Never will so few be asked to do so much for so many at so high a price.
Higher fuel costs and a weakened economy threaten the U.S. airline industry with an almost certain downpour of bankruptcies and mergers that will reduce the number of carriers and make flying more difficult and costly.
Before it`s over, some analysts say, as few as four of the eight major U.S. carriers could be remaining in business, with American, United and Delta Airlines certain to be among them.
Skyrocketing jet fuel costs as a result of Iraq`s Aug. 2 invasion of Kuwait and belt-tightening within the credit markets already have forced some cash-starved airlines to sell lucrative routes, pull back on expansion plans or consider bankruptcy.
Last month, Chicago`s financially strapped Midway Airlines, faced with a $10 million-a-month increase in fuel costs as a result of the Persian Gulf crisis, announced plans to halt its expansion program and sell its year-old Philadelphia hub.
On Wednesday, Pan Am Corp. reached a definitive agreement to sell its prized routes between the U.S. and London to Chicago-based UAL Corp., the parent of United Airlines, in an effort to avoid bankruptcy.
Also on Wednesday, Eastern Airlines Inc. barely averted liquidation when a federal bankruptcy judge in New York, over the objections of the carrier`s creditors, granted the airline`s request to draw money from its creditors` $30 million escrow account. The $15 million cash infusion will keep Eastern afloat at least another month.
On Friday, reports circulated in St. Paul that Northwest Airlines Chairman Alfred Checchi is exploring a buyout of Eastern Airlines, using up to $150 million in pension funds of Eastern`s union pilots.
Such retrenchments are likely to be commonplace while the economy remains stagnant and tensions in the Middle East continue, said industry officials and analysts. Several weaker airlines likely will end up being liquidated or merging with one of their larger and stronger brethren, they added.
”The shape of the industry likely will be a lot different a year from now,” said Robert Aaronson, president of the Air Transport Association of America, the airlines` Washington-based lobbying group.
”There will be a smaller number of carriers, and as a result, airline passengers will have fewer airlines to choose from,” he said. ”There won`t be less competition, because as long as you have several carriers remaining there will be competition. Nevertheless, for passengers the choices will be fewer. And for some, that will mean it will be harder to get to the places they want to go.”
Passengers can expect higher air fares and fewer discounts, Aaronson said.
Shrinkage in the airline business is not new. Cutthroat competition for passengers and routes following federal deregulation of the industry in 1978 took its toll of carriers after an initial expansion.
Pan Am took over National Airlines in 1980, and a wave of other mergers and acquisitions soon followed. Braniff filed for bankruptcy in 1982.
By the end of the 1980s, the number of major airlines had shrunk to eight. Combined, they accounted for 89 percent of the industry`s total traffic.
The industry shakeout of the 1980s, however, was primarily the result of the airlines` own doing. Those who failed became drunk with the freedom granted them by deregulation, and tried to grow too much, too fast. This time, however, the industry is expected to shrink for reasons beyond its control, with the high cost of jet fuel the leading cause.
With the higher fuel prices, the industry as a whole is looking at losses totalling $1 billion to $2 billion for 1990.
According to the Air Transport Association, every one-cent increase in a gallon of jet fuel results in an average increase of $150 million in expenses for the nation`s airlines.
”It is, by far, the biggest crisis the airlines face right now,” said ATA spokesman Timothy Neale.
”We`ve increased fares 15 percent since the Iraqi invasion to try to compensate, but that has only covered half of the increases in fuel costs,”
he said. ”We can`t pass the full expense onto the customer because demand for travel due to the economy already is weak, and hiking fares further would just drive that many more customers away.”
In predicting a major shakeout within the next year or so, Earl Gaskins, airline industry analyst for Philadelphia-based Provident Capital Management Inc., said: ”The weak sisters will merge or, as is likely in Eastern Airlines` case, they will just pretty much vanish.”
Besides American, United and Delta, other airlines frequently mentioned by analysts as potentially being among the oligarchy of surviving dominant carriers during the 1990s are USAir Group Inc. and Northwest Airlines.
”Dark horses” who might break into the elite group, some analysts believe, are Air West and even Continental Airlines, despite its current financial difficulties.
Continental, which has seen its fuel bills increase $70 million a month since the Iraqi invasion of Kuwait, considered filing for bankruptcy protection earlier this month. The carrier`s board opted instead, however, to sell assets and take whatever other measures were deemed necessary to keep the airline viable.
On the severely endangered list, most analysts agree, are Eastern and Pan Am.
”Eastern is all but gone, and although Thomas Plaskett, the chairman at Pan Am, is a very capable guy, he`s merely presiding over a funeral,” said one analyst who asked not to be identified by name.
In the ”troubled” catagory, analysts include Midway and Trans World Airlines. Some also include Continental.
The danger of having a smaller number of airlines dominating the industry, analysts said, is that these carriers might form ”gentlemen`s agreements” to increase fares and block new, smaller competitors from entering the market.
”With fewer carriers, there will be less reason for the dominant airlines to engage in fare wars,” Gaskins said. ”They might reduce fares from time to time to stimulate traffic, but for the most part, they are likely to increase fares at least to cover increases in the rate of inflation, if not more.”
In addition, Gaskins forsees dominant airlines eliminating some flights, while maintaining or even increasing their passenger loads by using larger airplanes on the flights they retain. Such a move would save the airlines money, but passengers would have fewer flights to choose from to get to their destinations, he noted.
Also for the sake of efficiency, the remaining major airlines likely would further limit the number of direct, nonstop flights from non-hub cities. That means airline passengers in cities like St. Louis, Detroit and Milwaukee increasingly will have to take a commuter flight to a major hub city, like Chicago, to catch flights to their ultimate destinations. That, undoubtedly, would make their journeys longer and more expensive-but it could also be a financial help to airports in major cities.
Not everyone agrees that a shakeout in the industry is imminent, or that, if it does occur, passengers necessarily will suffer.
”The principal determinant of whether or not we face liquidations and mergers depends on how long jet fuel will continue to cost $1.20 a gallon, twice as much as it did prior to the gulf crisis,” said David R. Hinson, chairman and chief executive officer of Midway Airlines.
”If it stays high for the next six months, a year, indefinitely, certainly some airlines may be forced to merge,” Hinson said. ”But if it stabilizes between $20 and $23 a barrel, most airlines in existence today will continue to do all right.”
Hinson contends that as long as there are two airlines in existence, there will be about as much competitive pricing of fares as there is now, especially once the fuel crisis is over.
Moreover, if airlines merge, the routes of the carriers that are absorbed aren`t likely to disappear, Hinson said.
”When an airline is absorbed, the only reason it is taken over is because the purchaser wants that airline`s market,” he said.
Predicting which airlines will surivive and which will fail is risky, but at least one airline industry consulting firm has devised a rating system to guide analysts and industry officials in forcasting which are likely to survive in the 1990s.
The system, put together by Washington-based Airline Economics, Inc., measures an airline by its future equipment orders, the strength of its hubs and reservations systems, its per-passenger costs, debt, profitability and international routes.
The two most important measures of probable success in the 1990s are an airline`s potential for competing in the international market and the sophistication of its reservations system, says Frank H. Cassell, professor emeritus of industrial relations at Northwestern University`s Kellogg Graduate School of Management.
Cassell, who does research for the Department of Transportation, says U.S. airlines that can compete internationally, especially in Europe, will more easily withstand high costs for fuel and new planes, because they will have a larger market.
