House of Representatives

The Honorable Harold Rogers

Chairman

The Honorable Martin Olav Sabo

Ranking Minority Member

Subcommittee on Homeland Security

Committee on Appropriations

House of Representatives

The Honorable John L. Mica

Chairman

The Honorable Peter A. DeFazio

Ranking Democratic Member

Subcommittee on Aviation

Committee on Transportation and Infrastructure

House of Representatives
Page 52 GAO-04-836 Airlines Financial Condition

Appendix I

Airline Cover Letter ApApenednxidexiIs
Appendix I

Airline Cover Letter

Page 53 GAO-04-836 Airlines Financial Condition
Appendix I

Airline Cover Letter

Page 54 GAO-04-836 Airlines Financial Condition

Air Carrier Contact Information

Contact Name:

Email Address:

Phone Number:

Fax Number:

1. Post-Enactment Implementation Period

Chart 1A: Financial Improvement Initiatives Post-Enactment

Describe Each

Initiative

Summary of How 

Expected Cost

Savings/

Revenue

Increases Were

Calculated,

Including Key

Assumptions,

for Each

Initiative

Implementation

Date, for Each

Initiative (also

include expected

implementation

dates if

applicable) 

Actual and/or

Estimated

Cost Savings or

Revenue Increases

for January 1

through

December 31, 2003

for Each Initiative

(Net, rounded to the

nearest dollar) 

Estimated

Cost Savings or

Revenue Increases

for January 1

through

December 31,

2004 for Each

Initiative (Net,

rounded to the

nearest dollar) 

Significant

Operational Impacts

Resulting From

Each Initiative,

If Any 

B C D E F G

I. Cost Reduction Initiatives

 -- labor

 -- fleet

 -- offices and facilities

 -- flight schedules

 -- commissions

 -- customer service

II. Revenue Enhancement

 Initiatives

 -- fare deals and specials

 -- new lines of business,

 i.e., low cost airline

 -- advertising/marketing

 -- alliance and code sharing

 agreements

Name of the Most Significant

Financial Improvement Initiatives 

This section might include

initiatives relating to the

following areas: 

This section might include

initiatives relating to the

following areas:

In completing this section, list only the initiatives that were or are expected to be implemented after the

enactment of the Act, i.e.,April 1, 2003 through December 31, 2003. Initiatives that were begun in this

time period but have not yet been completed are considered implemented in this time period. 

Using your best judgment, (1) report only the most significant initiatives such as those that result in large

dollar benefits or large operational impacts and (2) categorize initiatives into Cost Reduction and Revenue

Enhancement categories for the Financial Improvement Initiatives and into Liquidity, Debt Management,

and Other categories for the Balance Sheet Initiatives.

A
Appendix I

Airline Cover Letter

Page 55 GAO-04-836 Airlines Financial Condition

Chart 1B: Balance Sheet Improvement Initiatives Post-Enactment

Describe Each Initiative

Summary of Expected Benefits

for Each Initiative (Net,

rounded to the nearest dollar)

Implementation Date, for

Each Initiative (also include

expected implementation

dates if applicable) 

Significant Operational

Impacts Resulting From

Each Initiative, If Any 

B C D E 

I. Liquidity

II. Debt Management

III. Other

 -- refinancing or restructuring debt

Name of the Most Significant

Financial Improvement Initiatives 

This section might include

initiatives relating to the

following areas:

A

This section might include

initiatives relating to the

following areas:

 -- lines of credit

 -- investments
Appendix I

Airline Cover Letter

Page 56 GAO-04-836 Airlines Financial Condition

2. Pre-Enactment Implementation Period

In completing this section, list only the initiatives that were implemented after the terrorist attacks and

before the enactment of the Act (October 1, 2001 through March 31, 2003). Initiatives that were begun

in this time period but have not yet been completed are considered implemented in this time period. 

Using your best judgment, (1) report only the most significant initiatives such as those that result in

large dollar benefits or large operational impacts and (2) categorize initiatives into Cost Reduction and

Revenue Enhancement categories for the Financial Improvement Initiatives and into Liquidity, Debt

Management, and Other categories for the Balance Sheet Initiatives.

