Soaring fuel prices. Recession. Labor unrest. Heavy debt. The bad news is like a tolling bell for UAL Corp.'s Stephen M. Wolf and AMR Corp.'s Robert L. Crandall. Add it up, and the two big carriers lost more than $500 million on operations in the fourth quarter alone. There's no sign of relief. And with hundreds of new airplanes on order, Crandall and Wolf face onerous financial commitments.

Sound like time to retreat? Forget it. Plagued by a stagnant domestic market riddled with ailing, fare-slashing competitors, Crandall and Wolf are each spending billions in a battle to dominate international air travel into the next century. Wolf, who already commands the Pacific, lobbed the first grenade on Oct. 23 when he announced that United Airlines wanted to buy the London routes of Pan American World Airways Inc. in a deal valued at $400 million. With little choice but to fight back, Crandall got on the phone to Carl Icahn and agreed to plunk down $445 million for the London routes of the raider's Trans World Airlines Inc.

The dogfight for global supremacy is on. By agreeing in rapid succession to purchase the London routes, United and American Airlines are making a bold bid to become what Pan Am and TWA never really were: powerhouse flag carriers with strength both at home and abroad. Both airlines have been expanding across the oceans for some time. But since skyrocketing fuel prices put the industry in a tailspin, they've increased their pace exponentially, buying up the assets of troubled carriers.

Never has there been a more treacherous time to expand. Since Iraq invaded Kuwait, sending fuel prices up, the U. S. airline market has been imploding. Pan Am and Continental Airline Holdings Inc. both ran out of cash and filed for bankruptcy. Already bankrupt, Eastern Air Lines Inc. has been pushed to the edge of extinction. USAir Inc. and Northwest Airlines Inc. have had to scale back or delay growth plans drastically. All told, some 10,000 airline workers have lost their jobs.

The pressure has only exacerbated the problems the industry already had: slowing traffic, too many seats, rising labor costs, and rampant fare wars. United, American, and Delta are winning the war, but the combat exacts a price. A pitched labor conflict at American has prompted a pilot "sickout," causing Crandall to cut 11% of his flights. Delta is being held hostage by a fare-slashing Eastern, which is being propped up by the bankruptcy court. Then there's United, which has three open labor contracts and has had to lend $50 million to bankrupt Pan Am just to preserve its route deal. United may end up buying the troubled carrier whole.

With the U. S. industry threatening to melt down to five or six major players, many politicians fear competition is evaporating. Talk of re-regulation is coming from Capitol Hill. But Washington is also sensing something bigger--a new era in aviation. Markets are consolidating all over the world, and it may now be inevitable that a dozen or so super airlines will emerge (table, page 58). In such a world, Crandall and Wolf would be dominant figures.

OPEN SKIES. So far, their thrust toward Europe has only turned up the pressure to open the skies to free competition. Already, talks with Britain about transferring landing rights at London's Heathrow Airport to American and United promise to yield British Airways PLC unprecedented freedom to land and carry passengers in the U. S. Other countries from Germany to Singapore are likely to demand the same for their airlines. Meantime, Transportation Secretary Samuel K. Skinner is mulling a looser interpretation of rules that now limit equity investments in U. S. airlines. With dried-up capital markets in this country threatening to choke the industry, "it's time to reexamine the issue of foreign ownership," Skinner says.

No surprise, then, that Crandall and Wolf are willing to move so forcefully. Even if they are successful in establishing worldwide route structures, however, there is no guarantee the strategy won't stretch them too thin. When Pan Am's Juan Trippe and TWA's Howard Hughes expanded across the oceans in the halcyon days of flight, their challenge was to pioneer new routes and airplane technologies. For Crandall and Wolf, the real trick will be finding a way to gird the globe and still turn a profit.

Both Wolf, 49, and Crandall, 55, scoff at the notion of a personal rivalry. But their competition is shaping up as a classic. American's success and Crandall's outspoken, go-for-the-jugular style made him the industry's most feared competitor in the 1980s. Wolf has proved his mettle more recently. In the space of a month last fall, he ended a three-year battle with unions over control of United and placed a record order of $22 billion for planes in a bold move to out-expand American. Claims Hertz Corp.'s Frank A. Olson, a UAL director: "He has as much fire in his belly as Crandall." The two CEOs' styles, however, couldn't be more different. Executives who have worked for Crandall say his tough-guy public persona doesn't dilute much in private. He's thoroughly prepared, bulldog aggressive, and loves nothing more than vigorous debate. He has spent most of his career at American, and it is fashioned in his image--lean and well-informed. Crandall has forged the best cost structure of the top three airlines. And he pioneered the computer reservation system that let American drive weaker competitors crazy.

