TIME: Almanac 1995

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<text id=89TT1271> <title> May 15, 1989: The Sky Kings Rule The Routes </title> <history> TIME--The Weekly Newsmagazine--1989 May 15, 1989 Waiting For Washington </history> <article> <source>Time Magazine</source> <hdr> BUSINESS, Page 52 Special Report: Airline Giants The Sky Kings Rule the Routes </hdr><body> 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. </body></article> </text>