Fasten Your Seat Belts

By David Tinnin

Bitter aerial dogfights lead to a big airline shake-out

The nation's airlines are engaged in their greatest aerial combat ever. It is also their most costly. With cut-rate fares and fierce overcompetition taking the place of missiles and machine guns, the airlines are battling for survival in an ever tougher market. They have become so intent on shooting down one another "that they seem to have forgotten how to make money. Normally late spring and summer are the peak periods for airline profits. Not so this year. Last week as many of the nation's major airlines released their financial results for the second quarter, the figures were appalling.

United, the nation's largest airline, suffered a second-quarter operating loss of $46.7 million, raising its half-year deficit to $113.7 million. In the second quarter, American took a $45.3 million beating, bringing its loss for the first half to $120.3 million. TWA made a small $8.4 million second-quarter profit, but that was swallowed up by a big first-quarter deficit; the balance: $52.2 million in losses for the first half of the year. Eastern, which had made a profit in the first quarter, flew $12.8 million into the red during the second quarter and ended up with small first-half earnings of $4.5 million. Among the U.S.'s major airlines, only Delta, which earned $73.9 million in the past six months, is making substantial profits. Some of the regional airlines are also excelling; USAir, formerly known as Allegheny, rang up earnings of $35.9 million during the first half.

As the litany of losses continues, the outlook is becoming increasingly grim. The big carriers this year are likely to have losses of $500 million or more, vs. a $1.2 billion profit just two years ago. This would be only the second time since 1938 that the industry has lost money.

Even under the best of circumstances, 1980 was certain to be difficult. The recession has hurt both business and vacation travel, reducing the amount of passenger traffic by about 4% in June. Worse yet, fuel costs have skyrocketed, from 40-c- per gal. in early 1979 to 87-c- at present. The result: 30% of operating costs go simply to pay the fuel bill, vs. only 20% 18 months ago.

Nonetheless, the deregulation of the airline industry is the main cause of the present dogfight. Before President Jimmy Carter signed the Airline Deregulation Act in late 1978, companies were awarded specific routes by the Civil Aeronautics Board and then required to fly them as a public service. Fares were closely controlled. Now airlines are relatively free to fly where they choose and set fares with a minimum of Government interference.

As even many of deregulation's original proponents conceded, suddenly throwing a tightly regulated business into a situation of free, and often reckless, competition was bound to cause some chaos. Several of the major airlines reacted to the new market freedom by overextending themselves. Braniff, for example, added 18 new U.S. cities and eight foreign countries to its network. In the process, the airline ran up $789 million in debts and is losing money rapidly.

Pan Am has been hurt by Braniff and other carriers rushing to start overseas routes. Pan Am has taken over National, which will give the international carrier a full schedule of flights within the U.S. But the integration of the two airlines has been delayed for at least another few months, and in the meantime Pan Am is drastically reducing its overseas service to save money.

The strategy of all the major airlines has been to concentrate on money-making routes, while shucking off unprofitable domestic ones that they had been unable to drop during the regulated era. Says Donald Casey, a senior vice president of TWA: "If we can't make money in a market, we get the hell out." Within one year, the majors ceased service at some 100 airports.

But with all the airlines following the same script, price wars have broken out. Eastern sparked the current New York-California fare battle in which a one-way ticket now costs $129, compared with the old coach fare of $317. At the discount price, the airlines lose money unless the jumbo is at least 90% full. Many are not. TWA, American, United and Pan Am matched Eastern's price. Similar air wars have been fought on other popular routes, such as San Francisco-Los Angeles and New York-Miami.

While the major airlines have been flying into air turbulence, many regional lines are faring much better under the new system. Leaner, unburdened by huge corporate overhead and often flying highly fuel-efficient aircraft, the regionals are better prepared to cope with competition. As an added advantage, they generally have simple route structures that operate from one main hub airport, pulling in traffic from outlying "spokes." One prime example is Dallas-based Southwest Airlines, which earned $21.8 million during the first half of the year. Southwest flies the highly economical Boeing 737 and concentrates on markets in which it outschedules and underprices its bigger competitors. Braniff charges $148 for a Houston-Dallas round-trip fare; Southwest charges only half as much, $74. Says Southwest President Howard Putnam: "Everyone says that we ought to be sick like the other airlines, but we feel O.K."

Similarly, Air Florida, which three years ago was an everglade-hopping intrastate company, has selectively branched out on major long-haul flights, where it undersells the majors. Pacific Southwest Airlines, long noted as a low-cost carrier operating between San Francisco and Los Angeles, has taken advantage of deregulation to expand to Las Vegas. On this route, PSA is demonstrating that a well-run regional can undercut the price of auto travel, the historic enemy of the short-haul airline.

Deregulation has also fostered the fast-growing commuter airlines that now provide services to airports abandoned by the majors and not picked up by the regionals. The commuter airlines, such as New Haven Airways and Pennsylvania's Ransome Airlines, generally fly turbo prop or piston-engine aircraft, seating five to 25 people, and shuttle passengers to regional or hub airports.

Many of the commuter lines were previously small air-taxi outfits, and some have frightfully poor safety records. In 1979 the chance of a fatal accident was five times greater aboard a commuter air craft than with a regional or national carrier. Last week the National Transportation Safety Board asked the Federal Aviation Administration to set tighter standards for commuter pilots.

When the debris from the dogfights among the airlines finally settles, the U.S. will doubtless have an airline network that is good business for the remaining companies and a good deal for the flying public. However, the shake-out is likely to last longer and be more perilous than previously envisioned.

With reporting by Charles Alexander, Jerry Hannifin

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