Wolf spent 15 years at American, some working under Crandall, though not directly for him. But since then the enigmatic Wolf has been a vagabond. He went on to Pan Am and then Continental, where he was one of Frank Lorenzo's revolving-door presidents. After nine months he left, landing at Republic Airlines Inc., which he turned around and led into a merger with Northwest. Then he resuscitated Flying Tigers Inc. before Frederick W. Smith's Federal Express Corp. swallowed it whole.

EXPANSION DERBY. Although his turnaround efforts both involved winning concessions from labor, Wolf's simmering feud with United's pilots has become that company's central issue. Even there he differs from Crandall. American's chief has charged into his current dispute with acrimonious full-page newspaper ads and verbal jabs. Wolf, described by associates as thoughtful and highly conscious of his image, has battled unions from the shadows.

Crandall and Wolf are said to like each other, but one former American executive remembers an early example of Wolf's willingness to tweak the boss. At a budget meeting in the late 1970s, when Wolf was American's vice-president for Western operations and Crandall was marketing chief, Crandall nixed a supervisor position Wolf wanted to create. Railing on about costs, gesticulating with his ever-present cigarette, Crandall became even more exercised when a new secretarial job came up for review. "Why do we need this position?" he asked. The room hushed and Wolf thought a moment. "That supervisor needs someone to supervise," Wolf offered.

Wolf replaced Richard J. Ferris as United's chairman in 1987, after Ferris was ousted for a bungled diversification strategy. Although Ferris left Wolf with a major union snarl, the new CEO could thank his predecessor for one major coup against Crandall. Ferris got a head start in the expansion derby in 1985, when he persuaded Pan Am to sell its sprawling Pacific system. Crandall, who studied the routes carefully, decided they were too expensive. Now, he admits that decision was a major mistake. The Pacific Rim has developed into the most vibrant airline market in the world. And save for a few individual routes, American has been largely shut out--with no easy entry in sight. "The Pacific is the only problem that I don't know how we're going to solve," Crandall says.

'UTTER NONSENSE.' That's not to say American hasn't built a solid international network. It's just that Crandall has done it the hard way, putting down his head and bulling into Europe and the Far East route by route. Flights to Paris, Frankfurt, and Tokyo sprang from U. S. hubs in Dallas, Chicago, and Raleigh-Durham, N. C., and by 1989, American's international business had become 22% of revenues. International traffic was growing at about a 20% clip.

The industry's troubles, however, finally prodded Crandall to begin a buying binge. In December, 1989, he snapped up bankrupt Eastern's Latin American routes and other assets for $470 million. A year later, as Continental tumbled into Chapter 11, he grabbed its Seattle-Tokyo route for $150 million. Together, the routes generate about $335 million in revenue a year.

Crandall has had his frustrations, though. Last year he lost a fight with United to get U. S. approval for a new Chicago-Tokyo route. And a route between Chicago and Heathrow, which he bought in 1989 for $110 million from TWA, was transferred by Britain to London's less desirable Gatwick Airport. The bilateral treaty between the U. S. and Britain stipulates that Pan Am and TWA's routes to Heathrow can be transferred to another carrier only if there is also a transfer of corporate control. With United already fighting that battle over its Pan Am deal, the time was ripe for American to jump in with the purchase of TWA's routes. Was Crandall afraid United was becoming the dominant carrier? "That's utter nonsense," he bristles. Maybe so. But London was a market both carriers had to have.

It's clear why both executives are frustrated at home. In the U. S., traffic grew only 3% last year, as the industry added about 7% in capacity. That led to stiff fare competition in some markets--and crimped margins. In the Pacific, on the other hand, traffic grew by about 24% last year. Wolf and Crandall are also attracted by the profitability of long-haul international flights, which are filled with business fliers willing to pay hefty fares. And forget about all-out fare wars; ticket prices are usually regulated through bilateral treaties.

B LIST. International growth also helps buy labor peace. As United and American stretch around the world, they'll need more and bigger planes. To a pilot, that means increased job and promotion opportunities, higher seniority, and more job security. Crandall was able to use that logic in 1983 to split his pilots' union into two pay scales--a higher-wage A scale for senior pilots and a B scale for new recruits. The result: Though United eventually adopted a B scale, American's costs are 9% lower.

The question is how the airlines will pay for all their ambition. Because of soaring fuel prices and sluggish traffic, United had an estimated $250 million operating loss in the fourth quarter alone. American dropped an estimated $290 million. This quarter already looks just as bad, and if war breaks out in the Middle East, it will be much worse. Both United and American have about $800 million in cash, a nice cushion. But Standard & Poor's Corp. analyst Philip Baggaley estimates debt at both carriers is more than 70% of total capital when off-balance-sheet capital leases are figured in. American already seems to be feeling the pinch. Not only is it cutting some flights, but at a time when the outlook for airline stocks is depressed, Crandall is also laying plans for an equity offering to finance the TWA purchase.

