TIME: Almanac 1993/TIME Almanac 1993.iso/time/050492/0504510.000

Text File | 1992-09-10 | 8.3 KB | 206 lines

                                                                                INTERVIEW, Page 52

"This Industry Is Always in the Grip of Its Dumbest Competitors"


American Airlines chairman Robert Crandall on waging the fare war

By JANICE CASTRO and Robert Crandall


    Q. American's new fares have ignited a vicious
price-cutting war. Only six months ago, you insisted that
airfares had to rise if the airlines were going to survive. Why
have you reversed course?

    A. Six months ago, I believed that prices had to rise
because we simply could not make enough money to cover our
costs. But I had not realized how slowly business travel had
been growing in relation to overall air travel. Business travel
had gotten too expensive, especially for small companies. During
the past seven or eight years, a nonsensical fare structure had
developed where we were all carrying a lot of passengers who
paid far too little to cover the cost of their trips. We kept
losing money, and we were driving away our best customers.


    Q. The old full fares may have been a lot higher than your
new ones, but face it, they were irrelevant. Nobody paid them.
Almost everyone flew at a discount.

    A. Yes. Those who traveled did that, but remember, many
people stayed home. Most businesspeople have to fly on short
notice, and so they pay the full, unrestricted fares. And when
business travelers couldn't afford it and could not take
advantage of those cheaper, restricted fares, they simply didn't
go. That's not good for business, and it's not good for
American.


    Q. How can you raise revenues by lowering your fares?

    A. We studied this thing closely and realized that we
could fix the problem by rearranging fares. We've simplified
things. We will make the same amount of money on average per
passenger, but we think we will attract more passengers.


    Q. The stakes are high. The airline industry has been
losing a great deal of money. Several airlines are in
bankruptcy, and now you are lowering fares in hope of closing
the gap by building more traffic.

    A. But I think we have been proved right: our phone volume
is much higher since we announced the new system. Our customers
like it. We put a lot of thought into this fare structure. And
it is permanent.


    Q. But TWA and other carriers immediately undercut your
prices, and now a bloody fare war is under way. How can you
maintain your new fare structure in the midst of a price war?

    A. Because I will make it work. But if other carriers
insist on lowering their prices, we will follow them. We will
maintain our simple, four-fare system [first class, coach,
seven-day and 14-day advance purchase], but we will lower the
ceiling if we have to.


    Q. How low will fares go before prices stabilize?

    A. I simply don't know. This industry is always in the
grip of its dumbest competitors. I was surprised when TWA cut
fares. I don't understand TWA's strategy. It doesn't make any
sense, and therefore I don't know what they will do to further
lower fares. All I know is that we have no choice but to match
whatever low fare anybody puts out there. And so it will get as
bad as they want it to get.


    Q. Carl Icahn of TWA says you are trying to drive him out
of business.

    A. That's not true. How can I drive him out of business?
He's already bankrupt! If anyone is trying to drive TWA out of
business, it is Carl Icahn. Look, we will take a bigger hit on
our revenues from the new fares than the weaker carriers will.
American, United and Delta carry more full-fare passengers than
TWA does, and it is the full fares that we cut by 38%.


    Q. Icahn insists that he can compete only by operating as
a discount carrier.

    A. He's wrong. TWA's financial results would have improved
if he had simply matched our fares. People choose how to travel
based on price and frequency. Now our business is the closest
thing we have in this country to a perfect marketplace. The
prices are always equal because there's nowhere to hide. You
make one telephone call to your travel agent, and all of our
prices come up on the computer. Anybody who offers a higher
price for the same thing loses your business, so we all keep
matching the competition. And when the prices are the same,
people pick an airline according to the quality of its service.
It is foolish to call yourself a discounter and throw away good
service. Because the way this business works, the guy who
offers superior service at the same price always comes out
ahead.


    Q. But Icahn cannot compete with you on equal footing. He
is in Chapter 11. He doesn't have your level of service, your
new planes or the money to buy them.

    A. Whose fault is that? You can't invest capital in things
like new planes if you don't earn money. It isn't my
responsibility to worry about the financial inadequacy of my
competitors. I have to worry about American Airlines and what's
good for our customers. TWA is bankrupt as a consequence of
their past actions. They chose to pull out of their Chicago hub,
which was a bad decision. They chose to sell off routes. They
chose not to invest in new planes. They chose to allow the
quality of their service to deteriorate. I didn't. TWA is dead
last in quality of service among the major carriers. And it is
those things that have created their current financial
situation. American made different choices, and is stronger as
a result.


    Q. Are you saying there is only room for one kind of
pricing -- your pricing -- in the airline business?

    A. No. Take Southwest. Their fares are extremely low. They
have been the most successful airline in the industry for the
past 20 years. But they are offering an entirely different
product. There is no reserved seating. They have no galleys on
their airplanes. They cannot transfer your bags to another
airline.


    Q. What about other no-frills airlines?

    A. The term no-frills is wrong. I mean, what is a frill?
The ability to buy a ticket to Berlin is not a frill. Getting
food on a transcontinental flight is not a frill. Getting your
bags transferred to your connecting flight is not a frill. Our
customers want these things. And when we slip up on any of these
things, we hear about it.


    Q. Given the tough economics of this industry, how many
major carriers can survive?

    A. I think there is room for more than three, fewer than
six. There are seven now. American, United, Delta, TWA,
Continental, USAir and Northwest.


    Q. So you believe that two or three more major airlines
will drop out?

    A. I don't think they're going to drop out. Somehow or
another they're going to be combined with a national route
system.


    Q. You insist that your new fares are good for everyone.

    A. They are. We got letter after letter from folks telling
us that they worked hard to get a decent fare, and then they
got on the airplane and the person next to them had bought a
ticket yesterday for half the price. They said the discount
rates weren't fair, they weren't flexible. They said the prices
were too complicated. We read our letters. We talked to our
customers. And we designed a system that is better for everyone.


    Q. For everyone? You can hardly expect many vacationers to
think it is better. Many fares no longer exist, the deeply
discounted fares that made it possible for a lot of people to
take vacations they won't be able to afford now.

    A. You mean those fares for green-haired people who only
fly on Tuesdays? We are not going to offer those crazy fares.
If others do, we will either ignore them or we will move our
structure down to match the level. But we are going to stick to
our four fares.


    Q. How do you answer the critics who say that American is
improperly attempting to impose prices on the entire industry,
that you and United and Delta have become too powerful?

    A. It's a pretty sorry commentary on power when a company
loses $40 million in 1990, when it loses $240 million in 1991,
when it is compelled to cancel $8 billion worth of capital
commitments such as new-airplane purchases, and when it formally
gives up its long-term growth plan because of its inability to
earn a return on its shareholders' investment. That's really not
very much power, is it?