The Economic Perils of Chaos Aloft

By Christopher Byron

Disruptions in air service would bring problems aplenty for business

When 13,000 of the 17,500 American air-traffic controllers walked off their jobs last week, they put at risk far more than their own paychecks and jobs. The strike was also a karate chop at not just a key component of the American transportation system, the largest, costliest and most complex network on earth, but also, and ultimately, a blow aimed at the entire U.S. economy.

Moving both people and cargo regularly and reliably is one of the basic building blocks of any modern industrial economy, and increasingly that transport is done by air. Every day 800,000 passengers, 60% of them business travelers, settle down, buckle up and take off aboard 14,000 scheduled commercial flights, both domestic and international. In addition, 10,000 tons of air cargo containing everything from computer parts to goldfish are carried to destinations near and far. The immediate result is more than $30 billion per year in revenues to the airlines, and jobs for 340,000 employees, ranging from ticket clerks to mechanics to pilots and cabin attendants.

In addition, the ripple effects of the industry reach into just about every city, village and household in America. Airlines in the U.S. account, one way or another, for at least 3% or so of the entire American gross national product. Says George A. Warde, president of Continental Airlines of Los Angeles: "Aviation has become the predominant feature of American life, and any prolonged disruption of air traffic would cause major, major problems."

Every day, U.S. commercial airlines buy and burn $31 million in gasoline and jet-aviation fuel. Air carriers are a primary market for companies as diverse as Boeing Co. of Seattle, the world's leading maker of commercial aircraft, and Marriott Corp. of Washington, B.C., a hotel, entertainment and food services company that daily provided approximately 180,000 meals aloft before the strike. Airlines may be more dependent upon computers and data-processing equipment than any other private sector of the U.S. economy outside of banking and finance.

The growth of commercial air transport has literally changed the landscape of U.S. business. To spur their local economies and attract new corporations, cities have invested many billions of dollars in the construction and expansion of airports and terminal facilities. These have become beacons for business in their own right, complete with hotels, shops and restaurants. One of the newest in the nation is Atlanta's eleven-month-old Hartsfield Atlanta International Airport, a sprawling, twin-terminal complex designed to eliminate the congestion that had existed at the city's old one, which was already the second busiest in the U.S. after Chicago's O'Hare.

Extensive air-transport service in and out of Miami International Airport has made that city a key jumping-off point for companies doing business in South America. In recent years, more than 100 multinational corporations, including Alcoa, Du Pont, Goodyear and Borden, have opened regional offices in nearby Coral Gables, a ten-minute drive from the airport.

One reason that South Carolina now has the third fastest growing industrial sector of any state in the U.S. is Charleston International Airport. Among the companies that have set up factories within an easy drive of the twin-runway airport: Cummins Engine, Du Pont, Levi Strauss, Memorex, Celanese and Exxon. Says Michael Kazeef, a manager for Alumax Inc., a leading aluminum producer: "In Washington State, the airport is 120 miles from our plant and going there was a big inconvenience. For any large company, an airport close by is a necessity. Vendors, salesmen, parts, cargo, company officials, you name it. We use the Charleston airport every day."

Air transport spurred the development of business in both Hawaii and Alaska and helped to open them to statehood. It also fueled the growth of Puerto Rico and made it a leading business center of the Caribbean.

Fortunately, the U.S. economy has so far been spared the sorts of dislocations that the striking air-traffic controllers had been hoping to bring about. As planes continued to take off and land throughout the week, more or less on schedule, Administration officials grew confident that the actual economic impact of the walkout would not be great, at least for now. Said James Burnham, a White House economist and spokesman for the President's Council of Economic Advisers: "I don't believe that this strike, as it has developed, will have any measurable impact on the gross national product or any other national economic statistic."

