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Latest Air Merger Unlikely to Affect Fares : Analysts Point to Heavy Debt Load for Texas Air, People Express

September 16, 1986|BILL SING | Times Staff Writer

Although Texas Air and People Express gained strong passenger followings through the years by cutting fares, their proposed combination is not likely to push fares lower, analysts said Monday.

In some markets, particularly in New York and other East Coast centers, merging the two carriers along with Eastern Airlines--which Texas Air also plans to acquire--would sharply reduce competition and thus reduce pressure for continued fare cutting.

The combined carriers also would carry such a severe debt load that they could not afford to slash fares at the expense of profit, analysts said. And fares--or at least restrictions on fares--have already been increasing in recent weeks, including those at People Express and Continental Airlines, Texas Air's primary unit, analysts said.

However, while fares may not go lower, they probably will not increase much either, analysts said. Continental still enjoys among the lowest operating costs in the industry, thanks to the low wage rates that it won when it filed for bankruptcy reorganization three years ago.

A merger with People Express--another airline with low costs--would create a formidable nationwide low-fare airline network that will put strong pressure on competitors to keep fares and costs from rising too much.

Texas Air Chairman Francisco A. (Frank) Lorenzo "knows how to keep his costs down, putting pressure on whoever he competes with," said James Kennedy, investment analyst at T. Rowe Price, a Baltimore-based investment management company. "I wouldn't want to compete against Frank Lorenzo."

Airlines most likely to suffer the heat of a larger Texas Air include Delta, Piedmont and USAir in the East and United and American nationwide, analysts said. All have higher costs than Continental and People Express.

With Eastern and People Express under its umbrella, Houston-based Texas Air would become the nation's largest airline company, with a 17% share of industry revenue based on 1985 results, according to Lee R. Howard, executive vice president of Airline Economics Inc., a Washington-based consulting firm. That is far ahead of United at 13%, a combined Delta and Western, also at 13%, and American at 12.5%.

With the recent wave of proposed or completed mergers--including those of Delta and Western, Northwest and Republic, and Trans World and Ozark--the nation's top six airlines will together enjoy 73% of the nation's airline revenue, up from 59% in 1985, Howard said.

Such a high market share and increased concentration is likely in itself to reduce fare-cutting pressure, analysts said. Texas Air, among others, will have more control over more markets and passengers. Also, such a high market share held by a low-cost competitor like Texas Air will make it more difficult for new entrants, as People Express once was, to gain a foothold in the industry by slashing fares.

One market expected to suffer a reduction in fare-cutting pressure is New York. Combining Eastern, People Express and New York Air (another Texas Air subsidiary) would give Texas Air about 45% of the passenger traffic at the New York area's three major airports: Kennedy, LaGuardia and Newark, said Anthony B. Hatch, airline analyst with Argus Research Corp.

"Lorenzo's basic operating philosophy is to offer a low-cost, full-service product. One has to ask whether there will be sufficient incentive in the Northeast to continue that philosophy," said Daniel T. Smith, manager of consumer and industry affairs for the International Airline Passengers Assn. The Department of Transportation "will have to take a long look at this before granting approval" of the Texas Air-People Express acquisition, Smith said.

Texas Air also may not want to engage in massive fare-cutting because of its high debt load. Although it has as much as $1 billion in cash, according to some analysts' estimates, its debt-to-equity ratio is above 10 to 1, far higher than the 1-to-1 ratio that many analysts say is comfortable. Eastern and People Express also have high debt loads far above the comfort zone.

"The three airlines are so heavily leveraged, they need to make money to pay down debt," one airline analyst said. "Eastern, Texas Air and People Express are three of the most heavily leveraged entities in the business. To combine them is a very risky and very difficult move.

"They need a good economy to make things work out. If there's a sloppy economy, they're going to have loads of red ink."

Both Continental and People Express have been raising fares in recent weeks by placing more restrictions, such as advance-purchase requirements, on their low fares. That is likely to continue, analysts said.

Also, analysts said Continental and United have been increasing fares in Denver, a major hub for both carriers, following the recent shutdown of Frontier Airlines, a People Express subsidiary.

Fares industrywide have been rising since bottoming out about a month ago and are likely to rise next year because the industry is not expected to enjoy fuel prices as low as those this year, consultant Howard said.

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