Last year most major airlines recovered from a severe case of recession-fed, post-deregulation blahs, but the recovery did not lift all boats, the strong got stronger, the weak disappeared in record numbers and a new kind of government regulation reared its head.
Aided by declining fuel prices and a strong economy, the industry posted its best year ever in terms of revenue (about $44 billion). However, the industry's operating profit of about $2 billion was heavily diluted by interest on debt and other nonoperating expenses to produce a net of only $800 million, or 1.8 percent of revenue, about like selling groceries.
At the same time, American Airlines, the nimble 750-pound gorilla (to United's 900-pound version), kicked off the new year with its "Ultimate Super Saver," at first glance a fare war bonanza for the customer but which is turning out, at second glance, to be a yield producer for the airlines.
What this proves, industry experts say, is that the airlines -- with the help of computers -- are learning how to sell seats without committing suicide, as they almost did in 1982 when they had a record loss of $733 million. Discounts are now allocated selectively and may not be available at all on prime-time flights, but are used to fill up empty seats on other flights.
Delta Airlines, long regarded as the best managed, was shocked when it lost money in 1982, and instituted a major "yield management program," in the euphemism of Joseph A. Cooper, Delta's senior vice president for marketing. What that means is that Delta began monitoring flight bookings and competitor trends on almost an hourly basis to figure out where it could charge full fare and where it would be advantageous to sell discounts.
George James, president of Airline Economics Inc. and former chief economist for the Air Transport Association of America, has been looking at the numbers now that almost all carriers have reported for 1984 and has arrived at the conclusion that there is "growing concentration in the industry."
James noted that "four carriers posted two-thirds of the total industry operating profit," which left one-third for everyone else. Those carriers are United, American, Delta and Washington-based USAir, three long-time industry giants and an established regional airline turned national through its "controlled growth" program. All had solid balance sheets when deregulation began, so did not have the dual problems of fighting financial wars while learning how to play under deregulation's new rules.
Since 1978, when airline deregulation was passed by Congress, there have been 28 bankruptcies, James said, but 13 of them occurred last year, including Air Florida's. Frontier is high on the trouble list today, and two of aviation's biggest names -- Pan American World Airways and Eastern Air Lines -- have yet to solve debt service and other problems that have dogged them for years.
Eastern just concluded a two-year labor agreement that it hopes will bring productive stability and permit it to cut deeply into its debt load, which last year dragged an operating profit of $189.6 million into a net loss of $37,900.
Pan Am's operating loss of $94.6 million was deepened to a net loss of $206.8 million. Its interest expense in 1984 alone was $163 million and it was hurt by the strong dollar because of its extensive overseas operations.
Pan Am hopes its program to reduce the types of airplanes it is flying and greater labor productivity will improve the numbers this year. It faces a midnight Wednesday strike deadline from its mechanics, represented by the Transport Workers Union, and negotiations are continuing with five other unions. In addition to productivity improvements, Pan Am is seeking reductions in the company cost of benefits.
"It is clear," James said, "that fewer new carriers are entering the industry, while there is a growing number of bankruptcies among smaller and recently formed carriers. Similarly, the erosion in market share of the majors has been reversed."
USAir Chairman Edwin I. Colodny agreed. "We're going to have a tendency over the next few years for greater concentration and fewer carriers," he said. "American and United have major growth programs. American told its employes a few months ago they would add 16 new cities this year and have growth equivalent to the size of Piedmont. That's a lot of growth and you've got a real question mark on how much the new entrant carriers will be able to grow and how many new entrants there will be."
As for his own highly successful airline, Colodny said, "If we keep a good strong hub operation as we have in Pittsburgh, we'll have staying power." Another industry official calls USAir's Pittsburgh operation "a fort. Nobody's going to take them on there," he said.
USAir expanded carefully, even conservatively, from its Northeastern traffic base and has been able to avoid both overextension and the necessity to engage in fare wars and marketing gimmicks that others have used.
However, even USAir caved in to what has become a competitive imperative -- a frequent flyer bonus program -- when late in 1984 it became the last airline to start one. James estimated "conservatively" that each flight credited to a passenger's frequent flyer record is the equivalent of a 10 percent discount.