Chart 2A: Financial Improvement Initiatives Pre-Enactment

Describe Each

Initiative

Summary of How

Expected Cost

Savings/Revenue

Increases Were

Calculated,

Including Key

Assumptions,

for Each Initiative

Estimated Cost

Savings or 

Revenue Increase

for January 1

through

December 31,

2004 for Each

Initiative (Net,

rounded to the

nearest dollar)

Implementation

Date, for Each

Initiative

Actual Cost

 Savings or

Revenue

Increase for

October 1, 2001

through

December 31,

2002 for Each

Initiative (Net,

rounded to the

nearest dollar) 

Actual or

Estimated

Cost Savings or

Revenue Increase

for January 1

through

December 31,

2003 for Each

Initiative (Net,

rounded to the

nearest dollar) 

Significant

Operational Impacts

Resulting From

Each Initiative,

If Any 

B C D E F G H

I. Cost Reduction Initiatives

 -- labor

 -- fleet

 -- offices and facilities

 -- flight schedules

 -- commissions

 -- customer service

II. Revenue Enhancement

 Initiatives

 -- fare deals and specials

 -- new lines of business,

 i.e., low cost airline

 -- advertising/marketing

 -- alliance and code sharing

 agreements

Name of the Most Significant

Financial Improvement Initiatives 

This section might include

initiatives relating to the

following areas: 

This section might include

initiatives relating to the

following areas:

A
Appendix I

Airline Cover Letter

Page 57 GAO-04-836 Airlines Financial Condition

Chart 2B: Balance Sheet Improvement Initiatives Pre-Enactment

Describe Each Initiative

Summary of Expected Benefits

for Each Initiative (Net,

rounded to the nearest dollar)

Implementation Date, for

Each Initiative 

Significant Operational

Impacts Resulting From

Each Initiative, If Any 

B C D E 

I. Liquidity

II. Debt Management

III. Other

 -- refinancing or restructuring debt

Name of the Most Significant

Financial Improvement Initiatives 

This section might include

initiatives relating to the

following areas:

A

This section might include

initiatives relating to the

following areas:

 -- lines of credit

 -- investments
Appendix I

Airline Cover Letter

Page 58 GAO-04-836 Airlines Financial Condition

CY 2002 Actual

1st Quarter CY

 2003 Actual

2nd - 4th Quarter CY

2003 Estimated CY 2004 Estimated 

CY 2002 Actual

1st Quarter CY

 2003 Actual

2nd - 4th Quarter CY

2003 Estimated CY 2004 Estimated 

Revenue

Charter Revenues

Freight and Express Revenues

Passenger Revenues

Total Operating Revenues

Other

Mail Revenues 

3. Net Effect of All Initiatives

Total Block Hours

Total Available Seat Miles 

Total Revenue Passenger Miles 

Total Revenue Passengers Enplaned 

In completing this section, record the following operating statistics, financial data, and economic

assumptions for the specified time periods. This overall carrier performance will provide a context in

which we will evaluate the reasonableness and feasibility of the initiatives listed in this plan. This

information is similar to that which is provided to the Department of Transportation's Bureau of 

Transportion Statistics on the Form 41.

A. Operating Statistics

B. Financial Data

Employees (avg. FTEs)

Average Stage Length (miles)

Revenue Aircraft Departures 

Revenue Aircraft Miles 

Block Hours per Day

Avg. Number of Departures per Aircraft

Average Number Aircraft in Service

Average Passenger Trip Length (miles)

Revenue Passenger Load Factor (%)

Average Fare, Int’l

Average Fare, Domestic

Total Departures
Appendix I

Airline Cover Letter

Page 59 GAO-04-836 Airlines Financial Condition

CY 2002 Actual

1st Quarter CY

 2003 Actual

2nd - 4th Quarter CY

2003 Estimated CY 2004 Estimated 

CY 2002 Actual

1st Quarter CY

 2003 Actual

2nd - 4th Quarter CY

2003 Estimated CY 2004 Estimated 

Other

Expenses

Depreciation and Amortization

Aircraft rentals and landing fees

Fuel Expense

Wages and Expenses

Security 

Food Service

Commissions

Maintenance

C. Economic Assumptions

B. Financial Data

Other income and expenses (net)

Net Income (Loss) Before Taxes

Other

Other Interest

Long term debt and capital leases

Total Operating Expenses

Other

Common Stockholders Equity

Outstanding Debt

Net Income (Loss) 

Income Taxes

Avg. Fuel Price ($/gallon)

Average Federal Funds Rate

CPI (% change)

GDP (% change)

NonOperating Income and Expenses
Appendix I

Airline Cover Letter

Page 60 GAO-04-836 Airlines Financial Condition

4.

