TIME: Almanac 1993/TIME Almanac 1993.iso/time/051589/05158900.022

Text File | 1992-09-25 | 9.9 KB | 195 lines

                                                                                BUSINESS, Page 52

Special Report: Airline Giants

The Sky Kings Rule the Routes


A decade of dogfights and mergers has eliminated hundreds of
carriers and triggered fears that the surviving behemoths will
send prices rocketing

By Janice Castro


    As the summer travel season gets under way, many Americans
are suddenly feeling nostalgic for the airfares they paid just
a vacation or two ago. Since January, ticket prices have risen
an average of more than 15%, inducing a form of sticker shock
in consumers who have grown accustomed to deep discounts in the
decade since airline deregulation. But the kind of cutthroat
competition that produced those fares is fading fast. After a
severe shake-out in which some 214 airlines disappeared or
merged into hardier carriers, the industry is concentrated in
fewer hands than ever before. Gone from the runways are such
established carriers as National, Western, Pacific Southwest,
Frontier, Ozark and Republic. Vanished too is a fleet of
energetic upstarts, including People Express, Muse Air, New York
Air, Pride Air, Jet America and Empire.

    Before deregulation, the five largest U.S. carriers
controlled 63% of the passenger business. While many supporters
of the 1978 legislation hoped it would reduce the concentration
of market share among the top carriers, the opposite has
happened. Today the five largest airlines -- American, United,
Delta, Northwest and Continental -- control 70% of the industry
traffic.

    Some carriers also have virtually monopolistic shares of
the business in their "hub" airports and control so-called
feeder airlines that funnel passengers into their route systems
from outlying areas. Says Missouri's John Danforth, ranking
Republican on the Senate Commerce, Science and Transportation
Committee: "Deregulation initially worked as it was intended to
work. But increasingly competition has faded away. As of this
point in time, deregulation has failed."

    Yet the rapid consolidation in the airline industry has
created consumer benefits as well as disadvantages. The easing
of the fare wars has enabled major airlines to make a profit,
which in turn has fostered better service. The Department of
Transportation's latest monthly report on airline performance
indicates that fewer consumers are writing to the Government to
gripe about problems like lost or damaged baggage. Only 933
complaints were registered last month, down from 2,100 a year
earlier.

    The major airlines contend, for their part, that the
business is more competitive than ever, but not purely in terms
of price. Says James Guyette, United's executive vice president
for operations: "Basically, it's a service battle. Customer
expectations are high." Moreover, despite the current run-up in
rates, airfares during 1988 were still below the level of 1981.

    Even so, consumer advocates fear that with the scarcity of
competing carriers at many airports, surviving airlines will
not hesitate to roll prices back up. At Danforth's urging, the
General Accounting Office is currently comparing changes in
airfares over the past five years at 53 airports to determine
whether carriers that dominate traffic at certain hubs are
jacking up their prices to exorbitant levels.

    In California outraged consumers revolted in recent months
as fares on the 330-mile air corridor between San Francisco and
Los Angeles reached $148 one way (or 45 cents a mile, as
compared with 24 cents a mile on the New York-San Francisco
route). In response, American, United and USAir last week
temporarily rolled back fares on the route to $99.

    USAir came under additional fire last week in Pennsylvania.
State Attorney General Ernie Preate challenged the airline's
proposed $85 million purchase of eight Eastern Air Lines gates
in Philadelphia, which would give USAir control of 23 of the
airport's 49 gates. The carrier controls 36 of the 51 gates at
Greater Pittsburgh International Airport. Preate contended that
USAir's dominance of air traffic in the state would lead to fare
increases.

    Even if some critics of deregulation think the airlines
have too much freedom, almost no one wants to bring back the
heavy controls of a decade ago. Before deregulation, the U.S.
airline industry was locked in a form of stasis, its fares and
routes controlled by the Civil Aeronautics Board. In 1975, World
Airways, the largest U.S. charter operator, pressed CAB for
permission to offer a bargain-basement $89 coast-to-coast fare
(about $30 cheaper than the lowest available rate), and National
began advertising its "Frill Is Gone" fare of $61 between New
York City and Miami. In the face of those moves, Congress began
seriously considering deregulating all fares. Some industry
leaders, who feared that carriers would collapse in such a
chaotic marketplace, were aghast.