That, he said, plus the 35 percent expense tax deduction that a business traveler gets on tickets, helps ease the pain that has been inflicted on business by the newest airline marketing gimmick, introduced by American on Jan. 17 as the "ultimate super saver."
That program -- quickly matched in competitive markets by almost all carriers -- gives passengers mileage-based fares that do not exceed $129, one-way, for a transcontinental flight.
However, there are enough fences around those fares to virtually guarantee they cannot be used by business travelers. Tickets must be purchased for round trips, 30 days in advance, and any change or cancellation costs the passenger 25 percent.
Delta's Cooper said the new fare program replaces "at least five or six different discount fares that were not as carefully controlled as the new fare is. The new fare is aimed at the discretionary dollar, as opposed to the business traveler."
Cooper said that Delta has heard few complaints from the business traveler, because "there are still fares available other than first class and day coach. On this new fare -- we call it the Plan Ahead Fare -- we can allocate a greater number of seats on less attractive flights. The discretionary traveler realizes that to receive the savings he has to inconvenience himself a bit."
W. R. Brown, head of the AAA Travel Agency, the nation's largest, said there has been little complaining from business clients to his agents. "We don't see that yet, but that's not to say a further contraction of those middle fares and a higher level of selectivity as far as market pairs won't cause that reaction to occur," he said.
Lowell C. Duncan Jr., vice president for corporate communications at American, conceded that improving yields was one aim of the program. "We would anticipate that probably the percentage of flying on discount will drop some, and the percent of the discount ultimately will drop some too," he said.
Customer interest in the program was so high at American, Duncan said, that the airline had to add the equivalent of 1,100 reservation agents to answer the phone calls. Further, he said, "We've seen relatively little movement of traffic from the higher fare to the lower fare. That tells us it is doing what we hoped it would do -- generate new traffic."
Nobody is in a better position than United and American to adjust discount ticket sales efforts flight by flight to match demand. That is because United and American own the computer reservation systems most travel agents use to book flights for all airlines, not just United and American.
Clark Onstad is vice president for governmental affairs at Continental Airlines and has been busy on Capitol Hill explaining the advantages he feels that United and American have. He said that "fare wars have radically changed, because the carriers have become much more sophisticated. At first the big carriers ignored the little carriers; then they went like Sherman through Atlanta. Now they have gotten very sophisticated with their ability to fine tune fare wars. They can tell what the travel agent is booking and they can figure out the availability of seats on other carriers."
Continental responded to American's Ultimate Super Saver campaign with a counterattack. "We purposely undercut them United and American in some markets," Onstad said. "Airlines compete for the discretionary dollar. What Continental's whole strategy is based on is that there is less discretionary income in travel today, so we have to price our product in that range to generate traffic that makes us a profitable company."
United and American matched Continental the next morning.
While the computers whir and vacation travelers try to plan 30 days ahead, the airlines are looking at one other issue as a potential restraint on their future: federal reregulation in the form of airport and air traffic control restraints.
Last summer's flight delays were significantly reduced after the government arm-wrestled the reluctant industry into schedule changes at six major airports. Those "voluntary" agreements come to an end April 1, just in time for the spring and summer airline travel glut.
New York City, which was the nexus of the problem last year, has no more runways this year and the air traffic control system is still not fully recovered from the strike and firing of 11,400 controllers in 1981, and air traffic is expected to grow.
The inevitable result, as Norman J. Philion, president of the Air Transport Association, said in a recent speech, is that "We must be prepared for dealing with some capacity shortages, and proposed methods of accommodating to them, whether we like it or not."
Any government restrictions on airport or air route access reduce an airline's ability to expand, particularly if it seeks to add service to the most frequently used airports. Partly because of the New York area problems and partly because of demographic trends, United and American are concentrating their growth in the West and South and attempting to tie flights to hubs in Chicago, Denver and Dallas/Fort Worth.
James thinks that the trend toward consolidation is in a race with the trend toward reregulation, and that reregulation is leading at the moment, largely because of the system capacity issue. If that issue is unsolved, he said in a speech last week, "the 1990s will be a repeat of the 1970s -- a decade of debates on how to remove the shackles of government from the airline industry. That is not a stunning prospect."