5.

6.

7.

Phil McIntyre

Room 5V21

U.S. General Accounting Office

441 G Street, NW

Washington, DC 20548

We are expecting that we will be provided sufficient information to evaluate the reasonableness or 

feasibility of the initiative and underlying assumptions. During our review, we may follow-up with the

contact person listed on page 1 to ask for additional supporting information or clarification of the

information provided. If you have any questions or concerns, please call Phil McIntyre (202) 512-4373

or Steve Martin (202) 512-3389.

List the amount of airline relief payments you received on May 15, 2003 from the Transportation Security

Administration under the Emergency Wartime Supplemental Appropriations Act, 2003, (P.L. 108-11).

If you distributed any portion of these funds to another carrier or entity, provide a listing of such payments. 

Describe how the funds received from TSA were or are expected to be used.

Discuss here any other relevant information that you wish to highlight regarding financial improvement 

initiatives such as uncontrollable events or factors.

Once the plan is completed, submit it and any other supporting analysis or other documentation via

overnight mail, postmarked no later than July 16, 2003 to: 
Page 61 GAO-04-836 Airlines Financial Condition

Appendix II

Airline Enplanements and Government 

Assistance Received Pursuant to P.L. 108-11 ApendxiI

Legacy airlines 2003 Enplanements Percent of total 2003 Assistance Percent of assistance

Alaska Airlines 15,046,919 2.32 $67,058,661 2.93

American Airlines 88,798,446 13.71 360,975,306 15.77

Continental 38,474,938 5.94 173,210,289 7.57

Delta 84,076,432 12.98 390,151,227 17.04

Northwest Airlines 51,865,302 8.01 205,000,407 8.95

United Airlines 66,018,276 10.19 300,231,855 13.11

US Airways 41,250,548 6.37 216,050,915 9.44

 Subtotal 385,530,861 59.52 $1,712,678,660 74.81

Low cost airlines

AirTran 11,651,340 1.80 $38,061,041 1.66

America West 20,031,976 3.09 81,255,380 3.55

ATA 9,386,902 1.45 37,156,308 1.62

Frontier 5,061,757 0.78 15,573,165 0.68

Jet Blue 8,949,744 1.38 22,761,459 0.99

Southwest 74,719,340 11.54 271,374,057 11.85

Spirit 4,105,929 0.63 14,433,937 0.63

 Subtotal 133,906,988 20.67 $480,615,347 20.99

Regional airlines

Air Wisconsin 5,865,638 0.91 $2,261,517 0.10

Allegheny Airlines 1,997,934 0.31 645,050 0.03

American Eaglea 12,474,076 1.93 (Incl. in AA) N/A

Atlantic Coast 8,390,143 1.30 1,520,495 0.07

Atlantic Southeast 9,205,348 1.42 4,327,404 0.19

Chautauqua 4,624,335 0.71 426,665 0.02

Comair 10,935,597 1.69 3,814,004 0.17

Executive Airlinesa 2,739,909 0.42 (Incl. in AA) N/A

Express Jet 11,227,944 1.73 3,034,197 0.13

Horizon 4,934,769 0.76 4,337,459 0.19

Mesaba 5,702,260 0.88 2,373,104 0.10

Mesab 5,241,877 0.81 (Returned aid) N/A

Piedmont 2,343,742 0.36 1,138,230 0.05

Pinnacle 4,544,994 0.70 999,913 0.04
Appendix II

Airline Enplanements and Government 

Assistance Received Pursuant to P.L. 108-11

Page 62 GAO-04-836 Airlines Financial Condition

Source: GAO analysis of DOT data.

a

Aid to American Eagle and Executive Airlines was included with American Airlines. 

b

Mesa was awarded aid, but did not accept the aid.

c

The total number of enplanements in the U.S. airline industry during 2003 was 647,761,545.

d

TSA's July 9, 2003, memorandum cited total aid as $2,289,262,632.

Regional airlines 2003 Enplanements Percent of total 2003 Assistance Percent of assistance

TransStates 2,544,816 0.39 958,172 0.04

 Subtotal 103,493,130 15.98 $32,290,392 1.41

 Grand Totalc 622,930,979 96.17 $2,225,584,399d 97.22

(Continued From Previous Page)
Page 63 GAO-04-836 Airlines Financial Condition

Appendix III

Regional Airline Financial and Operating 

Statistics, 1998 through 2003 ApendxiI

Table 2: Financial Plans Reported to GAO

Source: Airline plans reported to GAO.