On the other hand, it is clear that the economy, as well as businesses by the tens of thousands, would suffer jolts aplenty if protracted and real chaos wrecked the smooth functioning of commercial aviation throughout the U.S. Says Robert Joedicke, an airlines industry expert with New York City's Lehman Bros. Kuhn Loeb investment-banking firm: "Air transport is the nation's only basic means of transportation beyond 500 miles. Without air transport, you absolutely hamstring the economy." Just how much it is hamstrung will depend on the duration of the turmoil in the skies.

Air travel basically enables companies to get their products to market and their salesmen to customers. "We are dependent on the airlines," says Sidney Topol, chairman of Scientific-Atlanta Inc., a firm that manufactures satellite antennas and other telecommunications equipment. "I've got 100 salesmen in the field, and air-travel availability is important. There is simply no substitute for face-to-face contact with customers."

Though most West Coast fruit and vegetables are shipped East for sale either by truck or refrigerated rail car, some perishables, like plant-ripened strawberries, must be moved by plane. Last week California growers were shipping 400,000 lbs. of the fruit daily by air with no difficulty. Says Herbert Baum, president of Naturipe Berry Growers Inc., one of the state's largest agricultural cooperatives: "We had expected serious problems, but so far we have not been affected. We are quite surprised."

The nation's fresh-fish markets last week braced for trouble. The U.S. consumes approximately 1.47 million lbs. of fresh fish daily, including Pacific Coast salmon, Maine lobster and Florida red snapper. Most of this must get to market in no more than a few days after it is caught, to help guard against spoilage. The Landlock Seafood Co. of Dallas has sold about $6 million worth of fresh fish this year to 175 different hotels, restaurants and supermarkets in the Dallas-Fort Worth area. Company President Richard Polins says that he may soon start bringing fish overland from Boston and Seattle by teams of truckers driving nonstop. Said he: "We've built our business by the air, and this strike could cripple us."

Even some foreign companies are suffering from the walkout. Shaver Poultry Breeding Farms Ltd. of Cambridge, Ont., is one of the world's largest poultry firms. Every 24 hours it ships as many as 50,000 day-old chicks to clients around the globe, some of them in the U.S. Newborn chicks can live for no more than three days without feeding, which is prohibitively expensive during transport. Thus air freight is essential for Shaver's business. Says a company official: "For the moment we are managing, but if U.S. flights halt, that could start backing up Canadian flights, and we would be in trouble."

Another business anxiously watching the strike is health-care services, which in recent years has become more and more dependent on air transport. The Greater New York Blood Program, the largest such nonprofit blood bank in the world, now receives nearly one-third of its daily blood needs on overnight flights from suppliers in Europe. The Cleveland-based Organ Recovery Inc., a regional clearinghouse for transplant operations, relies essentially on air carriers to get kidneys, livers and other organs quickly to those in need.

Fresh-cut flower markets also depend on air transport of their products. In Colorado, where about 20% of the nation's carnations are grown, wholesalers initially feared that flight cancellations would leave tens of thousands of blooms wilting alongside the runway at Denver's Stapleton International Airport. In New York's bustling flower market, blooms arrive daily from as far away as California, South America and The Netherlands, and delivery delays can mean big losses. In fact, shipments arrived as expected in most markets around the country.

It is not just products that can spoil or rot that move by air. Tens of millions of dollars in nonperishable goods are also transported by airlines, and delivery delays can lead to losses many times larger than the cost of the actual goods shipped. Commercial aviation moves 90% of the nation's first-class mails and is the principal way in which many firms rush spare parts to customers. Shell Oil Co.'s huge Norco refinery outside New Orleans daily receives several such shipments of spare parts, and its operations could have to be cut back without them.

any important new industries get their products to market by air transport. Much of the 1.2 million lbs. of air-freight cargo shipped every day out of Boston's Logan International Airport consists of computers, semiconductors and other microelectronics equipment manufactured by high-technology firms in the Boston area. Last week those shipments were leaving as usual.

The American financial system still relies on air service, despite the great growth in electronic fund transfers, the method of automatically switching money from one bank to another via computer hookups. To receive payment on checks deposited by customers, banks must physically transport them to regional clearing centers that are operated by large banks and Federal Reserve branches. The funds can then be processed.

