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Lorenzo Looks Like Winner in Airline Wars

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It has been a week of triumph for Texas Air Corp. and its chairman, Francisco A. Lorenzo, who is emerging as the big winner in airline deregulation. On Monday, Lorenzo agreed to acquire People Express, and its failed subsidiary Frontier Airlines. On Thursday, the Department of Transportation granted its approval to Texas Air’s acquisition of Eastern Airlines.

Thus, Lorenzo, a 46-year-old Harvard MBA who took his first operating job in the airline industry only 14 years ago with Texas International Airlines, has put together an airline that will be the largest in the United States, with roughly 590 aircraft and revenue of $8 billion to $9 billion.

But more importantly, Lorenzo’s company is just about the lowest-cost carrier in the business. He is thus in a position to set his fares at whatever level is necessary to win a market or generate a desired level of profit. That is why Wall Street favors Texas Air, despite the enormous debt--$2.8 billion--that Lorenzo has taken on to build his nationwide airline. “As the low-cost producer, he now has the size and market power to dictate his own profitability,” says leading airline analyst Michael Derchin of First Boston Corp.

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Big Are Getting Bigger

That’s what many people are afraid of, that with the rash of recent mergers--Western Airlines into Delta, Republic into Northwest, Ozark into TWA and those of Texas Air--the heyday of competitive low air fares is over. Deregulation was supposed to open up competition, but now the big are getting bigger again. In 1977, a year before deregulation, the top six airlines accounted for 67% of the domestic market. At present, it is estimated that the top six airlines will account for 73% of the market once Texas Air’s acquisitions are completed.

There is geographic discontent. Sure, there are $99 fares between New York and Los Angeles, but “what about Washington, D.C., to Nashville? That’s $250,” complains Morten Beyer, president of Aviation Marketing Services in the nation’s capital. The Los Angeles-to-Spokane, Wash., fare is more than double that of Los Angeles to Seattle--80 miles from Spokane.

So what’s the bottom line? Has deregulation been a boon or a boondoggle?

The answer, on balance, is boon. The real question to ask on deregulation is not are the big getting bigger, but are we better off when government’s grants and charters pick an industry’s top five companies or when cutthroat competition does it?

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Fares Down 20% in Decade

Alfred E. Kahn, the Carter Administration chairman of the Civil Aeronautics Board who pushed deregulation, has no doubt of the answer. “Fares are down because we got government out of the way,” says Kahn, now professor of economics at Cornell University, “down 20% in real (i.e., inflation-adjusted) terms from 1976 to the beginning of 1985.”

And this year has seen them fall further, as domestic air travel--which has doubled under deregulation--is at record levels. More people are flying, the cost and fare structure of the industry is lower, and yet it is employing more people than before deregulation. Offsetting, to some extent, the disruption to small cities that received subsidized air service under regulation is the growth of regional airline hubs. From a few, there are now about 30 around the country.

No question, wage levels are down and labor unions have suffered. But wages are down and unions are suffering in other industries--steel and machine tools for example--where there is no question of government regulation. And the employment outlook for the airline business, as the low fare structure expands air travel, is a lot better than for those other industries.

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Yes, fares will rise. But from what has been seen so far, it’s nothing to get hysterical about. Lorenzo’s recent changes in the fare structure of Texas Air’s subsidiary, Continental Airlines, is probably a pattern: Coach is up 10%, but there is a deep discount fare if you order tickets 30 days in advance--with a 50% penalty if you change plans. Business travelers may not be interested, but vacation travelers will be.

Finally, a related question, why has Lorenzo won so big? Because he has the ability to learn from his mistakes. Southwest Airlines, still one of the strongest regional airlines in the United States, beat Lorenzo’s Texas International in the Houston-Dallas-San Antonio market in the 1970s, showing him in the process how lower fares attract more passengers and fill up planes, lowering costs through more efficient use of aircraft and leading to still lower fares.

Lorenzo, an austere man who is known more than admired for his toughness, remembered that lesson in 1977 when, as president of Texas International, he opposed deregulation in testimony to Congress. If they allowed open competition for routes, Lorenzo told the lawmakers, a large carrier with ample finance--by which he meant United Airlines--would lower costs and fares and come to dominate the business. Congress went ahead and deregulated.

And Lorenzo went ahead and put together what is now the country’s largest and lowest-cost airline. Will he now take advantage of his size and market power to reap high profits from high fares? Not if he doesn’t want to learn again the lesson that Southwest taught him in the 1970s. Under deregulation, even the biggest has to watch his flanks.

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