Shake-Out in the Skies

By John S. DeMott

The nation's airlines adjust to a brave new business world aloft

Normally, the start of the summer travel season means just one thing to the U.S.'s $33 billion airline industry. As vacationers pack up and jet away by the millions, bookings rise, revenues soar and profits scoot skyward. This season the travelers will be there once again. But the nation's leading air carriers are awaiting the throngs of eager customers with attitudes ranging from uncertainty to downright trepidation. At every turn, the once proud commercial aviation business is being buffeted by economic change, and the shake-out is altering the whole structure of U.S. air travel.

No longer the invincible titans of air transport, major trunk carriers like Pan American, United, Braniff and TWA are now fighting off brutal competition from hosts of new airlines, some with only a few planes and a quick-thinking team of marketing men. Their business strategy: a sort of fast-food style of jam-'em-in, fly-'em-off air service. The upstarts have been spawned in large part by the airline deregulation drive that began during Gerald Ford's presidency and is likely to be accelerated by the Reagan Administration.

Deregulation has generated opportunities aplenty for all air carriers. Rather than having to go through often lengthy administrative procedures to change the price of a ticket, drop an unprofitable route or add a new one, the airlines can more and more do as they please. But freedom from regulation has led to scheduling chaos, a rise in the number of new carriers, and ferocious price wars, particularly on choice routes like New York to Miami and East Coast to West. The cutthroat competition is forcing many big carriers to ferry about planeloads of overjoyed passengers at bargain rates that sometimes do not even cover operating costs.

More immediately, air carriers, large and small alike, last weekend were confronting a problem that suddenly loomed for all of them: the threat of an illegal strike by air traffic controllers. Long a militant lot, the controllers were demanding, according to the Government, median pay raises of $10,000, plus cost of living adjustments that would bring their top annual base salary to $73,420. The union threatened a coast-to-coast shutdown if the Reagan Administration continued to resist. A full walkout would ground about three-fourths of U.S. commercial flights. But a partial strike would probably be manageable, at least for a while.

In fact, the prospect of a strike has merely compounded the uncertainties of an industry that is already in upheaval. Between now and the end of the year, vacationers and business passengers will be lining up at ticket counters of new or almost new airlines that many travelers have probably never heard of: Midway, Muse, Sun and People Express.

There will be hardly any pattern to the fares the travelers will pay: some charges will seem strangely high, others absurdly low. In New Haven, Conn., last week, bargain hunters snapped up promotional 75-c- tickets--a penny a mile--for New Air's inaugural flight to New York City's LaGuardia Airport. The fare will increase in stages to $32 by July 5.

In contrast to the cheeky upstarts are the befuddled giant U.S. trunk lines. In 1980, the air pockets of recession, rising fuel costs and always heavy union wage obligations produced operating losses that hit most of the big carriers: Pan Amerlcan hemorrhaged $129.6 million, American $112.7 million, Braniff $120.7 million, United $67.9 million, and TWA $35.6 million.

The majors are hoping for a turnaround in 1981. To cut costs, United is flying its planes higher and slower, thus saving on fuel. To reduce consumption even more, aircraft seats have been made lighter, and so have the screens for in-flight movies.

Some big lines are showing improvement. American's first quarter was its best in 14 years, as the airline scrapped unprofitable routes and laid off employees. Net income for Delta, which already flies many profitable routes and does consistently better than its competitors, gained 28% over its 1980 levels, but its operating profit dropped off. On balance, the major lines lost $72.6 million on domestic operations during the quarter, raising doubts about industry projections of $600 million to $700 million in overall 1981 earnings. Airline stocks have shown some buoyancy lately, though, mainly because of easing oil prices.

The big gainers from deregulation have turned out to be the 200 or so small and somewhat larger regional carriers. Passenger travel for trunk carriers last month was a mere 1.2% above that in May 1980 and, for six of the group's largest, has slumped sharply since the beginning of the year. By contrast, May over May revenue miles for the smaller carriers jumped a startling 28.1%. As operations have expanded and traffic has soared, profits have exploded. For half a dozen of the top smaller carriers, earnings during the first three months of the year have nearly quadrupled, to $30.2 million, as compared with the same period of 1980.