    During the first six years of freewheeling competition,
U.S. carriers endured the worst losses in their history.
Battling to hang on to their market share at a time when
passengers were intoxicated with supercheap fares, the airlines
hemorrhaged billions of dollars. American and United suffered
fewer losses than the others, since their East-West routes
largely attracted business travelers who tended to pay full
rates. But such companies as Eastern and Pan Am, which carried
a higher percentage of bargain-hunting vacationers heading for
Florida and overseas, suffered the heaviest losses.

    In the South, Delta and Piedmont pioneered the so-called
hub-and-spoke systems, a method of feeding travelers from small
cities into a central hub, where they could catch connections
on the same airline to other points. By establishing such route
structures, airlines were able to build central "fortress"
airports, where they can save costs on maintenance, baggage
handling and other ground services. Besides creating their own
hubs, the major airlines began merging with carriers in other
regions to pick up as many additional fortress cities as
possible. Atlanta-based Delta swallowed Western, which gave it
hubs in Salt Lake City and Los Angeles. Northwest bought
Republic, which consolidated its dominance in Memphis,
Minneapolis and Milwaukee.

    As airline travel nearly doubled, from 240 million trips in
1977 to a record 447 million trips in 1987, no major new
airports opened. The focus of competition shifted from cut-rate
fares to the control of airport departure gates and
takeoff-and-landing slots. Many airlines that were unable to
secure enough such facilities simply went out of business.

    Because of the booming demand, some major airlines can grow
as fast as they can add flights. American surpassed United as
the largest U.S. airline last year, in part because it was able
to add new planes to its fleet at a steadier clip. One reason
for United's failure to keep pace was a misguided plan in the
mid-1980s to become a full-service travel company by buying the
Hertz rental-car firm and Hilton International. After shedding
those companies, United posted record earnings of $377 million.

    The industry as a whole reaped record profits of $2.9
billion during 1988, a mark that most experts predict will be
exceeded this year. The majority of the healthy airlines have
put a renewed focus on improving service and employee morale.
Says Alan Muncaster, a Northwest vice president: "We've been
through a cultural change. There's a new philosophy stressing
candor and cooperation."

    The ranks of airlines are likely to be diminished even more
with two venerable carriers, Eastern and Pan Am, on the verge
of being swallowed up or dismantled. Eastern was losing more
than $4 million a day when it entered Chapter 11 bankruptcy last
March after a strike by its machinists virtually shut it down.
The bankruptcy court has set a deadline for Eastern bids this
week. And Pan Am seems to be running on fumes. Last week the
once proud carrier said it lost $151 million during the first
quarter, following a $73 million annual loss for 1988.

    Given the abysmal track record of start-up airlines over
the past ten years, investors are reluctant to enter the
airline business except as buyers of existing carriers. Says
wheeler-dealer Donald Trump: "There is still room for
entrepreneurs in the industry." Trump's nearly final $365
million agreement to buy Eastern's shuttle operations was put
in jeopardy again last week when Phoenix-based America West
Airlines offered to pay some $25 million more for the shuttle,
plus $335 million for ten additional Eastern aircraft.
Northwest, meanwhile, is trying to fight off a takeover by
Denver oilman Marvin Davis, who has bid $2.6 billion for the
airline.

    Can the U.S. make sure that its robust carriers do not get
too strong for the consumer's good? Transportation Secretary
Samuel Skinner, who generally believes deregulation has had good
results, has nonetheless expressed concern about the growing
concentration of power. "I am very sympathetic to people
traveling out of certain markets who feel that they don't have
options," he told TIME.

    One solution, Skinner believes, is to build new airports
and expand existing ones so that they have room for more
carriers. Next week voters in Denver will decide whether to fund
the initial $2.3 billion for a new airport. It is the only major
airport on U.S. drawing boards at the moment and, if approved,
would be the country's first new one since Dallas-Fort Worth was
completed in 1974.

    Some critics of the airlines have accused them of opposing
new airport construction because the additional gates would
bring new competition. "Obviously, we've got fewer players in
the airline industry. That's what makes everybody concerned
about the future," says Skinner. "I don't want to go back to the
time when only the rich could travel by air." If airline prices
keep heading north, however, growing numbers of the nonrich may
find themselves grounded.