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Airlines' Woe: Fastest Jet Can't Beat a Fax

July 21, 1993|JAMES FLANIGAN

The recommendations of a national commission that airlines be given some tax relief and perhaps a government agent to oversee their finances could both help and hurt the business. But the airlines' real "problems"--although not nearly as serious as they're being painted before the grandly named National Commission to Ensure a Strong Competitive Airline Industry--are beyond government help.

Two of those problems are that the economy is lousy and that the business is mature, meaning that, like steel long ago, airlines have reached a stage where they lose customers every time they try to raise prices to cover their costs.

And why do they lose customers? Because the airlines are in competition with communications: As transportation expense goes up, phone, fax and teleconference expense goes down, and so does business travel.

For almost all airlines, growth in passenger traffic has been stalled since the late 1980s--except for last year, when they slashed fares and drew throngs of passengers. Unfortunately, most airlines couldn't make a profit at those reduced fares and so the industry lost money--with the significant exception of Southwest Airlines, which could afford to cut fares because it operates at lower cost.

The industry faces a dilemma: Find a way to cut costs like Southwest, which is difficult for big airlines to do, or go on losing money or passengers.

Dissatisfaction is rampant. Passengers demand the lowest fares and yet are angered by crowded planes and airports; the incoming chairman of TWA is asking publicly for the return of government fare regulation, a sentiment shared by airline unions, which equate regulation with job and income security.

But regulation to make fares higher won't help an airline business that's losing traffic even at today's fares.

Besides, the industry's outlook is better than that, here and abroad. Airline profitability will pick up in the next few years as old planes are retired and supply and demand come into balance, says John Eichner, an airline planner in the Ford Administration and now a partner in Simat, Helliesen & Eichner, a New York consulting firm.

Longer term, we will see a new pattern in the U.S. industry, with great success internationally, says Alfred Kahn, the architect of airline deregulation in the Carter Administration and now a professor at Cornell University.

But to better foresee the future, we should understand the present.

What brought the airlines to their current dilemma is the fact that 20 years of technology advances--increasingly powerful jet engines, faster flight, declining costs--came to an end in the 1970s. "We planned deregulation in the Ford Administration to prevent the domestic industry from stagnating," says Eichner.

Deregulation, and the early phases of competition, began in 1978. Small airlines such as People Express were born and died, mergers were messy, shakeouts were brutal. And through it all, deregulation boosted passenger traffic by 73% from 1978 to 1992, and increased employment in the industry by 64%. "And more towns were served by more flights," adds Kahn, who now resides in the small university town of Ithaca, N.Y.

Now we have reached a new phase of competition, one based on productivity, for which Southwest is the airline model. Southwest doesn't pay lower wages than the larger airlines, American, United and Delta, but its people work harder and more effectively. It flies one kind of aircraft, Boeing 737s, which is efficient for maintenance. And it lands and takes off within 20 minutes because it does not connect passengers to other flights or transfer baggage to other airlines. It has lower costs, lower fares and makes money.

Not everybody can be or needs to be a Southwest. The big airlines, which fly across the country and the world, must interconnect with other flights and other airlines. Their costs are necessarily higher than those of Southwest, but quite competitive by international standards.

Fact is, the discipline of deregulation has given U.S. carriers lower costs than any international airline. That's why U.S. airlines today fly far more international flights and carry far more passengers than the regulated Pan Am, now defunct, and TWA, just out of bankruptcy, ever did. That's why the national commission proposes to let foreigners buy into U.S. airlines if American companies can buy in overseas. The advantage is with the Americans.

The challenge to airlines domestically is to cut costs to retain business customers. The market has shrunk as big companies have cut back on middle management, and become more price conscious as small-business people balk at the cost of travel and turn to the constantly improving economies of video and computer-driven communications.

So look for the major U.S. airlines to cut back to domestic routes they can fly profitably, leaving many shorter routes to Southwest and such low-cost regional airlines as America West, Reno Air and Morris Air.

There will be hard labor negotiations in the big airlines' future and predictable cries for re-regulation. But regulation doesn't address today's problem. The phone, the fax and the teleconference are making U.S. business more productive today, where once faster air travel filled that role.

Tax breaks and changes in government rules may help the airlines compete. But their real challenge is bigger than anything a national commission can meet.

Give a Bargain, They Will Come

Alfred E. Kahn, architect of airline deregulation in 1978, likes to cite the effect of bargain airlines on passenger traffic. People Express swelled passenger numbers in the Northeast from its start in 1980 through its peak in 1984. Similarly, Southwest Airlines has boosted California passenger traffic.

1980: People Express starts up; East Coast flights rise.

1988: People Express dies and East Coast flights decline.

1989: Southwest enters market; West Coast traffic gets boost.

Source: Alfred E. Kahn; Roberts & Associayes

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