It’s not clear exactly what the White House will do. But it’s obvious that the $300 million USAir/British Airways deal is a lightning rod for mounting anxiety in the industry. Airline woes are nothing new. But U.S. carriers seem to see their skies darkening, even as the economy brightens. Some critics say the industry simply needs a new attitude, maybe modeled on some of the successful upstarts like Southwest Airlines. But with a new administration at the helm in Washington, the big beleaguered carriers are hoping that they may get some special treatment, from tax breaks to a new push to open foreign markets.
Industry shrinkage may have accelerated lately, but it was kicked off more than a decade ago, in 1978, when airlines were deregulated. The early days brought a flowering of new entrants, like People Express and Midway, at the same time the economy was enjoying record consumer and business spending. Air traffic soared, and fares dropped. But the future looked so bright that a lot of airline executives got overexcited. Jockeying for power, they took on huge debts to acquire lines or routes and order new jets. Continental probably typifies the worst of the excess: it combined Texas Air, New York Air, People Express and Eastern, only to end up in bankruptcy and, in early January, agreed to give up control to an investors’ group including Air Canada.
Continental isn’t the only carrier to find that its problems have made it vulnerable to the siren call of foreign capital. Northwest sold a stake to Holland’s KLM for similar reasons. The attractions are obvious: a hard-pressed U.S. carrier gets an injection of cash, and the foreign company gets a foothold in the U.S. market. But the USAir/British Airways deal particularly riles big American carriers. At first, the two companies had proposed that British Airways pay $750 million for almost half the company and take significant control financially. But a huge lobbying effort by the Big Three helped nix that idea. Last week’s revised deal is more modest. It still allows the two carriers to do joint ticketing and handling of passengers but doesn’t give British Airways veto power over USAir purchases of goods such as aircraft. And there has been no concession on the issue that most riles the Big Three: expanded rights for them to land in and fly through Britain. (Canada and Holland don’t have the same barriers.) “Unless we rethink our policy,” Crandall has said, “there simply won’t be a U.S. international aviation industry 20 years hence.”
While such rhetoric makes for good lobbying, most experts say Crandall’s Armageddon scenario is farfetched. There’s no question that there are barriers abroad. But most experts expect them to fall-eventually-as the United States pushes for more free trade. Meanwhile, the big U.S. carriers are quite powerful and have gained steadily in many international markets in the last decade. Sir Colin Marshall, CEO of British Airways, calls “almost bizarre” the alarm expressed by American and United. The big U.S. carriers, says Marshall, control about 40 percent of the world market. And he is echoed by some on this side of the Atlantic. “To be very honest, I think that a number of the American companies have more foreign rights than they [are] prepared to talk about,” says Roger Ballou, president of American Express’s Travel Services Group.
“The real issue,” Ballou adds, “is the competition that the big carriers created themselves by putting too many planes in the air.” Capacity grew 4 or 5 percent a year in the late 1980s and 10 percent last year among the Big Three, as planes ordered in the late 1980s were finally delivered. Meanwhile, recession has sliced demand.
With such complications, a Clinton policy isn’t easy or predictable. If he were to block the deal, it “would trigger a trade war,” says a USAir spokesperson. And the administration may prefer to use limited ammunition on other hoary trade problems. Meanwhile, cash from foreign carriers is a fine source of support to troubled domestic carriers-and jobs. “Bullying” Britain for a better deal would be “toying with the survival of USAir at the same time,” says Lee Howard, an airline consultant. Still, Clinton is on record criticizing the earlier version of the USAir deal, and he has declared his determination to open up global air markets. Transportation Secretary Federico Pena has made similar noises. But beyond a vow last week by a Pena spokesman to examine the deal, he wouldn’t address the issue.
Even before the USAir deal was announced, political pressure was mounting. United CEO Stephen Wolf recently asked the president that bankruptcy laws be changed so that airlines under Chapter 11 protection from creditors won’t have an edge over those operating with normal obligations. Other supplicants, from executives to unions, are calling for a range of other actions, from adding more air-traffic controllers to giving airlines tax breaks and restoring some old-time regulation.
Whatever the administration does, one thing is sure. Many familiar names will go the way of Piedmont, Braniff and Pan Am, disappearing off the radar screen. Ballou expects only “five, seven, maybe eight” big carriers to be left worldwide by 2000, including two or three American companies. These “megacarriers,” as one Northwest executive calls them, will be complemented by a flock of niche players, ranging from European carriers that may serve parts of that continent to regional U.S. carriers like Dallas’s Southwest Airlines.
It is Southwest, in fact, that may provide inspiration for how American airlines can not only survive but prosper. Taking a new approach to both cost and culture, “we consider ourselves to be kind of the Wal-Mart of the skies,” says chief financial officer Gary Kelly. The company doesn’t serve meals, sells tickets at ATM-style machines and expands cautiously. Southwest even manages to be unionized, but without the acrimony afflicting the big carriers.
Even the big carriers may have a better year than it now appears. Ballou predicts they’ll sustain 10 percent price increases and break even for 1993. But the pressure is on Bill Clinton for an even better performance. The president has promised to show just what an enlightened industrial policy can do. His new team may have a chance sooner than it expected.
An industry shakeout has eliminated some of the best-known names in the business. Some of the victims:
The no-trills airline was acquired by Continental’s former CEO Frank Lorenzo. lt closed in 1987.
The airline was gobbled up by USAir in 1987 for a whopping $1.6 billion. Bad for Piedmont. Bad for USAir.
Another ill-fated Lorenzo acquisition, the venerable airline shut down in Jan. 1991 after a crippling strike.
The Chicago airline, which closed in 1991, was hit with a double whammy: a recession and the gulf war.
The aviation pioneer folded its wings after 64 years in Dec. 1991. The bankrupt airline was losing $3 million a day.
