The fight for dominance in the U.S. airline industry is winding down. Now begins the real struggle.
Gone are the Braniffs and Westerns, the Ozarks, Republics and Nationals. Eastern is being liquidated. Once-regal Pan American is struggling to reorganize under bankruptcy court protection. So is Continental. Trans World Airways is hanging on for dear life.
American, United and Delta Airlines are the U.S. behemoths now. And their primary competition is no longer struggling domestic carriers.
Nine years after American Airlines made its first transatlantic flight and eight years after archrival United inaugurated service across the Pacific, the airline business has entered a new, global era.
Unlike the past, growth in air travel is now greatest in the international market--particularly the Pacific region--and domestic routes within nations other than the United States. Airline officials expect the number of passengers flying internationally each year to nearly double by 2002--to more than 81 million.
Governments, meanwhile, have been at loggerheads over who should be allowed to fly where. The United States and Great Britain have dueled over access by U.S. carriers to London's choice Heathrow Airport and British Airways' additional access to key American hubs. At the same time, other countries are loosening their grips on airport access, opening new markets and, in turn, creating more competition.
And, further fueling the competitive fires, carriers in the United States and abroad are slashing fares on international flights--to the delight of consumers, who are able to fly round trip between Los Angeles and Australia, for example, for a mere $799.
"The whole (international) market is going to be the market of the 1990s and beyond, and what is the U.S. flag carrier's role going to be? Are we going to have a dominant presence?" U.S. Transportation Secretary Samuel K. Skinner asked rhetorically in a recent interview.
Whatever the outcome, the traveling public may be the biggest winner if the intensifying competition leads to lasting lower fares and improved service.
"It makes a lot of sense if we can fly a passenger from Chicago to Los Angeles and then take him to Tokyo as well," said Jack C. Pope, vice chairman and chief financial officer of UAL Inc., parent of United Airlines. "The passenger gets more scheduled frequency. We create a loyal customer. He knows he can get consistent service. There are no surprises. It's the same product wherever he goes."
But for now, U.S. carriers appear to be trailing in the international arena.
British Airways and Japan Air Lines have the largest shares of the international market, as measured in the number of paying-passenger miles. Pan Am is hanging on to the No. 3 position, but Luthansa, Air France and Quantas rank ahead of United. And KLM is ahead of TWA and American, which round out the top 10.
In an indication of what the future might hold, aircraft builder Boeing estimates that 60% of all jetliners sold during the next 15 years--worth more than $360 billion--will go toward expanding non-U.S. fleets.
But some close to the industry believe that U.S. airlines are well-positioned to claim a major stake in the growing international market. Assistant Secretary of Transportation Patrick V. Murphy, for one, argues that the hub-and-spoke route system that resulted from deregulation of the U.S. industry in 1978 has enabled major American carriers to feed many more passengers from around the country into foreign routes.
Observers agree that a combination of an extensive route system and a healthy balance sheet are two of the critical criteria for surviving--and thriving--against global competition.
But there are areas where carriers can get an edge. For example, take "third-party" work such as maintenance, pilot training and other technical services performed for other airlines. Carriers that do that work are able to, in effect, subsidize their own operations in these areas while increasing revenue, said Paul Turk, an analyst with Avmark Inc., an Arlington, Va.-based airline consulting company. Strong carriers, industry observers say, will also include those that are creative about forming joint-marketing agreements and partnerships that involve sharing such resources as reservation systems.
United, Delta and American--all of which are in solid financial condition and have good route networks--are the U.S. carriers that best fit the survivor profile, airline officials say. Also well-positioned are Japan Airlines, which has the largest share of the fast-growing transpacific market, and other Asian carriers, which are pursuing expansion with zeal and stress high-quality service.
Much attention has focused on an especially nasty skirmish between the United States and Great Britain, which are meeting this weekend to work out their differences. American Airlines--armed with TWA's old routes--and United--armed with Pan Am's--has fought to gain access to Heathrow. The British in turn have demanded concessions from the United States.