On any given day a typical big-city commercial bank might have anywhere from several million to several hundred million dollars in checks to clear, and delays are costly, since the prevailing short-term interest rate is about 20%. Says Douglas Chalou, vice president for distribution at Detroit Bank & Trust Co.: "Some of our check-clearing points are already beginning to have troubles because of the controllers' strike, and the delays can cost us up to $600 for every $1 million that we handle."

Most businesses are so far surviving the air controllers' strike reasonably well primarily because much of the $2.4 billion in goods shipped yearly by air freight moves at night, when passenger air traffic is at a minimum. Although many airlines last week had to cut their passenger flights by anywhere from 20% to 40% during certain high-volume daytime hours, night flights and freight shipments have not been hard hit.

That has been a relief to freight forwarding companies everywhere. In fact, in recent years, many such companies have begun operating, or sharply expanding, cargo-plane services of their own. Flying Tiger Line of Los Angeles, the largest U.S. all-cargo carrier (1980 revenues: $713 million), ships everything from oil-drilling equipment and Pharmaceuticals to machine parts, chemicals and cut flowers. Emery Air Freight Corp. of Wilton, Conn. (1980 revenues: $551 million), operates 62 aircraft serving 130 airports in North America, Europe and the Pacific. Federal Express of Memphis flies 60 jets delivering small packages overnight. Federal Express is so confident about its ability to maintain service despite the strike that last week it started a $7 million advertising program to launch its new private airmail system that sends letters overnight for $9.95 each.

The companies most immediately imperiled by the controllers' walkout are, of course, the airlines. The industry is already in the midst of an unprecedented upheaval as a result of the Federal Government's decontrol of routes and fares. Washington's action has spawned a whole new generation of regional and short-haul carriers that are slashing prices, adding routes and grabbing business away from some of the largest and best-known American carriers. Since January, passenger volume on American Airlines has slumped by 3.8%, while on TWA it is down 10.7%. Though American managed to inch back into profitability during the first six months of 1981, TWA lost $11.1 million, while United Air Lines, Eastern and Pan Am were all in the red.

The airlines had been counting on August, a period during which passenger bookings normally rise by about 20%, to help cushion the drop in business. But the walkout has now created doubts about whether anywhere near the normal number of people will be jetting off for end-of-summer vacations. Says Swati Vaishnar, a Manhattan travel agent: "There has been a lot of confusion and cancellations because people just do not know what to do. They simply don't want to be stuck in some city during their vacation, and they also think, rightly or wrongly, that there is a risk in flying without regular and experienced air-traffic controllers in the towers."

Losses to airlines from cancellations and no-shows are beginning to mount. Not only are the air carriers flying fewer planes, but fewer passengers are turning up at airports, and planes are taking off in some cases only half full. Many travelers are making reservations on several flights, in the hope that one will get off the ground. But that can mean five empty seats on other flights.

Worse still, the carriers are threatened by the loss of the largest group of full-fare passengers, businessmen. Industry Analyst Julius Maldutis of the Salomon Brothers investment-banking firm warns that if executives begin canceling appointments and meetings, that would shift the passenger mix more and more toward discount-fare vacation flyers, who are prepared to go out to the airport and wait a few hours for a standby seat. In the economics of the airline industry, those travelers provide marginal income rather than the bulk of revenues, which comes from full-fare passengers. Few airlines can make money on planes packed mainly with discount flyers.

On the first day of the strike last week, TWA alone estimates that it lost $6 million and perhaps as much as $14 million by week's end. To prevent a sudden cash crunch, Braniff Airways of Dallas, which in 1980 lost $131 million on revenues of $1.5 billion, laid off 1,500 of its 10,200 employees. In Miami, Eastern Air Lines slashed the salaries of 39 top officers by 10%. Company Chairman Frank Borman said the cuts would go into effect Aug. 16 and remain in force as long as Eastern continues to operate at a reduced level as a result of the strike.

