The Airlines Are Killing Each Other AgainWendy Zellner
American Airlines Chairman Robert L. Crandall has a favorite line he uses to describe 1991. "The only heartening thing we can say is that it's over." For airlines especially, that year, complete with war and recession, was hateful. The carriers that survived lost a staggering $1.6 billion.
Trouble is, 1992 may be bringing more of the same. While weaker carriers are still waging costly fare wars in many markets, most airlines say they've yet to see any increase in traffic. And the simplified fare structure that Crandall tried to force on the entire industry is shaky: The latest crack in the plan came on May 26, when Northwest Airlines Inc. unveiled a family discount. The next day, attempting to defend its structure, American matched Northwest by halving the price of its cheapest advance-purchase tickets. To top it all off, rising oil prices, always an industry wild card, threaten to obliterate any hope of a financial rebound. "No question," declares an executive at a major U.S. carrier. "We're getting squeezed." If fuel prices rise, "we won't show a recovery this year."
NO STAMPEDE. Earlier this year, Crandall attempted to wrestle his airline, at least, into recovery. In April, he announced with great hullabaloo a plan to replace the industry's labyrinth of ever changing fares with a set of only four fares per route. He predicted the simplified system, with sharply lower full-coach fares, would boost travel and revenues. It's still only a prediction.
The biggest problem is that lowered fares haven't provoked a stampede to the ticket counter. When American introduced the new structure, says A. H. Kolakowski, senior vice-president for sales at Delta Air Lines Inc., "they said one factor that would make it a success would be if it stimulated new traffic. That hasn't happened so far." American says demand is strong and more fliers are paying full-coach fares, but Continental and USAir say they've seen no pickup in business since matching American's plan. It may take until after Labor Day to judge whether the fares generate new business. But Kolakowski and others remain dubious.
Moreover, American, instead of establishing pricing discipline, set off a free-for-all. Weaker carriers such as Trans World Airlines Inc., operating under protection from creditors, started beating American's fares as soon as they were announced. Crandall's original plan dropped standard coach fares by at least 38%. TWA responded with a promise to undercut American by 10% to 20%. That set off a scramble that dragged prices down a further 10% to 25% industrywide, leading analysts to downgrade second-quarter estimates for many carriers. Most are expected to report losses (chart).
With the economy still weak, the fare wars show no sign of abating. In the last week of May, the industry managed to nudge prices up in about 1,500 markets. But that boost, pushed through when TWA's six-month-old business-saver fares expired, merely restored prices to their levels of mid-April. It's probable that TWA or another carrier will soon introduce new cuts. If demands remain weak, the rest of the industry will have to follow.
`BACKLASH.' Even the promised fare simplicity may not survive the year. On major routes, such as New York-Los Angeles, passengers are still confronted with a mind-boggling array of fares, as many as 9 on American alone. And major carriers are under intense pressure to restore corporate discounts to high-volume customers. "We're facing a backlash," says Kolakowski. If carriers buckle, a basic principle of the new fares will have been destroyed.
That means that even without a spike in oil prices, chances for a profitable 1992 are fading. Before it dawned on oil markets that Saudi Arabia was setting aside its traditional role as OPEC's leading advocate of moderate prices, airline analysts had reduced industry profit estimates from $500 million to break-even. Now, assuming a hike of $3 per barrel in oil, Airlines Economics Inc. on May 27 sharply downgraded its industry forecast, predicting a loss of up to $1 billion for U.S. carriers in 1992.
OPEC is a notoriously undisciplined cartel, and some of its members are likely to produce more than their quota. But even if the price per barrel doesn't rise the full $3, to $23, that many fear, the airlines may wind up remembering 1992 as the recovery that wasn't.