A 1980 treaty between the United States and Britain granted landing rights at Heathrow to Pan Am, TWA and British Airways, by name. At the time, it was envisioned that the three would be around forever. With TWA and Pan Am in desperate need of the cash from the sale of the routes, some U.S. officials feared that British recalcitrance was designed to eliminate two of British Air's competitors in the international arena.
Britain argued that the treaty gave the United States an advantage by permitting two U.S. carriers, but only one British airline, access to Heathrow. Last week, the British government decided to open Heathrow to more carriers, but the immediate beneficiary was Britain's own Virgin Airways.
The British, meanwhile, have been negotiating to fly more planes into the United States from London. British Air already has the lion's share--39%--of the New York to London traffic. In addition, the British were seeking "beyond" rights--to pick up more passengers in the United States and fly them to other foreign destinations, particularly Latin American cities.
Cross-pollination of international airline companies is making the industry's global picture murkier. Scandinavian Airlines System, for example, owns 16.8% of Continental Airlines. KLM has 10.5% of the voting shares in Minneapolis-based Northwest Airlines. Ansett Airlines of Australia has a 20% chunk of Phoenix-based America West Airlines, and Japan Airlines owns 20% of Hawaiian Airlines. Delta, Singapore Airlines and Swissair own 5% of one another.
In addition, American Airlines owns 7.5% of Air New Zealand. "It is a quality airline," said Alton Becker Jr., an American spokesman. "We wanted to see how business is done in the Pacific."
Foreign investment in U.S. airlines is seen as a major industry trend in the 1990s. Skinner recently decreed that foreign carriers may increase their financial investment in U.S. lines to 49% from 25%. But foreign carriers would still be restricted to 25%, or less, voting interest. He clearly reasoned that such cash infusions might help rescue Pan Am and TWA. But others fear that the longer-term result could be fewer--though financially stronger--carriers worldwide.
Expanding routes and cross-border ownership are not the only dimensions of the new global arena. Indeed, whole new networks of relationships are developing among airlines, with most now involved in some kind of cost-saving marketing arrangement with one or more foreign carrier.
For example, American Airlines, besides owning a piece of Air New Zealand, also has a marketing and "code-sharing agreement" with the carrier, which means that a passenger can keep the same flight number through different legs of a trip.
Among foreign competitors, British Airways has been especially aggressive in pursuing a global strategy. It has tried several times to buy into airlines outside Britain but has struck out each time. When United Airlines' pilots tried to buy their carrier two years ago, British Air planned to put up 15% of the money, but the deal fell through. More recently, an arrangement was agreed upon that would have given British Air and KLM a 20% stake in Sabena World Airlines, the Belgian carrier. But objections by the European Community scotched the plan. Now there are reports that British Air is interested in some kind of a partnership with USAir.
British Airways has marketing agreements with other airlines in the United States, including United. But once United formally acquires Pan Am's London routes, the United-British Air partnership is certain to dissolve.
"Our objective is to maintain the growth of British Airways and to take advantage of the overall global expansion of the industry," says Sir Colin Marshall, deputy chairman and chief executive of British Airways. "This is being achieved by British Airways and other like-minded airlines . . . forming alliances by merger, acquisition and through non-financial cooperation. Our mission is to be the best and most successful company in the airline industry, a global airline capable of effectively serving a market which has become global in nature."
Japan Air is also aggressive. It operates 73 weekly flights between points in North America and in Japan, compared to 64 flights for United, and would like to overtake Northwest, which has 75 weekly flights. In addition to its stake in Hawaiian Airlines, JAL owns 7.5% of Air New Zealand.
"By the mere fact of being a worldwide airline," says Akio Nakamura, managing director and senior vice president for the Americas, "the future growth of JAL depends on the extent that full advantage is taken of global opportunities in fields of meaningful marketing agreements with cooperating airlines."
JAL sees new opportunities in another part of the world. "We are looking to make (agreements) with the airlines of Eastern European countries," a JAL spokesman said. "With the Iron Curtain lifted, there are some vast opportunities in that area of the world."
Delta, Singapore Air and Swissair call their cross-ownership "the Alliance." They have a novel plan to become the first carriers with round-the-world service, under which passengers could fly from one country to another on the same plane but with different crews on each leg of the trip.