For troubled Pan Am, the perils of a protracted walkout are, if anything, even greater. Since January, the ailing airline has lost $217.6 million on revenues of $1.9 billion, and corporate infighting has consumed top management in almost nonstop bickering and intrigues. Last month the board of directors forced Chairman William Seawell to retire a year early, and it is now searching for a new chairman. Though nearly 70% of Pan Am's business derives from overseas flights, which have so far been least affected by the controllers' walkout, passengers have still not been turning up for departing flights. On a normal Monday, nearly 13,000 passengers board Pan

Am planes in the U.S., but last week the number dropped to a mere 7,600, and planes were flying throughout the week only 64% full at best.

Though the walkout will continue to pinch the revenues of all commercial airlines in the short run, the longer term prospects may not be so bleak. Air carriers may have to operate at reduced schedules for perhaps a full year, while the Federal Aviation Administration trains new air-traffic controllers to replace those fired by the President last week. This would force the companies to curtail flights of their less efficient planes, including DC-9s and Boeing 727s, and ultimately to accelerate the selling off of the aging planes, which has actually already been under way for months. With fewer planes in the air, more seats would be filled, and discount fares would diminish. Overall industry profits would wind up climbing rather than falling.

Business prospects for many hotels, resorts, convention centers and travel agencies are equally unsettled for the short term. Commercial aviation has spurred the growth of American trade-show and convention business, and made possible a 20-year boom in domestic and foreign vacation resorts, ranging from dude ranches to health spas and ski slopes.

While reservations at hotels and vacation resorts have not dropped sharply in all cities, isolated floods of cancellations are beginning to develop. In New Orleans, no-shows at the New Orleans Hilton & Towers are running at 50% for the week.

New York's Sheraton Center experienced a similarly large and abrupt rise in cancellations and no-shows, as well as a dramatic 75% drop in new reservations.

By contrast, the week-old walkout has already proved to be a bonanza for a few lucky businesses. In New England, passenger volume for Trailways jumped 40%. In the Midwest, business for Greyhound was up 55% on some routes, particularly in the Chicago and Indianapolis areas. The troubled Amtrak rail network enjoyed a 5% to 10% bookings spurt. On Amtrak's Metroliner service between New York City and Boston, passenger traffic climbed by 20%.

Perhaps the biggest winner from the strike has been the car-rental agencies. Nationwide business for the Hertz division of the RCA Corp. was up 10%; rentals by the firm jumped 25% in Manhattan and 35% in Atlanta. In Dallas-Fort Worth, demand for cars was so strong that National Car Rental System, a subsidiary of Household Finance Corp., ran out of vehicles.

Private charter airlines also did well last week. Jet Airways of Los Angeles operates five Learjets and a twin-engine Piper Navajo prop, but demand has been so strong that the company is now looking to lease more planes.

Even if the economic disruption in the U.S. has not been as great as expected, experience abroad shows what strikes, sick-outs and slowdowns by air-traffic controllers can eventually do to business. In Italy, sudden and unannounced work stoppages this summer have scrambled schedules at Fiumicino Airport and elsewhere, scaring away travelers and crimping that country's $7 billion tourist trade. Britain has had on-again off-again air-traffic control service for months.

In the end, nothing can replace the laborsaving, productivity-boosting powers of commercial air transport. Like a vast and intricate nervous system for the economy, air travel has stimulated business and fostered wealth wherever planes have flown. In the process, more and more businesses have come to depend on air transport as much as aviation has grown to rely on business. That mutual dependency has brought enormous benefit to Americans everywhere, and that should continue when air travel returns to normal.

After a week of efforts by the controllers to stop America's air-transport system, the industry continues to function with a smooth reliability that has surprised almost everyone.

--By Christopher Byron. Reported by Benjamin W. Cate/Los Angeles and Christopher Redman/Detroit, with other U.S. bureaus

With reporting by Benjamin W. Cate/Los Angeles, Christopher Redman/Detroit

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