Table 3: Regional Airline Financial Data, 1998 through 2003

Source: DOT Form 41.

Table 4: Regional Airline Operating Data, 1998 through 2003

Source: DOT Form 41.

Oct. 1, 2001-Dec. 31, 2002 2003 2004 Total

Estimated costing savings $446,502,222 $629,541,586 $683,673,652 $1,759,717,460 

Estimated revenue enhancements 19,113,222 151,552,715 335,779,305 506,445,242 

1998 1999 2000 2001 2002 2003

Total operating expenses $5,057,869,883 $5,881,841,615 $6,915,601,352 $7,720,000,791 $8,150,793,920 $8,509,585,465 

Total operating revenues 5,783,674,129 6,636,592,689 7,483,755,692 7,332,342,090 8,690,621,788 9,619,103,662 

Operating profitability 725,804,247 754,751,074 568,154,341 (387,658,702) 539,827,869 1,109,518,197 

Net profitability 442,994,024 479,620,812 315,474,270 (254,927,731) 160,989,012 672,896,060 

Cost per available seat mile 0.199 0.189 0.190 0.194 0.166 0.139 

Revenue per available seat mile 0.227 0.213 0.205 0.184 0.177 0.157 

1998 1999 2000 2001 2002 2003

Available seat miles 25,443,959,344 31,093,704,791 36,466,550,000 39,862,849,000 49,113,092,768 61,220,086,000

Revenue passenger miles 14,907,428,829 18,450,932,577 21,972,811,000 23,521,349,000 31,438,127,438 40,733,293,000

Revenue departures 2,886,675 3,052,628 3,097,984 3,026,924 3,225,374 3,481,985
Page 64 GAO-04-836 Airlines Financial Condition

Appendix IV

Scope and Methodology ApendxiIV

To identify challenges facing U.S. airlines since 1998, we relied on a variety 

of sources. We conducted interviews with airline officials from legacy 

airlines, low cost airlines, regional airlines, and representatives from airline 

trade associations. We also interviewed government experts from the 

Department of Transportation (DOT) and its agencies—the Federal 

Aviation Administration (FAA) and the Bureau of Transportation 

Statistics—and the Department of Homeland Security’s Transportation 

Security Administration (TSA). Using DOT Form 41 and SC-298 financial 

and traffic data, FAA aviation forecasts, and business fare data from Harrell 

Associates, we examined the effects of various events and time frames on 

airline traffic and finances. In addition, we interviewed credit and equity 

analysts, academic experts, and private consultants to gather their opinions 

and relevant studies. 

To assess the measures taken by airlines to remain financially viable, we 

relied on a variety of sources. First, we used submissions provided by 64 

U.S. commercial airlines that received assistance under the Emergency 

Wartime Supplemental Appropriations Act of 2003. The Act and its 

accompanying conference report tasked airlines with providing us with a 

plan demonstrating how they would reduce their operating expenses by 10 

percent. Working with airlines and airline trade associations, we devised a 

data collection template for airlines to submit their financial plans (see 

app. I). Because of the proprietary nature of these plans, and for the 

purposes of this report, we aggregated the financial information contained 

in these plans into one of three airline categories—legacy airlines, low cost 

airlines, and regional airlines. We then compared the plans with actual 

financial results as reported to the DOT on Form 41 filing for the same 

period to determine to what extent these plans were realized. We also 

interviewed airline trade associations and representatives of five legacy, 

two low cost, and two regional airlines to discuss their plans. Finally, we 

met with airline equity and credit analysts to discuss airline measures. 

To review the financial condition of the U.S. airline industry, we conducted 

interviews with airlines and their trade associations, credit and equity 

analysts, government experts, and academics. We also reviewed DOT Form 

41 and SC-298 financial and traffic data submitted by the carriers in our 

study. We obtained these data from BACK Aviation Solutions, a private 

contractor that provides DOT Form 41 data to interested parties. To 

determine airline stage-length adjusted cost curves, we contracted with 

Roberts Roach Associates, a consulting group that specializes in airline 

economics. We also reviewed airline cash flow data that DOT supplied 

directly to us in order to determine how airlines’ cash balances have 
Appendix IV

Scope and Methodology

Page 65 GAO-04-836 Airlines Financial Condition

fluctuated in recent years and what airlines’ main sources of cash have 

been in recent years. Finally, we used airlines’ publicly reported Securities 

and Exchange Commission filings to determine airlines future financial 

obligations. To assess the reliability of these data, we reviewed the quality 

control procedures that BACK Aviation Solutions, DOT, and Roberts Roach 

Associates apply and subsequently determined that the data were 

sufficiently reliable for our purposes. 

