acing the prospect of an airline industry dominated by a few powerful firms, Bush administration officials are considering whether a dose of foreign investment may be needed to prop up the industry's weakest carriers.
Battered by higher fuel prices and weak demand, the number of major U.S. airlines could be reduced by almost half over the next few years, according to industry officials and analysts.
Some of the oldest names in U.S. aviation -- Eastern Air Lines, Pan American World Airways and Trans World Airlines -- are in serious financial trouble, their futures in question. Other airlines, including Continental, Midway and America West, are finding themselves on increasingly shaky ground.
New carriers are not likely to emerge to challenge the lock on the industry by the remaining giants, most industry experts agree. "I'd say it's virtually impossible today, given the fact that even near healthy companies are having enormous difficulties in financing," said Frank Lorenzo, former chairman of the Texas Air Corp. empire, which included both Eastern and Continental airlines.
With so many carriers on the endangered list, legislators and regulators increasingly are worried about the consequences. When the airlines were deregulated almost a dozen years ago, it produced a rough-and-tumble industry characterized by intense competition between carriers for the dollars of travelers. But that era is drawing to a fast close and could produce a jolt of higher fares after a decade of discounting, analysts believe.
The prospect has forced the administration to look toward foreign airlines as a potential way to rescue weak U.S. airlines and preserve competition.
Transportation Secretary Samuel K. Skinner "has come to the conclusion -- at least tentatively -- that a hard look at our foreign ownership rules should be part of any effort to improve the prospects for maintaining a healthy and competitive U.S. airline industry in these uniquely difficult times," according to Jeffrey N. Shane, assistant transportation secretary.
Currently, foreign investors are prohibited from buying more than 25 percent of the stock of a U.S. airline or from having what in effect would amount to control over any U.S. carrier. That law resulted in the Transportation Department's requiring KLM Royal Dutch Airways to reduce its proposed investment in Northwest Airlines in 1989 and has prevented the prospect of weak carriers here being merged with stronger airlines abroad.
The fading prospects for competition in the United States has produced a chorus of voices calling for a new look at those restrictions.
Alfred Kahn, former chairman of the Civil Aeronautics Board who is often referred to as the father of airline deregulation, believes that loosening the restrictions of foreign carriers may be the key to preserving competition. Allowing carriers from abroad to compete more freely in the United States could also help to keep fares lower, he said. "The American automobile industry and the American steel industry were ultimately disciplined by foreign competition," he said.
Friendly U.S. Skies? But preserving competition in the airline industry will take more than just allowing foreign carriers to invest in U.S. airlines or to fly more freely within the United States, say many of those concerned about where the industry is headed.
"I don't understand the hand wringing over this," said Henry Duffy, the outgoing president of the Air Line Pilots Association. Proponents of deregulation "said this industry needed a free market. Well, this is a free market."
Duffy acknowledged "there's no going back" to a regulated industry. But he said the airline unions would oppose any move in Congress to allow foreign airlines to fly domestic routes. "I think we can hold the political process against this happening," Duffy said.
John Peterpaul, the vice president in charge of transportation at the International Association of Machinists union, is equally opposed to letting foreign airlines fly domestic routes. He is less certain about foreign ownership. "I've got mixed emotions about foreign investment," said Peterpaul. He noted it would help preserve U.S. jobs in the industry. "Where do we get hurt the most, by letting them buy or not letting them buy?"
Peterpaul predicted the current financial troubles in the airline industry will get worse in the coming years. "There's going to be a lot of turmoil and more bankruptcies," he said.
Most industry experts agree two key factors make it unlikely that new competitors will emerge: Major carriers already dominate the nation's airports, and success is difficult without a computer reservation system in tow.
In the early stages of deregulation, those problems barely occurred to anyone.
"Those of us who worked hard on deregulation in 1978 never thought once about the implications of computer reservation systems," said one airline executive who participated in drafting the law. But then, there were other surprises as well, including how few carriers survived deregulation.
"My guess is that people thought there would be more carriers around now rather than fewer," said Marvin Kosters, an expert in deregulation from the Nixon and Ford administrations, now at the American Enterprise Institute in Washington. "Most people guessed there probably would be more airlines than there in fact are."
Robert Crandall, another official from the Ford administration who worked to deregulate the industry and, now at the Brookings Institution in Washington, disagreed. He said the shakeout in the airline industry following deregulation was expected. "We thought there would be a substantial increase in concentration," Crandall said. "The biggest surprise is that it is coming so late."
But airlines without a computer reservation system have difficulty competing. More than 80 percent of airline tickets are now sold by travel agents using computerized systems -- most of them on either American Airlines's Sabre system or United's Apollo.
Although the extent of the benefits from those systems has been debated, several studies have found that they provide the airlines that operate them with substantial profits and substantial other benefits as well.
"I am sure you can imagine the difficulty faced in any business where you are forced to use your competitor to distribute your product, as is the case with airlines," Lorenzo said in a recent speech. "You might expect, as a result, to suffer damaged products, late deliveries or no deliveries at all."
Barriers to Competition Although regulators and legislators have taken steps to keep the owners of the systems from blatantly putting their competitors at a disadvantage, the same technological sophistication required to operate the enormous systems allows their operators to devise formulas that suit their own interests over their competitors, according to some airline officials and regulators.
"It always has seemed to me, regardless of the very effective defenses that have been made, that the way carriers have behaved has shown it is more important to be on the inside of those systems than not," said Kahn.
Still another barrier to competition cited by the General Accounting Office and others is the difficulty of breaking into a market, since most of the airports are dominated by a large carrier. "I think it was a major surprise for most people who were analysts in the industry that the hub and spoke system would turn out to be so important," said the American Enterprise Institute's Kosters.
Enter Hubs and Spokes Once the industry was deregulated, it became increasingly important to airlines to fill as many seats as possible on each flight. The result was the hub and spoke system. Airlines gather passengers from many cities at a hub to fill flights to another destination.
Christopher Winston, an airlines expert at the Brookings Institution, said, "The bottom line is that a new entrant is going to have to have a hub." Even established foreign carriers "are going to have set up a domestic hub and spoke system the way the network has evolved" if they want to compete in the United States.
Executives from the major airlines argue that the hubs they dominate have produced greater competition in the industry. A consumer flying from Washington to Los Angeles now can choose among many airlines that provide service through their hubs, compared to before deregulation, when travelers often had no choice at all on certain routes, they say.
Still, the Justice Department is looking at whether airlines are using anti-competitive practices to keep rivals out of their hubs and whether they are using predatory pricing to discipline discounters.
The next few years are likely to produce a major national debate on competition in the airline industry, particularly if more airlines fail to survive. In addition, negotiations between the United States and its trading partners over bilateral treaties governing the airline industry are likely to move the discussion of the role of foreign carriers into the forefront.
"It may not be the next transaction or the next failed carrier," said one airline industry executive. "But at some point the industry will be so concentrated there will be harm to the consumer and diminished competition."
Lorenzo, who for better or worse was probably the dominant figure in the first decade of deregulation, was even blunter: "Until something is done, and done soon, to restore competition, there won't be much of an airline industry left."