Fare Wars Take Wing as Airlines Struggle to Get Out of Doldrums

Times Staff Writers

California became the latest battleground in the nation's air fare wars Monday as two regional carriers announced discount programs aimed at stimulating traffic during the traditional winter doldrums.

Analysts said the moves, coupled with recently announced discounts on coast-to-coast and East Coast corridor flights, are part of the fiercest fare war since 1983, when airlines wildly slashed prices to attract passengers in a recession. And they predicted that pressure to keep the fares low is likely to continue at least until April.

"The airlines have added about 9% more seats, and passenger traffic is projected to increase just 5% this year. And the easiest way to deal with that 4% difference is to cut rates," said Earl Hamlin, who follows the industry for San Francisco investment banker Hambrecht & Quist.

Several analysts said the airlines would try to fight the war with limited fare reductions aimed at boosting weekend and off-peak traffic while leaving prices for full-fare business passengers untouched.

Although the renewed discounts are a boon to travelers, analysts cautioned that they will erode airline profits unless a cease-fire is called by the peak summer traveling months, when airlines typically accumulate most of their earnings.

On the local front, 5-month-old Continental West, the Los Angeles-based unit of Continental Airlines, said Monday that, effective immediately, it will charge $29 for all one-way trips between Los Angeles and San Jose, the only two airports it serves in the state. Continental West's one-way fare on its only other route, between Los Angeles and Seattle, will be $69.

Currently, one-way fares between Southern and Northern California airports range from $29 to $94, and the range is $69 to $210 between Southern California and Seattle.

Earlier Monday, AirCal in Newport Beach announced a new 24-hour "Weekend Jetaway" program: $39 fares between Northern and Southern California and $79 fares between California and Seattle. However, the discounts are good only from noon Saturday until noon Sunday from Jan. 11 through March 16.

Although competing airlines, including San Diego-based Pacific Southwest (PSA) and Western, immediately matched the AirCal discount program, the Continental West move went unanswered.

"It doesn't make any sense for us," said a Western spokeswoman. "We can't make any money that way, and we don't think they can, either."

"We are not matching (Continental West's) fares because we already have those fares in place," said a PSA spokeswoman, referring to the company's selective $29 and $69 discount fares. "We have more seats out there at those fares than (Continental West has) in total seats."

Continental West President Sheldon Best insisted that the new airline can make money with its new fares.

"This is a business, not a public service. Of course we can make money," said Best, a former AirCal executive. "The question is not who pioneered low fares, but who can sustain them. . . . We intend to maintain our attack for the consumer against high fares."

Continental West's parent, Continental Airlines, has been one of the leaders of the national fare war. Last week, it announced a heavily restricted $99 "cheap frills" fare between New York and Los Angeles and $65 fly-anywhere tickets for senior citizens.

On Monday, Trans World Airlines offered an identical fare, good until March 5, for one-stop or connecting transcontinental flights on Tuesdays and Wednesdays, with a 14-day advance purchase requirement.

And World Airways pitched in Monday with a coast-to-coast fare of $90--linked, it said, to comedian George Burns' 90th birthday. Burns, who has been World's spokesman for almost a year, will turn 90 Jan. 20. The promotional fare, good only for round-trips paid for seven days before the journey, will be in effect through March 15.

World also announced a $65 senior citizen fare available Tuesday and Wednesday between New York or Washington and Los Angeles or San Francisco.

People Express, the acknowledged pioneer of rock-bottom ticket pricing, is offering $99 coast-to-coast fares and a $99 one-way ticket between San Francisco and Brussels.

The price cutting has even extended to the route between Florida and the cold Northeast, which usually is heavily traveled at this time of year. Several airlines are offering $69 seats between Boston and Miami, a discount of $30.

"The one sure way to fill up the seats is to lower the prices," said Michael Hamilton, an analyst with Piper Jaffray & Hopwood Inc., an investment house in Minneapolis. "Without a doubt this is as tough a market as we've seen since 1982-83."

However, the analysts doubted whether the airlines would be as wounded by the current war as they were three years ago.

Hambrecht & Quist's Hamlin said the increasing use of computers will allow airlines to accurately assess passenger loads and channel travelers to the seats that return the greatest profit for the carrier. Further, he claimed the improved information systems would hold down the panicky, "give-away-the-store" discounts that characterized 1983.

David Sylvester of Montgomery Securities in San Francisco said the airlines are not likely to give away the full fares of business traffic to attract additional low-cost recreational passengers.

"Airlines are more sophisticated than they used to be," Sylvester said. "Even when demand is light, they're not going to give away full-fare (seats for) business travelers."

Sylvester and Hamlin predicted that the airlines would try to fight the current war with limited, strategic fare programs that would not reduce ticket prices for full-fare business passengers. The AirCal program was cited as an example of a limited fare cut because it is designed to increase traffic during a slow weekend period and leaves the rest of the higher-paying week alone.

However, Hamlin questioned whether the limited warfare would work if all the carriers are drawn into the fray. "Even selective cuts have a way of hurting someone and, if everyone plays, then it feels like an all-out war," he said.

Already, PSA is predicting that the wars will delay its airline subsidiary's return to profitability.

"The fare war is going to hurt us during the fourth quarter, no doubt about it," said a spokesman for the airline. "Traffic is up, but the yields are down. . . . It's going to be a tough quarter for a lot of carriers."

The wars have been frustrating for PSA employees, who, in 1984, traded 15% pay and benefit cuts for participation in a profit-sharing plan. The airline, which lost $207.2 million between 1979 and 1984, had been expecting to make the first payments under that plan this year.

After a strong first half in 1985, PSA officials predicted that employees might receive their first payments from the complicated plan. During the first half, PSA set aside $2 million for profit-sharing payments. However, after revenues began slowing during the third quarter, PSA was withdraw from the profit-sharing pool.

Because of the fare wars that have stalled revenues and eaten away at already narrow profit margins, "It's unlikely that there will be any profit sharing" for fiscal 1985, Hastings said on Monday.

The revenue slowdown that began to squeeze PSA's airline profit margin became apparent in September. Although PSA Inc. (which includes airline and non-airline operations) reported that profits in the third quarter rose 210% to $9.1 million, revenues rose just 10% to $204 million.

In October, PSA Inc. Chairman Paul Barkley acknowledged that the fare war had "taken the bloom off" of the airline's third-quarter performance.

And PSA officials predicted that wars would continue. "I don't think 1986 or 1987 will be any different than (1985)," PSA President Russell Ray said in October, adding that unlike past fare wars, "this one has not generated (new) traffic."

The fare wars have hit at a time when PSA is nearing the end of a multi-year, $1 billion fleet renovation project that will boost its available seat total by more than 15% during the first quarter of 1986, Hastings said. During 1985, PSA's fleet grew to 52 from 36, and the airline's departure level grew by 45%.

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