To determine how the competitiveness of the U.S. airline industry has 

changed since 1998, we obtained and stratified DOT quarterly data on the 

top 5,000

1

 city-pair markets for calendar years 1998 through 2003 and then 

determined shifts in competitive factors overall and for markets with and 

without low cost airlines as well as for legacy and low cost airlines. These 

data are collected by DOT based on a 10-percent sampling of tickets and 

identify the origin and destination airport, which we converted to city-pair 

markets for cities with multiple airports.2

 Since only the issuing carrier is 

identified, regional airline traffic is counted under the legacy parent or 

partner airline. To assess the reliability of these data, we reviewed the 

quality control procedures DOT applies and subsequently determined that 

the data were sufficiently reliable for our purposes. According to DOT, 

these markets accounted for about 92 percent of all passengers and about 

11 percent of domestic city-pairs in 2003. The smallest markets in this 

group ticketed 4,840 passengers while the largest ticketed 5.1 million 

passengers in 2003. To analyze changes in competition based on the size of 

the passenger markets, we divided the markets into four groupings based 

on 1998 passenger traffic: less than 85,000 passengers; 85,000 to 289,999 

passengers; 290,000 to 839,999 passengers; and 840,000 and more 

passengers. Each group comprised one-quarter of the total passenger 

traffic in 1998. To stratify these markets by the number of carriers 

operating, we used the following categories: 1, 2, 3, 4, and 5 or more 

carriers. To stratify the data by market distance, we obtained the great

1

Because there were often several markets with the same number of passengers at the low 

end of the passenger scale, it was not always possible to have exactly 5,000 markets in our 

database for each year. For example, in 1998,we included 5,002 markets whereas in 2003 we 

included exactly 5,000 markets.

2

Multiple airport cities are Chicago, Dallas, Houston, Los Angeles, New York, San Francisco, 

and Washington, D.C. We have in the past analyzed the Washington, D.C., market both as 

airport pairs and as one market because we had found that the airports represented distinct 

markets for time-sensitive business travelers.
Appendix IV

Scope and Methodology

Page 66 GAO-04-836 Airlines Financial Condition

circle distance3 for each market using the BACK Aviation Solutions 

database and then grouped the markets into five distance categories: up to 

250 miles; 251-500 miles; 501-750 miles; 751-1,000 miles; and 1,001 miles and 

over. To assess changes in competition in these markets, we analyzed 

changes in passenger traffic by market type and airline type, changes in the 

number of markets according the various stratifications we developed, 

determined the number of dominated markets,4

 and calculated the average 

number of effective competitors5 in each market for each year as well as 

the average annual number of effective competitors per market grouping.

We had access to sufficient information to make informed judgments on 

the matters covered by this report. We performed our work between 

December 2003 and August 2004 in accordance with generally accepted 

government auditing standards.

3

The great circle distance is the shortest distance between points along the surface of the 

earth.

4

Consistent with definitions that others (e.g., the Transportation Research Board) have 

applied in the past, we defined a market as dominated if a single airline carried more than 

half of total passengers.

5

Effective competitors are the number of equal-sized competitors that would provide a degree of 

competition equivalent to that actually observed in the market-share data. We computed the number 

of effective competitors in each market by summing the squares of the markets shares of all airlines 

serving in the market (the Herfindahl-Hirschman Index) and then inverting this number.
Page 67 GAO-04-836 Airlines Financial Condition

Appendix V

GAO Contacts and Staff Acknowledgments ApendxiV

GAO Contacts JayEtta Z. Hecker (202) 512-2834

Steven C. Martin (202) 512-2834

Acknowledgments In addition to those named above, Paul Aussendorf, Tom Gilbert, David 

Hooper, Ron La Due Lake, Grant Mallie, Richard Swayze, and Pamela Vines 

made key contributions to this report.

(544073)
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