Airlines say other savings benefits could include combined ticket counters, offices and other service facilities in cities where the airlines have operations. Another advantage would be joint purchase agreements. Airline partnerships could purchase larger quantities of items that all use to get a better price.
It is still possible that other American carriers may emerge as significant players in the new globalization. But deregulation and a host of other problems--excessive debt, poor management, labor unrest, unprofitable routes and antiquated fleets--have eliminated or significantly weakened many familiar lines.
Of the 220 airlines that received certification to operate passenger service in the years after deregulation, only 76 remain. Most are small commuter lines.
Western merged with Delta, American bought Air Cal, USAir bought Piedmont and PSA, Ozark merged with TWA, Republic was acquired by Northwest and National was taken over by Pan Am.
Eastern Airlines, once one of the nation's largest carriers, recently threw in the towel after trying for two years to emerge from bankruptcy. Continental is in Chapter 11 bankruptcy for the second time in less than a decade, and Pan American World Airways, after having sold most of its assets in the last 10 years, is also in bankruptcy proceedings. TWA is struggling with staggering debts that caused it to delay payment to lenders. USAir and Northwest are also troubled with high debts and declining passenger loads but are expected to survive.
Don J. Carty, executive vice president of financing and planning at American Airlines, says the survivors have been carriers that took "the right steps," notably buying aircraft that best matched route networks. Carty said keeping debt under control also was a key to American's success. "In rough times, (some U.S. carriers) took all of the cash they were generating to service the debt," he said.
But the next era of competition promises to be just as unsettling--and the role of U.S. carriers remains an open question. Transportation Secretary Skinner, for one, actively encourages U.S. airlines to "to look beyond our borders whether by flying internationally themselves or by entering into agreements with foreign carriers.
"There are going to be greater opportunities in the next few years than we have ever had before," he added. "We want to be in a position to take advantage of those opportunities."
AIRLINE MERGERS Mergers and consolidations of U.S. airlines 1978-1990
American airlines: acquired Air Cal in 1986; agreed to buy Trans World Airlines' London routes in 1990.
Braniff: filed bankruptcy 1982; emerged in 1983; acquired Florida Express in 1987; filed bankruptcy & liquidated in 1989.
Delta Airlines: acquired Western Airlines 1986.
Northwest Airlines: acquired Southern and North Central in 1979; Hughes Airwest in 1980; Republic Airlines in 1986.
Pan American: acquired National Airlines in 1980; files for chapter 11 bankruptcy court protection in January 1991.
Texas Air Corp.: formed by Frank Lorenzo in 1972; created New York Air in 1980; bought Continental in 1981 and merged it with Texas Air in 1981; Continental filed bankruptcy in 1983; bought Eastern Airlines in 1986; bought People Express in 1987 which had merged with Frontier Airlines in 1985; Eastern filed Chapter 11 in 1988; Continental filed bankruptcy again in 1990; Eastern liquidated by bankruptcy court in January 1991.
Trans World Airlines: aquired Ozark Airlines 1986.
USAIR: acquired PSA 1987; Piedmont Airlines in 1988 (Piedmont had acquired Empire Airlines in 1985).
United Airlines: acquired Pan Am's Pacific routes in May 1985: proposed to buy Pan Am's London routes in 1990.
Source: Airline Economics Inc.
INTERNATIONAL TOP 10
Passenger miles (millions) Rank Airline (millions) 1 British Airways 35,830 2 Japan Air Lines 25,974 3 Pan American 22,213 4 Lufthansa 20,706 5 Air France 17,848 6 Quantas Airways 16,266 7 United Airlines 16,105 8 KLM 15,487 9 TWA 14,289 10 American Airlines 11,657
Source: International Air Transport Assn. FOREIGN INVESTMENT IN U.S. AIRLINES
Percentage Foreign airline U. S. airline ownership SAS Continental 18.4% Swissair Delta 5.0% Singapore Airlines Delta 5.0% Ansett Airlines America West 20.0% Japan Airlines Hawaiian Airlines 20.0% KLM Northwest 49.0% British Air United 15.0%
Source: Aviation Daily