If you're planning to fly, why not try one of these super specials:
Washington to San Francisco: $66.
New York to London: $89.95.
Round the world trip: $199. Pets free.
Trenton, New Jersey, to Dayton, Ohio: $13.88.
Too low, you say. There's something wrong. You're right. These are phony prices. But don't rule them out. Airlines are flooding the market with a rash of discount fares, and where they'll end is anybody's guess. The industry may never be the same again.
One thing is certain, thoug - a bit of history is repeating itself. Back in the late 1950s, a revolution took place in the airlines: The introduction of jet aircraft. It led to sharply reduced fares, and what followed was an industry boom as the major domestic carriers rolled up massive operating profits of $2.6 billion between 1958 and 1969. But then came the sick 1970s, and in this period, airline traffic stagnated.
Well, those days of stagnation have recently given way to a replay of the early 1960s. Thanks to those discount fares - especially in the 30 to 45 percent range - passenger traffic has been barreling ahead with double-digit monthly increases since last September. And in response to these hefty gains (which have continued strongly in 1978 despite an uncooperative weatherman) airline stocks, long in the investor's dog-house, have begun to take off. In the past five and a half months, these stocks have averaged gains of about 11 percent, versus a 5 percent decline in the same period for Standard & Poor's 500-stock index. And some classy brokerage houses - such as Oppenheimer & Company and Salomon Brothers - are telling clients it's still not too late to hop aboard for further gains.
Maybe so, but then again, that surge in airline traffic could be short-lived. Try this scenario: Continued proliferation of discount fares - namely bigger discounts and broader discount coverage (such as special fares for youths and senior citizens) - and a faltering economy in 1978 or early 1979. Even one of the bulls, Salomon's airlines specialist, Julius Maldultis Jr., concedes profits would take an immediate drubbing. And how would airlines respond to slowing traffic growth? "That's the problem," admits Maldultis. "No one could predict how far these discounts would go."
Another top airlines analyst goes a step further, declaring: "These discounts - if they continue to spread - could be the swan song for some airlines. The industry has put itself into a profit straitjacket."
National Airlines chairman L. B. Maytag recently said pretty much the same thing, warning that "excessively discounted airline fares" could seriously hurt industry profits.
For some thoughts on the subject, I dropped in to see American Airlines chief Albert V. Casey, who pioneered coast-to-coast "Super Savers" (30 to 45 percent discounts) in April of last year. "TWA and United thought we were out of our mind, but meanwhile they matched us and they're now benefiting from it," he told me.
Casey thinks the resulting surge in traffic should offset the discounts.
But what happens if the economy slows? "The economy is slowing, but we're not," Casey quickly responded. He noted, for example, that the gross national product rose at a rate of 5.1 percent in the third quarter of 1977, while airline traffic grew 7 percent in that period. In the fourth quarter, the GNP was up about 4 percent, whereas airline traffic shot up around 13 percent. "And we're still getting strong double-digit traffic increases right now," Casey said. "We're seeing a rebirth of the airline travel market, and I think it's going to last."
A vivacious man, often bolting from his swivel chair and hovering above me to emphasize a point, Casey rejected the idea that some airlines might fatten their discounts to gain an edge on the competition - especially in a period of declining business. "I don't see any more discounts coming from any airlines because they'd be discounting themselves out of business," he said. "We're down to such a low price now that I don't know how the hell you could do it."
A nonstop talker who recently turned fifty-eight and who is paid $300,000 a year for running the fortunes of the $2.3 billion American Airlines, Casey told me that contrary to the advertisements the industry is really not giving 30 to 45 percent discounts. "Let me tell you a secret," he said. "The vast majority of people getting discounts were already getting them before (through night coaches and group fares). So the discounts the airlines are suffering really average out to only about sixteen to seventeen percent. And that's the economic secret. We're really not giving away the airline business."
Casey figures the airlines should also benefit handsomely on another count - namely, that they're not going to expand as recklessly as they did in the 1960s. "They won't do it for two reasons," he said. "They don't have the financial capacity and they've learned from their past mistakes. Now they'll simply let the load factor (a reference to revenues per passenger-miles) rise on its own." As another significant plus, he expects the industry to be granted a 2 to 3 percent fare increase soon followed by another 2 to 3 percent hike in October.
Considering his optimism, one might well expect Casey to predict another year of rising industry earnings, which last year totaled a record $600 million. Not so. Casey sees profits for the domestic industry as a whole dropping to $400 million to $500 million this year - a decline of 16.5 to 33 percent - because, as he explained it, "the growth in expenses is outpacing the growth in traffic." He estimates about a 13 percent increase in this year's industry costs, versus only an 8 percent rise in traffic. Why only 8 percent? Because a leveling off from current double-digit traffic increases will be inevitable when the industry tries to match the explosion in traffic that got under way last summer.
Despite the likelihood of a sharp earning decline this year (the company benefited from an advantageous fuel contract in 1977), American may soon be delivering its shareholders an unexpected piece of good news. I have it on excellent authority that at the next board meeting (April 19), American will strongly consider reinstating a modest cash dividend. It last paid a dividend - 40 cents a share - in 1971. Casey wouldn't talk about a payout, but sources tell me it reflects management's belief that "the overall trend is upward for the industry."
The overall trend may indeed be up, but American, nevertheless, is taking strong measures to stabilize its earnings - in effect, minimizing the extent to which it gets caught up in the industry's roller-coaster profit swings - through growing diversification. It's expanding its oil and gas exploration activities. It's looking to get into the broadcasting business. And while Casey won't talk about it, I hear American is presently negotiating to acquire a publicly owned insurance company.
Casey strikes me as a nice fella and I wish him luck. But judging from his very own words, one shouldn't get too carried away with his enthusiasm - either for American or for the industry. As Casey candidly put it: "Were a play - but not for the long pull. When the economy goes up, we go up faster. It's that simple."
The problem is, though, that the economy's been getting soggy. Perhaps that's why Cosey only owns about 6,000 of the company's 28.6 million shares. Apparently his head is not in the clouds.
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