An article in the March 2 Business section contained an incorrect reference to a merger involving Northwest Airlines. Northwest is merging with Republic Airlines.
Alfred E. Kahn, a major force behind the deregulation of the airline industry, sees cut-rate fares and all-out competition threatened by the mergers that are uniting some of the nation's largest airlines.
In Kahn's view, the proposed acquisition of Eastern Airlines by Texas Air Corp. and two other pending mergers involving major airlines are part of a troubling concentration in the industry around a half-dozen of the most powerful airlines.
In an interview last week, he called for tougher enforcement of antitrust laws and closer scrutiny of the industry's biggest pending deals: Eastern and Texas Air, Trans World Airlines and Ozark Airlines, and Northwest Airlines and Frontier Airlines.
"When we deregulated the airlines, we didn't abolish the antitrust laws," Kahn said. "This administration had better be tough on applying antitrust laws" to the airline industry, he added.
Kahn's credentials make him an influential witness on the issue. He was one of the last chairmen of the Civil Aeronautics Board before it was abolished. And he is a director of New York Air and an ally of Frank Lorenzo, president of Texas Air, which operates New York Air and Continental Airlines.
"I may be disloyal to Frank Lorenzo . . . but I think antitrust has to look at the Eastern Shuttle and New York Air," Kahn said.
His concerns go to the heart of the debate about the future of the deregulated airline industry.
Many industry analysts agree with Kahn that a wave of consolidation moving through the industry will leave only a half-dozen major airlines intact, supported by 20 or 30 smaller regional carriers.
Whether that structure threatens to undermine the competition that has kept airline ticket prices down is the core issue.
Nowhere has that competition been tougher than in the busy corridor running from Washington to New York to Boston that is served by Eastern's Shuttle and New York Air. Those two carriers would maintain separate operations but be under one owner if Lorenzo's offer of nearly $700 million is approved by regulators.
On Friday, Texas Air and Eastern made a joint filing with the Department of Transportation contending that other airlines provide plenty of actual and potential competition along the corridor to prevent anticompetitive pricing by Eastern or New York Air.
For the year that ended June 30, 1985, Eastern carried 34.6 percent of passengers between New York and Washington (National and Dulles) passengers; New York Air carried 30 percent, followed by People Express (24.5 percent), Pan Am (7 percent) and TWA (3.1 percent).
But Eastern and Texas Air argue that there are at least six carriers with enough landing rights at both LaGuardia and National to operate hourly service. And beginning April 1, airlines owning these landing rights, or slots, may sell them to other airlines, thus opening the competitive window wider, said James V. O'Donnell, vice president of marketing services for Lorenzo's Continental Airlines.
Reagan administration officials "make perfectly good arguments that markets are easy to enter," Kahn replies. "It is a matter of degree.
"I am unwilling to rely exclusively on potential competition. There have been five studies of air fares I know of since deregulation. Every one of them concludes that how many carriers you have in a market makes a difference. If entry were a sufficient discipline, you wouldn't see different fares whether there is one carrier in the market or five."
In the airline industry, these antitrust issues are scrutinized by the Transportation Department, not the customary antitrust agencies -- a distinction made by Congress when airline industry deregulation legislation was passed in 1978.
Kahn and Harvard Business School airline expert John Meyer believe the law needs to be changed. They argue that airline industry mergers should be treated like deals in any other industry and subjected to antitrust review, not by DOT, but by either the antitrust division of the Justice Department or by the Federal Trade Commission.
"It should be treated like any other industry," Kahn said. "This antitrust review should be given to the people whose job it is to preserve competition."
As some experts see it, that review becomes more important as the airline industry enters an important new phase, following the initial, revolutiontary period of deregulation that began roughly in 1978. The new phase will see a handful of the largest airlines gaining strength at the expense of small, regional airlines, these experts expect.
The first round belonged to the upstarts -- Sir Freddie Laker's short-lived budget flights for transatlantic travel; Frank Lorenzo's "peanuts fares" at Texas International that cut existing fares in half, and such newcomers as New York Air and People Express.
From 1978 until 1983, these new and small airlines gained a foothold, typically by hiring nonunion crews and mechanics at dramatically lower wages than the majors paid and offering no-frills or low-frills flights at budget prices. In the five years after 1978, the majors lost 13 percentage points of market share to smaller rivals.
That first round of deregulation is ending in a painful spasm of recession-induced economic shocks, bankruptcies and mergers that are reshaping the industry, separating the strong from the weak, some experts have concluded.