Even if fuel prices retreat, American and United face a harrowing couple of years. While the industry is getting hit hard on the revenue side by the recession, Crandall and Wolf face stormy skies on the cost side from open labor contracts. That spells trouble for profits, at a time when both men are busy funding multibillion-dollar fleet expansion plans. "It's a lot harder than it was a year ago to make a case for long-term profitability," says Crandall. Echoes Wolf: "We're facing dire economic circumstances."

HIGH HURDLE. While comments like that may be aimed directly at highly contentious labor negotiations, the threat of soaring payrolls is real. Wolf faces three open contracts with three hostile unions. And Crandall is locked in a pitched battle with his pilots, 65% of whom are now on the B scale and are feeling their oats.

Delta Air Lines Inc. set the pace this summer by giving pilots a rich 12.5% pay increase over four and a half years. The Atlanta carrier justifies the move by saying its employees are that much more productive, thanks to loose work rules. If American brought its pilots up to Delta's wages, it might add $360 million a year to costs. And United, which already pays higher wages, would have to ante up $245 million more a year, industry experts estimate. Considering that in 1988, its most profitable year of that decade, American netted just $440 million, that would be a high hurdle. United has been even less profitable, and it also has contracts with mechanics and flight attendants to worry about. Neither United nor American is likely to match Delta, which has historically had higher wages. But labor costs at both carriers will certainly rise sharply.

In the current environment, passing costs along to consumers will be well-nigh impossible. Regular fares are already high enough to discourage many passengers. And a snowballing recession means fewer business trips. Then there's the industry's dirty little secret: corporate discounts. Douglas C. Birdsall, president of travel consultant Travelmation Corp. and Frank Lorenzo's former rate strategist, estimates that many major corporations receive discounts of 30% to 50% on their travel. And as long as there are carriers in financial distress, fare wars will continue to spread. Says Robert W. Baker, American's executive vice-president for operations: "Bankrupt carriers bleed this industry to death."

Amid such upheavals, it's tough to say which carrier is better positioned for the global push. Most analysts say they're neck and neck. American is still likely to enjoy a cost advantage when all the open contracts are closed. And while its Raleigh-Durham hub isn't as efficient as it could be, profitability should improve as Crandall introduces Fokker 100s, which are best suited to its routes. American's Chicago hub will also get a boost from the 40 gates Crandall bought from TWA as an adjunct to the London deal. Another Crandall advantage is that he still owns 100% of the highly profitable Sabre computer reservation system. United sold half of its Apollo system to a joint venture with six other airlines.

WILD CARD. But United's franchise in the Pacific outshines anything Crandall can muster. And Merrill Lynch & Co. analyst Candace Browning says Wolf is only now aggressively managing a domestic system that had been neglected for years, as United waded through its takeover battles. If Wolf can somehow get his bellicose unions to trade reasonable wage increases for promises of growth, he probably will have the upper hand against Crandall.

Washington's reaction to the current crisis is a wild card for everybody, however. The environment can be seen in two ways. Some, like Skinner, view it as a great opportunity: It is positioning a few powerful U. S. carriers to take on foreign competition in a global marketplace. Others, like Representative James L. Oberstar (D-Minn.), see only reduced domestic competition, with a few carriers holding passengers hostage to monopolistic hubs. Oberstar, chairman of the House aviation subcommittee, gets a taste of that every time he flies home to Northwest's hub in Minneapolis.

Such concerns could easily lead to stern legislative action. Oberstar is scheduling hearings to examine competitive issues, which could build sentiment for re-regulating some aspects of the industry. And others are calling on the airlines to divest themselves of their powerful computer reservation systems.

But the sheer economic logic of global competition will likely prevail in Skinner's favor. The push into London could be the opening gambit. Transportation Dept. sources say that, in return for transferring Heathrow landing rights to United and American, British Airways will likely get access to two new cities. More important, it should get highly coveted "beyond rights"--clearance to pick up passengers in this country and fly them to another foreign destination.

Although such rights are negotiated separately with each country, others will clamor for them. After all, American has rights to pick up passengers in Paris and fly them to other countries, but Air France can fly passengers only to U. S. gateway cities. And in the Pacific, while United and Northwest can pick up passengers in Tokyo and fly them to Bangkok, Thai Airways Co. isn't allowed to do the same in reverse. Thai authorities, in fact, are threatening to slash the number of U. S. flights they'll let land for just that reason. Japan may also deny United landing rights in Tokyo for its flights from Chicago, pending talks over JAL cargo flights to O'Hare. "There's a great deal of dissatisfaction," says Richard Stirland, director of corporate development at Cathay Pacific Airways Ltd. in Hong Kong. Says analyst Michael Derchin of County NatWest Securities USA: "We're clearly in the beginning stages of a global airline market."