More and more seasoned airline executives are moving into the wide-open field by going out and starting their own airlines. Last week Dan Colussy, who resigned as president of troubled Pan Am seven months ago, took the first steps toward launching his own Columbia Air, which will fly DC-9 twin-jets out of Baltimore-Washington Airport and serve the mid-Atlantic region.

Deregulation has allowed already established lines that were once confined to intrastate and point-to-point commuter runs to spread out across entire regions. With generally small, fuel-efficient planes and in some cases nonunion flight and ground crews, the new high-flyers have been able to swoop into short-haul markets where the majors cannot profitably operate their bigger planes.

On the other hand, trunk carriers, with their jumbo jets and service and support systems in distant cities, are still ideally suited to long-haul routes. Says an industry expert, Robert Joedicke of the Wall Street investment banking firm Lehman Bros. Kuhn Loeb: "Each airline has to determine its own strengths. You cannot be all things to all people."

At the same time that smaller carriers are expanding their point-to-point runs, many regional lines have begun augmenting their so-called hub-and-spoke operations, self-contained little networks, with longer-haul service. Larger carriers, meanwhile, are developing new hub-and-spoke systems too. Such operations allow the lines to increase revenues by gathering passengers through the spokes, then flying them longer distances.

Southwest Airlines, one of the oldest of the new breed of carrier, was founded in 1971 as a strictly intrastate Texas operator. Now the line serves New Orleans, Tulsa and Albuquerque as well. Air Florida started out as an intrastate carrier, and has gone international. From its base in Miami, the line now serves Washington, New York, London, Amsterdam and Brussels.

Air Florida can offer bargain prices on many flights because it provides almost none of the amenities that are offered by the established trunk carriers. No hot meals are served on domestic runs, and there is no more room per passenger than is absolutely necessary.

On the other hand, when it sees an advantage in doing so, Air Florida will happily offer quite extravagant extras to promote itself on competitive routes. On the line's Miami-to-London run, gourmet foods and vintage wines become part of what the carrier terms its upper-class service. Upon arriving at Gatwick Airport, 25 miles outside London, the plane's disembarking upper-class passengers are whisked free of charge into town in a convoy of chauffeured Rolls-Royces provided by the airline.

While smaller lines have benefited by deregulation, the freedom to compete has simply aggravated the difficulties that more than a few of the majors were having even before deregulation came along. Some of the big carriers simply cannot raise the money they need to stay competitive in an economy of sky-high interest rates and proliferating price wars. "We are just staying economically viable," says an Eastern Air Lines spokesman. "We can't go the barebones, no-frills route because we'd lose passengers to Delta."

Braniff Airways' problems are even worse. After deregulation, the carrier expanded wildly under since ousted Chairman Harding Lawrence, overreached itself and suffered badly when the economy softened. At one point, Braniff was leasing airplanes for its new routes, fueling them with kerosene bought on the superexpensive spot market, and taking off with half-empty planes.

The saddest story of all is Pan American's. Once the undisputed world leader of commercial aviation, Pan Am filled the skies with its elegant Clipper ships and, later, Boeing 747 jets. Yet in April, when Juan T. Trippe, one of the last of U.S. aviation's founding patriarchs, died at 81, the airline he established and built was barely scraping by, subsisting in part on $294.4 million from the sale of its Manhattan office building.

One of Pan Am's biggest problems has been the cash drain brought on by its takeover, in 1979, of National Airlines, after years of futile efforts to secure domestic feeder routes for its largely overseas business. Meanwhile, deregulation had opened wide the whole U.S. domestic market to Pan Am anyway. Subsequent labor problems have slowed the melding of National's work force into Pan Am's employment structure, and executive bickering has further sapped energies and driven up costs.

Though it may sometimes seem so to executives at the major trunk airlines, the nation's biggest and most venerable air carriers are not about to succumb any time soon to the buzzing attacks of competitors. But three years of quickening deregulation have exposed the whole industry to a range and intensity of competitive pressures never before known to most airmen. To remain aloft over the long term, even well-entrenched airlines will have to work harder, think more quickly and move faster than ever. If not, the race for markets, and profits, will continue to be won by lean, trim and eager new adversaries. --By John S. DeMott.

Reported by Gisela Bolte/Washington and Robert Geline/New York

With reporting by Gisela Bolte, Robert Geline

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