Among the Airlines, It’s Survival of the Fattest : Airlines: Braniff’s suspension of operations and filing for bankruptcy protection is the latest indicator of a trend toward domination of the airline industry by a few mega-carriers.
Unfortunately, it is time to say goodby to Braniff Airlines . . . again.
For the second time in less than eight years Braniff has suspended operations. In late September the nation’s 15th-largest airline filed for bankruptcy protection. Earlier this month the carrier shut down scheduled operations and put itself on the auction block.
In retrospect, Braniff’s failure comes as no surprise. It is a simple case of an airline not being able to compete with larger carriers.
Braniff simply could not go up against the aggressive marketing campaigns, frequent-flier programs and flight frequencies of the big airlines. It tried to expand, but lacked sufficient capital to do so.
What happened to Braniff is simply the latest example of the trend toward oligopoly in the airline business. In this age of mergers, failures and consolidations, the situation threatens to get worse.
One of the reasons Braniff failed was its inability to secure a partner--a larger carrier to either absorb it or buy a controlling interest.
Braniff was not the only airline with this problem. Last year Thomas Plaskett, chairman of Pan Am, publicly acknowledged that in order to survive, Pan Am would need a merger partner.
Yet earlier this year, when Northwest Airlines was for sale, Pan Am, surprisingly, was among the bidders. In a bold and ultimately unsuccessful move, the airline joined forces with a group of investors to raise money to buy Northwest.
“If it had worked,” said one airline official, “Pan Am would have bought more than an airline. Pan Am would have bought time.”
In the past few years, ownership of some carriers has changed rapidly. The number of owners has decreased as airlines have failed, been sold or merged into larger carriers.
But what is beginning to concern industry observers and the U.S. Department of Transportation is not just mergers and airline failures. Rather, it is the new ownership agreements and how they might affect frequency of flights, choice of routes and, perhaps most important, the cost of your airline ticket.
Airlines are quickly forming global alliances in an attempt to secure long-term survival in a deregulated environment. These are more than just marriages of convenience. In some cases the liaisons are shotgun weddings--bonds made necessary because of dismal economic projections.
In October, in the wake of the Northwest purchase by Wings Holdings Inc. (in which the Dutch airline KLM has a stake), U.S. Secretary of Transportation Samuel K. Skinner announced that “We quickly recognized that the magnitude and the potential impact of the transaction could cause a significant change in the operations and character of the company,” and said that his department would begin a thorough review of the purchase.
“We must assure that a carrier ‘recently acquired’ is fit, willing and able to perform service and that U.S. airlines must actually be controlled by U.S. citizens.”
Two years ago, Jan Carlzon, SAS chief executive, predicted that no more than five of the current European airlines would survive by 1995. The way things are going, Carlzon’s prediction might come true two or three years early.
One by one, airlines are forging domestic and global alliances, creating mega-airlines out of marketing agreements, route swapping, code sharing and, in some cases, substantial ownership of one airline by another. In most cases the resulting companies are now multinational.
British Airways already has absorbed British Caledonian. Recently the airline was poised to swap $750 million for a 15% stake in United Airlines. The deal fell through, but may be revived.
There are reliable reports that KLM, Aer Lingus, Finnair and Sabena are each quietly looking for a merger partner or to acquire another airline. In Germany, Air France and Lufthansa have begun joint operations with a new airline, Euroberlin France, with scheduled service from West Berlin to destinations within West Germany.
That’s just the start.
Other significant ownership changes:
--Ansett Airlines (an Australian carrier) owns a 20% stake in America West. The airline also owns 20% of Ladeco, a Chilean airline.
--A year ago Texas Air (owner of Continental and Eastern), faced with ballooning debt and unable to achieve an operating profit, announced an alliance with SAS. The “preferential air carrier agreement” links both airlines’ schedules and flights around the world, and the Scandinavians also paid $50 million for the right to buy up to 10% of Texas Air. (Under federal law, American air carriers can have a maximum of 25% foreign ownership.)
The agreement was nothing new to SAS. In 1988 the airline paid about $160 million for a 40% share in Aerolineas Argentinas. Not content with two major airline agreements, SAS struck again two months later, buying 24.9% of Britain’s second-largest airline group: British Midland Airways, Manx Airlines, Loganair and London City Airways.
--In the South Pacific, Qantas became a large shareholder in Air New Zealand (a bid for 100% of the airline by British Airways in partnership with a Japanese tourist development company didn’t work out). But Qantas isn’t alone in the deal: It owns 19.9% of Air New Zealand, American Airlines owns 7.5% and Japan Air Lines will own another 7.7%, the remainder of the airline stock divided among a host of other investors.
--In the Middle East some airlines are talking privately about mergers. “It’s the only way we’re going to be able to compete with the mega-carriers,” said the chairman of one airline. “Individually, we’re all too small. But together we can be a mega-carrier, too.”
Royal Jordanian has searched for a merger partner in the Middle East or Europe for two years. So has its Israeli counterpart, El Al. There have been no takers for either airline. (Recently, Royal Jordanian suspended flights to Los Angeles because of poor load factors and other financial problems. El Al reportedly still is confronted by cash problems.)
Some veteran airline observers contend that these new partnerships and alliances will have a serious impact on airline routes, equipment and, ultimately, the cost of airline tickets, which are likely to rise substantially.
When pilots struck Eastern Airlines last March, American Airlines moved quickly into Miami. Within a few weeks it had established a major hub there. If Pan Am fails, Delta Airlines is poised to grab many of its routes, including its nonstop transcontinental flights between San Francisco and New York and Los Angeles and New York. Within days of the Braniff bankruptcy, USAir and Trans World Airlines added flights to Kansas City, where Braniff had controlled 30% of the market.
Foreign airlines have not ignored the sobering fact that 10 years after U.S. deregulation, eight large airlines control 94% of the U.S. market.
The foreign airlines now want a piece of that market, especially as some of it seems to be up for sale. In European markets where mergers already have occurred and competition on routes has diminished, air prices have risen.
That also has happened in the United States. A study by the DOT showed that at many airport hub cities where the traffic is substantially controlled by one airline, air fares have risen dramatically.
The report showed significant fare hikes in Detroit (27%), Salt Lake City (26%) and St. Louis (22%), where TWA controls more than 80% of the flights. A logical argument can also be made that in markets dominated by single airlines, service standards have decreased.
As airline alliances increase in number and the number of airlines continues to decrease, there is a very real danger that route domination by a small group of the mega-carriers will result in increased air fares and possibly decreased service.