CAPITAL IDEA. Former Civil Aeronautics Board Chairman Alfred E. Kahn, who led the push for deregulation, insists globalization can go a long way toward overcoming that policy's shortcomings. He applauds Secretary Skinner's rethinking of the law that limits foreign investment in U. S. airlines to 25% of the voting stock. "We're cutting off our nose to spite our face if we don't let some foreign capital in," Kahn says. "It's one way to give competition a real try." One big beneficiary of such a change would be USAir Chairman Edwin I. Colodny. After losing $470 million this year, a spokesman says, Colodny may turn to foreign investors for help.

Globalization is no panacea for United, American, and other carriers. It is difficult and expensive to build air travel business overseas. Reworking hundreds of bilateral treaties will be slowed by bureaucratic and political snags. To meet global competition, United and American will have to upgrade service and master new cultures. In some markets where terrorists are a threat, security will be a major obstacle. Millions must be spent to establish a brand identify. But after surviving the brutal domestic air wars in relatively good shape, Wolf and Crandall might just pull it off.


United and American aren't the only big airlines with grand international plans. Their strongest domestic rival, Delta, has made some key foreign moves. A number of European and Far Eastern airlines are also aggressively adding routes and seeking alliances that will help them overseas. Here are the carriers in position to give United and American a run for their money.


Estimated 1990 revenues: $10.9 billion

Aggressive, government-owned carrier will be Europe's biggest after acquisition of UTA and Air Inter. Top-notch service and a new marketing link with USAir will help it compete with U.S. carriers. High costs make it vulnerable to European deregulation


Estimated revenues: $9.7 billion

Privatized by Thatcher in 1987. Strong reputation for service and marketing. Would bear the brunt of competition from United and American at Heathrow but should win rights to expanded U.S. service in return


Estimated revenues: $2.7 billion

Businesspeople love it. Exceptional service doesn't tarnish hefty profits, but Hong Kong's brain drain is pinching margins. Faces sharp rise in labor costs


Estimated revenues: $9.8 billion

America's No. 3 airline, Delta benefits from strong fare structure, loyal business passengers. Conservative culture has limited international expansion, but financial strength may allow it to catch up. Has three-way marketing and equity relationship with Singapore Airlines and Swissair


Estimated revenues: $8.8 billion

Dominates Tokyo's Narita Airport. Prime vehicle for nation's obsession with worldwide travel. Huge fleet, sprawling route network. Lusts after greater access to U.S., where it has hotels. Dmmestic rival All-Nippon Airways is turning up heat internationally


Estimated revenues: $3.8 billion

Has used alliances and its big, long-haul fleet to broaden scope. But has yet to make its 20% investment in Northwest Airlines pay dividends via marketing agreements. A liberalized U.S. market might help


Estimated revenues: $9.5 billion

Poised to cash in on unification and the opening of Eastern Europe. Government-owned carrier recently bought Pan Am's prized inter-German service and now dominates Berlin as well as Frankfurt and Munich. Loyal business travelers, but tough unions


Estimated revenues: $7.2 billion

United's biggest U.S. challenger in the Pacific, Northwest is strong internationally. But its domestic and North Atlantic systems need work. Management currently preoccupied with heavy debt resulting from LBO


Estimated revenues: $5.6 billion

Chairman Jan Carlzon is a maestro of marketing agreements. Ups and downs with his 16% stake in Continental: Shared Newark hub has boosted traffic, but Continental's Chapter 11 forced a $106 million writedown


Estimated revenues: $3.2 billion

Like Cathay, this airline has a golden reputation among business customers. Its `Singapore Girl' service draws raves. Fat 30% margins despite high costs of expansion, labor. Marketing relationship with Delta and Swissair, solidified by reciprocal 5% equity stakes


      1990 REVENUES*         $11 BILLION
      1990 NET EARNINGS*    $100 MILLION
      MARKET SHARE*** 16.5%
      1990 REVENUES*  $11.7 BILLION
      1990 NET LOSS*  $18.9 MILLION
      MARKET SHARE*** 16.6%
      *Estimates**As of Sept. 30. Includes capital leases
      ***Share of U.S. airlines' worldwide traffic
      *Estimates**As of Sept. 30. Includes capital leases
      ***Share of U.S. airlines' worldwide traffic
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