Flyers May Not Fare Well if Airlines Get Bigger

Imagine, if you will, what air travel could be like four years from now. The cheapest coach air fare between Los Angeles and New York may be $600. Super-saver discount tickets may be eliminated. The lowest price for a New York to Chicago flight may be $275.

Business travelers may grudgingly fork up the extra money needed to fly. And vacation travelers may have to think twice, and sometimes three times before committing to a pleasure trip. Finally, airline frequent-flyer programs may have become an extinct species.

The reasons: vicious fare wars, poor airline management, the cost of financing new equipment and rising fuel prices at the end of this decade.

As a result, some industry analysts believe there may be only five major super-carriers left flying in this country: United, American, Texas Air Corp., Northwest and “TBA” (to be announced).

Believable Scenario

These big five mega-airlines wouldn’t need to purchase as many new planes or hire large numbers of additional employees. And their planes would be flying almost full--competition on air routes would be severely diminished as supply levels began to drop to nearly equal the demand for airline seats.

Needless to say, this is not a particularly pleasant scenario. At the same time, it is a believable one. And some aviation industry observers even think it is likely to happen before 1990.

Since 1978, when airline deregulation began, there have been more than 190 new, scheduled airlines. And yet, during the same period there have been more than 100 bankruptcies and airline liquidations.

Last but not least, there have been 24 significant mergers and acquisitions as weaker airlines struggle to stay aloft and stronger airlines consolidate their power base and financial clout. Thirteen of those mergers and acquisitions have occurred in the last year.

And, in just the last month:

--Texas Air Corp. (owners of Continental, and New York Air) gained conditional approval from the Department of Transportation to acquire Eastern Air Lines.

--Delta Air Lines, which has been reportedly amassing nearly a $1-billion line of credit, denied rumors it was about to buy Western Airlines.

--People Express agreed to sell Frontier Airlines to United Airlines for $146 million.

A Rash of Mergers

What hath deregulation wrought?

One answer may be merger mania. It started in 1979 when North Central and Southern Airways merged to form Republic Airlines. Pan American quickly followed with its purchase of National Airlines. A number of big deals followed--Texas Air bought Continental, Southwest Airlines bought rival Muse Air and People Express bought Frontier Airlines.

Earlier this year, United Airlines completed its purchase of Pan Am’s Pacific Division.

In January, Northwest stunned the aviation community by announcing it was essentially planning to absorb Republic Airlines.

‘We’re calling it a merger,” says Paul Jasinski, Republic’s chief legal counsel.

“Before deregulation,” he says, “airlines thought of themselves as protected static public utilities. However, under deregulation, we discovered we’re a retail commercial business in a volatile economic environment. We quickly learned that what is here today may be gone tomorrow. Republic felt it was burdened by an aging aircraft fleet and a very heavy debt load. We just weren’t equipped to play in that game.”

When the airline looked at Northwest, they saw a perfect match in a possible merger. Republic has 171 mostly small jets. Northwest has 130 mostly large aircraft.

A Look at Trends

“When we looked at long-term trends,” says Jasinski, “we saw a host of airline failures. The big airlines, like United and American, are growing bigger, and we could see it was going to be very tough to be a player in that game.”

In many cases, the forerunner to an official merger or acquisition is the establishment of joint marketing agreements that entail coordination of flight arrivals and departures between the two carriers (so that the arriving flight of one feeds the departing flight of the other). It may also include a merger of two airlines’ reservations computer systems.

The merging of reservations systems is a hotly debated subject. Critics argue that by doing so the airlines are sharing proprietary information and thus are no longer competing. The airlines claim that the move is purely an economic one designed to save high operating costs, and that no imminent merger or acquisition can be implied because of such an action.

However, the United/Frontier agreement goes beyond United’s acquisition of 42 Frontier airplanes and up to 4,700 Frontier employees. It also calls for a United/People Express joint marketing program. Under the agreement, People Express would also participate in United’s “mileage plus” frequent-flyer program.

The agreement also gives People Express the option to sell to United all or part of its assets. Specifically mentioned in the deal are up to 20 desirable landing slots at Chicago’s O’Hare airport, three departure gates at the Dallas/Fort Worth airport and six at Denver’s Stapleton airport.

Diminished Competition

And, a clause in a recent contract between Pan Am and American, linking Pan Am into American’s Sabre computer reservations system and merging their frequent-flyer programs, states that American would have first chance should Pan Am later sell “a significant portion of its assets or . . . stock of the airline” over the next five years.

What does all this mean for travelers in the short run?

For starters, diminished competition. In March, TWA announced that it was buying Ozark Airlines for $250 million. Both airlines have large hub operations in St. Louis. The agreement combines TWA’s 200 daily flights in St. Louis with Ozark’s 144 flights. TWA chairman Carl Icahn predicted that the combination would eliminate costly “wing tip to wing tip” competition between the two carriers.

But it’s precisely that competition that has kept air fares reasonable. That’s one of the reasons why the U.S. Justice Department has expressed its “competitive concerns” about Northwest Airlines’ proposed acquisition of Republic. Both airlines now compete in 45 domestic markets. Both airlines have large hub operations in Minneapolis and Detroit.

Manager Worries

Some airlines are also concerned. “What’s the choice for the consumer in Minneapolis if the Northwest/Republic deal happens?” asks Laurence Price, route planning manager for British Caledonian, an airline that recently considered a merger (and is still a merger candidate). “The answer is that he hasn’t got any. Is that really what deregulation was supposed to be about?”

Edwin Colodny, U.S. Air chairman, has also warned that airline mergers could defeat the goals of deregulation and that consumers might lose if a few large airlines dominate the industry. “The current assumption that bigger is better should not be blindly accepted,” he said.

United Airlines argues that their purchase of Frontier is in keeping with the spirit of deregulation. ‘We’re not there to acquire Frontier and just take it out of the ballgame,” says spokesman Chuck Novak. “All that this proves is that you can’t have three successful carriers in one major hub.”

What about future air fares and competition? “There’s still competition in the markets where we competed with Frontier,” says Novak. “And in Denver there’s Continental, and they’re a strong competitor. But, if someone were to raise the fares, we expect someone else will come in and try to undercut us.”

New Fare Restrictions

If recent history is any indication, United’s reaction--as well as Continental’s--to such price undercutting by a third carrier would be to simply match the fares--or even beat them--until the new competitor could no longer operate without a devastating financial loss.

For some travelers, the unpleasant future has already arrived. In the past few months, major airlines have added a host of new and somewhat unforgiving fare restrictions to their discount tickets, as well as penalty assessments for cancellation or the rewriting of tickets.

The answer, if indeed there is one, may ultimately be found with the U.S. Department of Transportation, the federal agency that assumed only basic policy controls after the demise of the Civil Aeronautics Board.

Despite the government’s current anti-regulatory mood, if the high-price, low-competition scenario becomes a reality, the government could be asked--or forced--by Congress to intervene to once again regulate routes and fares.

Until that happens, enjoy the fare wars while they last. But also consider the likelihood that the airlines who win these wars may not be particularly benevolent in victory.