Time - Man of the Year/Time_Man_of_the_Year_Compact_Publishing_3YX-Disc-1_Compact_Publishing_1993.iso/moy/042792/0427200.000

Text File | 1992-09-10 | 10KB | 195 lines

                                                                                BUSINESS, Page 41

Fasten Your Seat Belts for the Fare War


American's new prices offer simpler, often cheaper choices. But
rivals must now join the battle . . . or die.

By JOHN GREENWALD -- Reported by Bernard Baumohl/New York,
Deborah Fowler/Houston and William McWhirter/Chicago


    As American Airlines launched its new streamlined U.S.
fare system last week, the traveling public responded with a
round of applause and a ring of the reservation phone line. The
reforms jettisoned a maddening maze of rates and restrictions
and replaced them with just four new fares that provided savings
of up to 50% for first-class and nearly 40% for business flyers.
Competitors jetted to join the cut-and-simplify frenzy, with
United's top executives holding late-night sessions to get their
own new fares into ads right on American's heels. "This is good
for the traveler and good for the company," says Edmund
Greenslet, publisher of the Airline Monitor trade journal. "This
new structure was long overdue."

    There's no doubt that almost everyone stands to gain as
the new fares generate more traffic. Last week American,
United, Northwest and Delta said they received twice as many
fare inquiries as usual. "The response was unprecedented," said
an American spokesman. "We read it to mean we had struck a chord
with customers who had been complaining about the complexity of
the system."

    But there is a darker side to the fare war: many experts
see it as a thinly veiled declaration of war against low-cost
rivals like TWA and Continental, which currently fly under the
protective wing of the bankruptcy courts and thus pay no
interest on part of their debt. Life will get rougher for them
once they emerge from Chapter 11 protection and are forced to
survive on their own resources -- something many analysts fear
these weaker carriers may be unable to do for long. Once rid of
such pesky competitors and their cutthroat tactics, the major
airlines could regain full control of airfares -- and might then
be free to raise them. "This is the nightmare that the marginal
carriers didn't want to see happen," says John Riener, president
of commercial operations for Carlson Travel Network, the largest
U.S. travel company. "There's the scent of a final kill in the
air."

    American insists that it merely wants to bring order to a
chaotic fare system that discouraged air travel and encouraged
ruinous price wars. Under its old system, American and other
carriers offered as many as 200 types of fares and discount
plans for any given route, a system that most travelers found
confusing and unfair. "Everybody will benefit from this new
plan," says Robert Crandall, the company's aggressive chairman,
who pioneered innovations like frequent-flyer programs and
supersaver fares.

    If the new fare structure holds up, it could finally halt
the proliferation of discounts in a price-cut-happy industry.
"The driving reason for the change is American's desire to get
more control over its pricing system than it had when there was
a hodgepodge of fares out there," Greenslet says. "American's
objective is not to drive TWA out of existence," he asserts.
"They can live with TWA operating with a different fare
structure, as long as it doesn't declare war."

    But Crandall acknowledges that the new fares will draw
some traffic away from American's low-cost competitors. "As we
close the price gap," he said in an interview with TIME, "we
expect to see business come from the discounters." At the same
time, Crandall warned that he stood ready to lower fares across
the board if that proved necessary to match cuts by American's
rivals. "We are going to be price competitive. If we have to
lower this overall structure, we will do so."


    American said it was prepared to take losses for months
until the new rate schedule generated enough traffic to make up
for the reduction in business fares. "This will hurt earnings
in the short run," says Richard Foote, an airline analyst for
Argus Research. "But I expect to see a positive impact in the
second half of the year." On the brighter side, American expects
to save $25 million a year in administrative costs by reducing
the number of its fares from a dizzying 500,000 to a relatively
stable 70,000.

