Air Fare Wars a Factor : PSA Profit-Sharing May Pay Off

Pacific Southwest Airlines employees, who last year traded 15% pay cuts for participation in a profit-sharing plan, could receive their first payment this year from the airline, which, based on a complicated profit-sharing formula, has not recorded a profit since 1979.

Figures for the first half of 1985 and predictions for the second suggest that the outlook for that payment is good, PSA officials believe.

However, an ongoing fare war that already has “taken the bloom off” the third quarter could stall second-half revenues and shrink the airline’s already narrow profit margin, according to PSA Inc. Chairman Paul Barkley.

During the first half of 1985, PSA recorded a pre-tax, post-interest-expense profit of about $13 million. The profit-sharing plan kicks in when the airline generates a profit, based on the pre-tax, post-interest-expense formula.

In 1984, using that formula, the airline operation logged a loss of $11.5 million. That boosted the airline’s cumulative pre-tax, post-interest income loss to $207.2 million since 1979, when PSA reported a $20.4 million profit. During that same period, PSA Inc., the airline’s parent company, logged $53.5 million in profits from its other operations and from investment tax credits and depreciation.

Airline Fare Wars

Given the airline’s strong first-half performance, PSA set aside $2.3 million for the employee profit-sharing plan, Barkley said. However, the amount to be distributed at year end depends on how profitble PSA remains in the face of the current fare war that pits PSA, AirCal, United Airlines and Continental West.

“We’re running substantially ahead of last year through the third quarter,” said PSA President Russell Ray. “We will have a profitable year but the magnitude of profits is obscured by the fare wars.”

Ray said sporadic fare wars will likely continue to slow revenues and squeeze profits for the foreseeable future. “I don’t think 1986 or 1987 will be any different than the current year,” said Ray, who added that unlike past fare wars, “this has not stimulated traffic.”

Despite the fare war--one of many hurdles confronting the airline during recent years--Barkley recently boasted that PSA is “running at a full sprint.”

That contrasts with Barkley’s description in January of an airline that had spent the previous eight years “walking sideways” as it fought to regain a competitive stature.

PSA ran into heavy weather during the late 1970s, when skyrocketing jet fuel costs crippled its fuel-guzzling fleet. Established competitors and new, deregulation-spawned airlines scurried to fill the gaps that appeared as PSA pared back the high-frequency scheduling it had used to fly to the top of the California Corridor, stretching between Los Angeles and San Francisco.

Lower Operating Costs

PSA has spent $1 billion to build a new, fuel-efficient fleet. The airline also forged a three-year, employee wage reduction and productivity enhancement pact that, according to Barkley, has already trimmed the airline’s operating costs by $20 million.

Propelled by the “prospect of continued improved earnings,” Ray said, PSA has matched--and, recently, surpassed--the frequency flying schedule that existed before fuel costs forced the cutback.

That expanded schedule--including 31 non-stop flights per day in each direction between Los Angeles and San Francisco, and service that will soon start to a cluster of Pacific Northwest destinations--followed a fleet expansion that will bring PSA from 36 planes at the end of 1984 to 53 planes by the end of this year. PSA has options on 20 more of the quiet, 85-seat BAe 146s that have played a pivotal role in its return to frequency flying, and will take delivery on two larger MD-80 aircraft during 1986.

PSA has also boosted the time its planes spend in the air. The increased flying time has had the effect of “adding three or four planes to the fleet . . . without buying any airplanes,” Ray said. “One of the best things you can do to (lower costs and widen profit margins) is to improve utilization.”

More Flying Time

Consequently, PSA’s fleet now averages about 10 hours of flying time per plane each day. “That has the effect of lowering the cost of running an airline because you spread out the costs associated with labor and space rentals, landing fees and other fixed costs,” Ray said.

Although PSA last summer boosted its seat total by 10% to 15%, Barkley said labor costs rose by less than 5%.

To meet future growth, though, PSA will soon hire pilots, flight attendants and ground personnel, Ray said. PSA has slowed the rate of automatic raises on the lower end of its pay scale to reduce future payroll costs, but it did not--unlike some other airlines--negotiate a “two-tier” wage system that keeps newcomers on a wage scale that is lower than the scale for existing employees. That approach creates “two work forces that are at odds with each other,” Barkley said.

However, PSA is at odds with its Teamster-represented reservationists over staffing at a Reno, Nev., reservations center that will open in December. The airline recently delivered layoff notices to a quarter of the 400 reservationists working at its Scripps Ranch facility, and announced the eventual hiring of more than 200 lower-paid reservationists at the new facility.

Easier to Use

The lower wages are justified because reservationists will be using a new “touch screen” reservations system that is easier to use than the existing technology, Ray said. He added that PSA had offered as much as $20,000 and outplacement services to Scripps Ranch employees who received layoff notices but were unable or unwilling to make the move to Nevada.

However, the union broke off negotiations over the layoff notices, and “those who don’t want to make the move will have to terminate their employment with the company,” a PSA spokesman said. Teamsters officials were not available for comment.

PSA subsequently withdrew its offer of $20,000 and placement services to employees who “cannot or will not go to Reno,” Ray said.

The Reno center plays an important role in PSA’s move to the Pacific Northwest, Ray said. The airline recently announced service between San Francisco and Eureka; Medford, Ore.; Eugene, Ore.; Pasco, Wash.; Yakima, Wash., and Boise, Idaho.

“This strengthens us,” Ray said. “PSA is seen as the California carrier, it’s not seen as a Seattle or Portland carrier, and the addition of these cities . . . (will) help improve the idea that PSA is a Pacific states airline, not just a California Corridor carrier.”