CLINTON’S INDUSTRIAL POLICY : An Airline Revival by Committee? Could Be

The airline business, in a word, is in crisis. And that’s the good news, because a crisis may be just what’s needed to bring about new structures and arrangements in the industry.

A stronger airline business could emerge from today’s troubles--but salvation will be neither quick nor easy. And first we’re going to get high drama on the national stage.

President Clinton met Monday at Boeing Co.’s Seattle headquarters with the heads of the major airlines to determine what the government could do. As nobody apparently had a good answer, Clinton decided to form a commission.

The grandly named National Commission to Ensure a Strong Competitive Airline Industry will convene soon in Washington--its 15 members drawn from the top ranks of aerospace, airline unions, universities and public agencies. And some good could come from it.

“It may take an outsider to cut through the problems and the factions in this industry,” says Lee Howard, co-director of Airline Economics, a Washington research firm.

The problems of the airline business can be stated simply and starkly: The more passengers the airlines carry, the more money they lose. Passenger traffic was up a healthy 6.5% last year, but fares fell and U.S.-based airlines collectively lost $1.9 billion on operations.

Counting financial losses from depreciation on old aircraft and financing of new planes, they lost $4.5 billion.

Major airline bosses, such as Robert Crandall, chairman of AMR Corp.--the holding company of American Airlines--blame the debacle on airlines such as Continental, Northwest and TWA, which are operating under Chapter 11 of the bankruptcy law. Crandall charges them with pricing uneconomically because they don’t have to pay creditors or satisfy stockholders with profit and dividends.

The Chapter 11 carriers fire back that Crandall caused today’s problems by slashing fares 50% last summer in what they charge was an attempt to drive competition out of business.

The aerial dogfight might be amusing if the consequences weren’t so serious. Because of postponements of plane deliveries, Boeing last week announced the elimination of 28,000 jobs. Pratt & Whitney, the aircraft engine maker, cut back operations recently, and the downturn is being felt by firms large and small throughout the vast aerospace business.

The frustrating part is that no one was prepared for the downturn. For more than a decade, air travel had been growing rapidly in the United States and abroad, thanks to reduced fares and rising incomes. Airlines ordered planes on expectations of continued growth, and plane makers expanded capacity. Then, in 1991, U.S. traffic fell during the recession; in 1992 it rebounded but at fares that proved unprofitable.

So now there is an agonized reappraisal. McDonnell Douglas has just come out with a 20-year forecast for passenger traffic that is 5% down from its forecast last year--a reduction of $50 billion worth of business in the global, industrywide outlook.

What can a commission do about that? Short-term it can bring some order to the chaos. It can urge the Chapter 11 carriers to operate more economically, perhaps set a limit on how long they can operate in bankruptcy, one industry expert says.

“They can repeal the latest $2 federal ticket tax, which takes $2 billion a year from passengers,” says John Eichner of Simat, Helliesen & Eichner, a New York-based airline consulting firm. Tax relief might allow fares to be low, but more profitable for the airlines.

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There is even talk in Washington of some re-regulation to raise fares. But that would only discourage passengers and further compound the industry’s problems.

In any event, whatever short-term moves are made to help the airlines, the real solutions are likely to be more dramatic.

The U.S. majors--American, United and Delta--may concentrate on long-haul traffic domestically and overseas and give short-distance travel over to smaller airlines--either their own subsidiaries or independent lines. Some see that pattern emerging already in cooperative ventures between American and Phoenix-based America West and Houston-based UltraAir.

The model of small airline efficiency is Dallas-based Southwest, which continues to spread its low-cost, high-spirited service to more parts of the country.

Southwest last year was the only sizable U.S. airline to operate profitably. And it is the inspiration for regional or niche airlines that are starting up or catching the attention of financial markets--Reno Air, Morris Air in Salt Lake City, Air Wisconsin, Metro Air in Dallas and the Northeast.

The business will also become more global, with foreign airlines increasing investments in the U.S. market. The Clinton Administration, in turn, will open tough negotiations with the European Community over subsidies to Airbus and with other governments over restrictions that hobble the ability of U.S. airlines--which are highly competitive--to take advantage of growing overseas markets.

There will be a lot of advantage to take. In this troubled period, air travel’s potential should be kept in mind. Even today, fewer than 35% of the U.S. adult population take a commercial flight in any year--it was less than 25% in the regulated 1970s. And the world market is simply waiting to be tapped: U.S. travel is more than three times that of Europe, 23 times that of Asia and 38 times that of Africa.

When the airlines and aerospace get their acts together, business could take off.