    Whatever its motives, Fort Worth-based American could
profit handsomely from an industry shake-out. Staggered by the
recession, constant fare fights and a global epidemic of
aerophobia growing out of last year's Persian Gulf conflict,
U.S. airlines have lost more than $6 billion since 1990.
American has been no exception: its parent company, AMR, has
lost a combined $279 million in the past two years. All that has
led Crandall to predict that the number of major carriers will
continue to shrink. Says he: "I think there is probably some
consolidation left to happen."

    Predictably, Crandall's revolutionary fare changes
triggered a dogfight last week with Carl Icahn, the corporate
raider turned executive who heads TWA. Icahn challenged the new
fares by slashing TWA's rates as much as 40% below American's
prices. Icahn also vowed to keep volume discounts for corporate
travelers, which American's plan eliminated. "We are here to
stay," he told TIME. "I'm not a passive guy. It's hard to drive
a low-cost competitor out of business. And, as far as I'm
concerned, it won't work."

    Icahn brings some surprising strengths to this skirmish.
Bankruptcy-court protection keeps his airline's costs down and
permits it to offer some of the industry's lowest prices. TWA
has suspended payments on $1 billion of debt and is
renegotiating lease payments on some aircraft as it works out
a plan to satisfy creditors. While Icahn says he expects to fly
TWA out of court late this summer, some analysts argue that he
may try to stay in Chapter 11 proceedings while doing battle
with American.

    Business travelers are the clear winners under the
simplified fare plans. They will get as much as 50% off the
previous first-class fares and 38% off unrestricted coach rates
on American's flights and realize similar savings on other
carriers. "The business traveler was getting ripped off," says
the Airline Monitor's Greenslet. "It's just not fair when the
price of a full-fare ticket is three times that of a
deep-discount ticket." The new fares will be no more than 49%
higher than American's discount rates. That should be
particularly helpful to self-employed travelers and to small
businessmen who didn't qualify for volume discounts under the
previous rate structure.

    Leisure travelers, by contrast, stand to reap fewer
overall savings. While rates will drop on most of American's
flights, they will rise a bit on certain lightly traveled
routes. Passengers between New York City and Wichita, for
example, will pay a 3% higher fare. (American and other carriers
are also clinging through April to special discounts that are
even lower than many of the new reduced rates.) Senior citizens,
meanwhile, will pay 20% more starting May 9 for their discount
travel on domestic flights.

    But many vacationers should enjoy at least some advantages
under the streamlined programs. Besides being simpler, the new
fares drop the irksome use-it-or-lose-it requirement that kept
advance-purchase travelers who failed to make their flights from
getting refunds or new tickets. While American's discount fares
will still be nonrefundable, consumers will be able to exchange
them after paying a $25 service charge.

    Other major airlines offered variations on American's
plan. Delta and United adopted the basic four-fare system but
said they would continue to study volume discounts for
corporate and military travel. Although his airline matched
American's moves, Northwest chief executive John Dasburg
questioned the plan. "At first blush, this actually looks like
it might end up reducing rather than raising revenues per seat
mile," Dasburg said. "Price simplification has been a little
like tax simplification -- it doesn't seem to work."

    Executives of some smaller carriers that generally stuck
to their schedules called the new fares dangerous to their
health. "This intensifies the battle within the industry between
big and small, rich and poor," says Marilyn Hoppe, vice
president of revenue management for America West, a
Phoenix-based carrier that is in bankruptcy court. "American,
United and Delta are not going to take market share from each
other," Hoppe declares. "They are going to try to take it from
the smaller carriers whose only weapons are lower prices. Bob
Crandall would dearly love to get rid of little guys like us."

    The air was filled with such suspicions last week. "I'd
book and buy my tickets sooner rather than later," quips
Carlson Travel's Riener. "If the country ends up with just three
carriers, where do you think prices will head -- up or down?"
Maybe that's an unduly jaundiced view of fare changes that many
travelers have happily welcomed. But it squares with the
historical winner-take-all nature of the U.S. airline industry,
which has dwindled to a handful of major carriers in the 14
years since the country embarked on deregulation in the hope of
increasing competition in the skies.