No large air carrier has gone bankrupt since Continental filed a Chapter 11 bankruptcy petition in 1983. But 15 small and mid-sized carriers have gone under.
Lane Kirkland, president of the AFL-CIO -- a federation that includes the unions that have taken a battering from deregulation -- predicts that consumers and communities ultimately will be worse off as a result of the changes in the industry. "The ultimate end of it is probably the creation of a couple of giants with control of the market, and an end to all these little transitory advantages that seem to flow from what goes on in the interim."
According to George W. James, president of Airline Economics Inc., the major airlines have lowered operating costs; created more efficient route networks by orienting their flights around strong, centralized "hub" locations, and learned to use frequent flier incentives and other marketing programs to regain customer loyalty and take advantage of their size.
"In 1984, four carriers -- American, United, Delta and USAir -- had 62 percent of "In 1984, four carriers . . . had 62 percent of the industry operating profit." -- George W. James, president, Airline Economics Inc. the industry operating profit and 102 percent of the net profit; the rest of the industry showed a slight loss," he said.
The same four companies also have the inside track on the new generation of passenger jetliners, whose powerful, fuel-saving engines and advanced computer controls promise big improvements in cost control.
The proposed purchase of Eastern Airlines by Texas Air is the latest in a pattern of mergers involving the major carriers. Texas Air, the outgrowth of Lorenzo's Texas International, owns New York Air and Continental. With Eastern, it would become the nation's first- or second-largest airline.
James said he believes that six or eight major carriers are likely to wind up dominating 85 to 90 percent of airline traffic in the next few years, assuming the government does not slow the trend.
Perhaps 20 or 30 smaller airlines will find niches by serving medium- and small-sized communities, James predicts. But their health will depend in large part on obtaining a profitable relationship as feeders for the major airlines. Many of the remaining new, low-priced carriers will be merged into larger airlines, or disappear, James predicts.
The rapid evolution of the airline industry into a network of hubs and spokes will accentuate that trend of concentration, James and other experts say.
The hubs are airports in large cities where airlines centralize operations. The major airlines channel as many flights as possible through these hubs, hoping to hold onto their passengers as long as possible. The spokes are the connecting flights from smaller cities, flown by the majors or by smaller carriers.
"Before deregulation, the major airlines interchanged traffic at the same hubs. Today, major airlines are interested in interchanging traffic only with themselves," said Alan Stephen, executive vice president of the Regional Airline Association.
"As the major airlines have developed these hubs, they have selected the commuter feed partners and built a powerful alliance," said Stephen.
"It has been difficult for carriers not aligned or new start-up airlines to compete. Emerging carriers like an Air Wisconsin and Ransom have grown under deregulation by providing feeder patterns and it is difficult for new carriers to compete against that.
"There are very few market opportunities for start-up airlines" now, said Stephen.
Meyer disagrees that the trend toward a hub-and-spoke structure threatens competition significantly. Therefore, he is not concerned about the impact that the TWA-Ozark combination might have on St. Louis, or that the pending Northwest-Republic merger might have on Minneapolis.
"Chicago and Dallas are hubs dominated by bigger carriers than what TWA-Ozark or Northwest-Republic would be," Meyer said. "Domination of a hub is not necessarily disasterous if it is surrounded by other hubs controlled by different carriers.
"There is already some hub domination. Pittsburgh has that kind of domination by USAir. The real key is whether the airport authority has the terminal capacity and runway space to allow new entrants."
Meyer said the proposed combination of New York Air and Eastern "worries me even less. Piedmont and People Express are already prominent competitors in most of those East Coast markets, and you have a lot of people on the wings that could enter the market. American, Delta and TWA could easily expand if fares were pushed too high by New York Air-Eastern . You also have some new start-ups like Presidential Airways in the northeast corridor. I wouldn't worry too much about it."
"The real competitive question is one hub against another," said Carl Icahn, chairman of TWA.
"I think it the proposed merger of TWA and Ozark should be allowed because you have two airlines that are sort of failing." Combining them would produce a stronger hub operation in St. Louis that would fight harder against other hubs.
"We are trying to be more competitive so we can compete against the other hubs. If you don't do this, you hurt competition because you might lose a St. Louis competitor. When people travel across the country, we compete versus United's hub in Chicago, Northwest's hub in Minneapolis and American's hub in Dallas. From our point of view, this is important."
Finally, argues Continental's O'Donnell, there is the power of the consumer. "Today's passenger wants the lowest possible fare with full service. If a market suddenly finds itself without that kind of service, there will be somebody, someplace who will jump in."