Fasten Your Seat Belts for The Fare War

By John Greenwald

AS AMERICAN AIRLINES LAUNCHED its new streamlined U.S. fare system last week, the traveling public responded with a round of applause and a ring of the reservation phone line. The reforms jettisoned a maddening maze of rates and restrictions and replaced them with just four new fares that provided savings of up to 50% for first-class and nearly 40% for business flyers. Competitors jetted to join the cut-and-simplify frenzy, with United's top executives holding late-night sessions to get their own new fares into ads right on American's heels. "This is good for the traveler and good for the company," says Edmund Greenslet, publisher of the Airline Monitor trade journal. "This new structure was long overdue."

There's no doubt that almost everyone stands to gain as the new fares generate more traffic. Last week American, United, Northwest and Delta said they received twice as many fare inquiries as usual. "The response was unprecedented," said an American spokesman. "We read it to mean we had struck a chord with customers who had been complaining about the complexity of the system."

But there is a darker side to the fare war: many experts see it as a thinly veiled declaration of war against low-cost rivals like TWA and Continental, which currently fly under the protective wing of the bankruptcy courts and thus pay no interest on part of their debt. Life will get rougher for them once they emerge from Chapter 11 protection and are forced to survive on their own resources -- something many analysts fear these weaker carriers may be unable to do for long. Once rid of such pesky competitors and their cutthroat tactics, the major airlines could regain full control of airfares -- and might then be free to raise them. "This is the nightmare that the marginal carriers didn't want to see happen," says John Riener, president of commercial operations for Carlson Travel Network, the largest U.S. travel company. "There's the scent of a final kill in the air."

American insists that it merely wants to bring order to a chaotic fare system that discouraged air travel and encouraged ruinous price wars. Under its old system, American and other carriers offered as many as 200 types of fares and discount plans for any given route, a system that most travelers * found confusing and unfair. "Everybody will benefit from this new plan," says Robert Crandall, the company's aggressive chairman, who pioneered innovations like frequent-flyer programs and supersaver fares.

If the new fare structure holds up, it could finally halt the proliferation of discounts in a price-cut-happy industry. "The driving reason for the change is American's desire to get more control over its pricing system than it had when there was a hodgepodge of fares out there," Greenslet says. "American's objective is not to drive TWA out of existence," he asserts. "They can live with TWA operating with a different fare structure, as long as it doesn't declare war."

But Crandall acknowledges that the new fares will draw some traffic away from American's low-cost competitors. "As we close the price gap," he said in an interview with TIME, "we expect to see business come from the discounters." At the same time, Crandall warned that he stood ready to lower fares across the board if that proved necessary to match cuts by American's rivals. "We are going to be price competitive. If we have to lower this overall structure, we will do so."

AMERICAN SAID IT WAS PREpared to take losses for months until the new rate schedule generated enough traffic to make up for the reduction in business fares. "This will hurt earnings in the short run," says Richard Foote, an airline analyst for Argus Research. "But I expect to see a positive impact in the second half of the year." On the brighter side, American expects to save $25 million a year in administrative costs by reducing the number of its fares from a dizzying 500,000 to a relatively stable 70,000.

Whatever its motives, Fort Worth-based American could profit handsomely from an industry shake-out. Staggered by the recession, constant fare fights and a global epidemic of aerophobia growing out of last year's Persian Gulf conflict, U.S. airlines have lost more than $6 billion since 1990. American has been no exception: its parent company, AMR, has lost a combined $279 million in the past two years. All that has led Crandall to predict that the number of major carriers will continue to shrink. Says he: "I think there is probably some consolidation left to happen."

Predictably, Crandall's revolutionary fare changes triggered a dogfight last week with Carl Icahn, the corporate raider turned executive who heads TWA. Icahn challenged the new fares by slashing TWA's rates as much as 40% below American's prices. Icahn also vowed to keep volume discounts for corporate travelers, which American's plan eliminated. "We are here to stay," he told TIME. "I'm not a passive guy. It's hard to drive a low-cost competitor out of business. And, as far as I'm concerned, it won't work."

Icahn brings some surprising strengths to this skirmish. Bankruptcy-court protection keeps his airline's costs down and permits it to offer some of the industry's lowest prices. TWA has suspended payments on $1 billion of debt and is renegotiating lease payments on some aircraft as it works out a plan to satisfy creditors. While Icahn says he expects to fly TWA out of court late this summer, some analysts argue that he may try to stay in Chapter 11 proceedings while doing battle with American.

Business travelers are the clear winners under the simplified fare plans. They will get as much as 50% off the previous first-class fares and 38% off unrestricted coach rates on American's flights and realize similar savings on other carriers. "The business traveler was getting ripped off," says the Airline Monitor's Greenslet. "It's just not fair when the price of a full- fare ticket is three times that of a deep-discount ticket." The new fares will be no more than 49% higher than American's discount rates. That should be particularly helpful to self-employed travelers and to small businessmen who didn't qualify for volume discounts under the previous rate structure.

Leisure travelers, by contrast, stand to reap fewer overall savings. While rates will drop on most of American's flights, they will rise a bit on certain lightly traveled routes. Passengers between New York City and Wichita, for example, will pay a 3% higher fare. (American and other carriers are also clinging through April to special discounts that are even lower than many of the new reduced rates.) Senior citizens, meanwhile, will pay 20% more starting May 9 for their discount travel on domestic flights.

But many vacationers should enjoy at least some advantages under the streamlined programs. Besides being simpler, the new fares drop the irksome use-it-or-lose-it requirement that kept advance-purchase travelers who failed to make their flights from getting refunds or new tickets. While American's discount fares will still be nonrefundable, consumers will be able to exchange them after paying a $25 service charge.

Other major airlines offered variations on American's plan. Delta and United adopted the basic four-fare system but said they would continue to study volume discounts for corporate and military travel. Although his airline matched American's moves, Northwest chief executive John Dasburg questioned the plan. "At first blush, this actually looks like it might end up reducing rather than raising revenues per seat mile," Dasburg said. "Price simplification has been a little like tax simplification -- it doesn't seem to work."

Executives of some smaller carriers that generally stuck to their schedules called the new fares dangerous to their health. "This intensifies the battle within the industry between big and small, rich and poor," says Marilyn Hoppe, vice president of revenue management for America West, a Phoenix-based carrier that is in bankruptcy court. "American, United and Delta are not going to take market share from each other," Hoppe declares. "They are going to try to take it from the smaller carriers whose only weapons are lower prices. Bob Crandall would dearly love to get rid of little guys like us."

The air was filled with such suspicions last week. "I'd book and buy my tickets sooner rather than later," quips Carlson Travel's Riener. "If the country ends up with just three carriers, where do you think prices will head -- up or down?" Maybe that's an unduly jaundiced view of fare changes that many travelers have happily welcomed. But it squares with the historical winner-take-all nature of the U.S. airline industry, which has dwindled to a handful of major carriers in the 14 years since the country embarked on deregulation in the hope of increasing competition in the skies.

CHART: NOT AVAILABLE

CREDIT: [TMFONT 1 d #666666 d {Sources: American, Delta and United airlines. Topaz Enterprises}]CAPTION: New York to Los Angeles

With reporting by Bernard Baumohl/New York, Deborah Fowler/Houston and William McWhirter/Chicago