Fighting For Their Lives

By THOMAS McCARROLL

Planning a trip? You'll be happy to know that Pan Am, American and Northwest airlines have drastically cut fares for travelers buying tickets before March 1. British Airways would like to cut transatlantic fares one-third, and TWA, USAir and Pan Am want to cut them that much or more, if the government lets them. Air carriers are offering dramatic bargains -- and not out of benevolence. They're desperate.

In 1990, their all-time worst year, the world's airlines lost a record $3.5 billion and nearly half their passenger traffic to the threat of war and the pain of recession, and they figured things couldn't get any worse. They were wrong. With bombs falling in the Middle East and the world economy almost motionless, this year is shaping up as an even bigger disaster. From passenger airlines to aircraft makers, the aviation business is in a tailspin. Losses and failures are mounting, planes are flying half empty, and the transatlantic fare war is certain to create more ruin. Says Lee Howard, chief executive of Airline Economics: "This is the most serious crisis in the history of the airline business."

The crisis signals an end to a decade of unprecedented expansion. Passenger travel, which soared to record levels in the aftermath of deregulation, is paralyzed by corporate belt-tightening and fear of terrorism. So far this year, international traffic is down 40%. In the U.S. 2 of every 5 seats are flying empty. As the war and the recession roll on, carriers are lightening their loads by suspending unprofitable routes, flying remaining ones less often and cutting costs. Airlines have reduced new orders for aircraft as much as 50%; 44,000 airline workers worldwide, from machinists in Kansas City to flight attendants in Amsterdam, have lost their jobs since January. USAir, which reported $221 million in losses for the fourth quarter, last week laid off 3,600 workers. Belgium's national airline, Sabena, and Spain's flagship carrier, Iberia, each announced plans to eliminate more than 2,000 jobs. British Airways, which suffered a 72% profit decline last quarter, cut 4,600 jobs while mothballing five Boeing planes worth $1.5 billion.

Even before Iraq invaded Kuwait, America's stalling economy was forcing the U.S. industry to consolidate. With passenger revenues slowing, the airlines separated into two groups: healthy carriers with strong balance sheets, like American, United and Delta, and those weighed down by excessive debt from buyouts and overexpansion, such as Pan Am, Eastern, TWA and Continental. To remain aloft, the weaker carriers sold routes, planes and other assets piecemeal to their stronger competitors, widening the chasm. Desperate for cash, Pan Am offered its London routes to United for $290 million, while financially troubled TWA agreed to unload its Heathrow landing rights to American for $445 million.

The Middle East crisis and the resulting rise in jet-fuel prices hastened the consolidation. Fuel ranks second only to labor in airline expenses, accounting for about 20% of operating budgets. Overleveraged carriers couldn't take the hike. After its annual fuel costs rose 33%, to $1 billion, Continental failed. Faced with a similar bill, Pan Am filed for bankruptcy a month later. Last week Northwest raised the possibility of merging with a stronger airline or selling its lucrative Pacific routes. Analyst Julius Maldutis of Salomon Brothers says, "The industry is being separated into the big eagles and the sitting ducks."

The still regulated airlines across the Atlantic are asking the European Commission to reduce red tape, approve joint operating ventures and allow the carriers to raise fares. European airline traffic has dropped 25% since January. Italy's Alitalia, with its transatlantic business down 30%, wants government assistance for workers scheduled to be laid off.

The surest way to bring back passengers is also the most painful: a fare war. British Airways fired the first shot Feb. 9 with its plan to cut transatlantic fares for summer travel one-third. U.S. carriers responded with fare cuts of up to 50%, but U.S. Transportation Secretary Samuel Skinner rejected all cuts, including the British Airways request. The decision is widely viewed as retaliation for London's foot dragging in approving the sale of Pan Am's and TWA's London routes. TWA said it will be forced into bankruptcy if the sale isn't approved soon. Skinner permitted Pan Am fare cuts for domestic and international flights before March 1, an offer that American and Northwest immediately matched. While consumer response has been positive, the impact on the industry will probably be negative. Says David Swierenga, airline economist at the Air Transport Association: "The fare war will only increase the bloodshed."

The industry received a boost last week when First Lady Barbara Bush took a commercial flight to Indianapolis to show terror-stricken Americans that air travel was safe. Said she: "I'm not afraid to fly." Her gesture may diminish fears, but it will take a stronger economy and probably an end to the gulf war to get the industry -- big eagles and sitting ducks alike -- airborne again.