Lately American Airlines boss Robert Crandall looks like the consumer’s hero. In April he turned the industry on its ear by simplifying American’s price structure. Then late last month Northwest undercut American’s fares -and Crandall took the gloves off, beating the rates. The fare warfare has caused a flying frenzy. Consumers jammed phone lines and crowded into airline offices to enjoy fares that hadn’t been seen since those heady days when upstarts like People Express seemed to be throwing in a free flight with the cost of the in-flight meal.
But, for many within the industry, Crandall is now the villain. Rivals saw American’s move as the beginning of the endgame that would leave a handful of airlines to rule the skies. Route-rich United and deep-pocketed Delta also stand to profit from a shakeout, but American has taken center stage-becoming, to use baseball legend Reggie Jackson’s words, “the straw that stirs the drink.” Competitors accuse American of deliberately taking losses in order to drive its weaker competitors to the wall. “American is doing predatory pricing, period,” says one CEO. Now Crandall, who had a price-fixing dispute with the government in 1983, could end up in court. NEWSWEEK has learned that Continental, Northwest and perhaps others are considering private antitrust suits against American. Those airlines refused to comment publicly. But Tim Doke, personal spokesman for Crandall, said the airline had been anticipating a lawsuit for months: “Our competitors have been laying their weaknesses at our doorstep for some time … We do not believe any case alleging predatory prices will have any merit.”
The battleground is already fall of the flying wounded. U.S. airlines have lost some $6.5 billion since 1990, more money than they have made in all of their history. Last year Pan Am and Eastern closed their doors, and since 1990 Continental, Trans World Airlines and America West have filed for bankruptcy protection. Now some industry figures are saying it’s time for the government to step in-not to reregulate the industry but to preserve competition. The industry is so sick that “the airlines are in a death struggle,” says Lee Howard of Airline Economics, a consulting group. “Each airline is fighting for market share and cash flow on a daily basis.” Is this any way to run an airline? Into the ground, maybe. Helane Becker of Lehman Brothers says, “I’d expect one or possibly even two carriers to liquidate” by the fall. Adds one airline CEO: “A number of us won’t be around when this thing is over.”
American says it intends its price cuts to aid consumers, not to kill competitors. Michael Gunn, a senior vice president, says, “This is a brutally competitive business and will always be. So we met the competition.” And certainly, some of the weaker airlines have themselves to blame. No one forced Northwest to borrow heavily to take itself private-a big factor in its $317 million in red ink in 1991. USAir didn’t have to enter its costly 1987 merger with Piedmont. Still, some rivals question American’s motives. Michael E. Levine, a former government air expert who this week leaves Yale’s School of Organization and Management to join Northwest, points out that Crandall has said there are too many airlines. “American Airlines responded to what were normal seasonal promotions by Northwest Airlines-kids to fly free with an adult in the summer–with half fares off for everybody. He was not just meeting competition, he was trumping it five times over.” American’s Tim Doke says that his airline abolished all special fares in April and warned then “we would not go back into that jungle again. We are meeting competition.”
Not everyone believes that the sky is falling. While even the most laissez-faire of antitrust enforcers in the Bush administration would step in to prevent an actual monopoly, officials say there’s little risk of that happening. Mark Gidley, associate deputy attorney general for antitrust, says, “Inefficient carriers will die, but others will survive and still others will be launched.” Still, an industry that boiled down to just five or even four companies could eventually mean higher fares for consumers. Ed Perkins of Consumer Reports Travel Letter says, “When you have a situation controlled by two or three suppliers, you have the potential for a lot of mischief.” Observers disagree on how to avoid too much power in too few hands. But several suggestions commonly crop up:
American and United have the most powerful computers for making reservations-a lucrative business that makes money for the host airline even when consumers book flights from competitors. Paul Schoellhamer, a Washington consultant, says half of American’s profit in the late ’80s may have come from its Sabre system. More important, the computers give host airlines an advantage, says Schoellhamer, who calls them “stealth weapons … It takes many more finger strokes to book a competitor’s flight than the host’s flight. It doesn’t sound like much, but like the rest of us, travel agents take the easy way.” American and United insist such bias has been eliminated, but the government-very slowly-is demanding further reforms. Even so, low fares mean that “there just isn’t much mileage to pushing what looks like abstract reform,” says Lee Howard of Airline Economics.
The airlines’ hub-and-spoke system might benefit from stricter government scrutiny. Studies show that carriers handling 75 percent of the traffic at a hub can charge customers 19 percent more because their dominance cuts down on customers’ alternatives. When three airlines share a market, prices tend to be about 15 percent lower than one-airline markets, says Indiana University professor Clint Oster. Administration officials say hub concentration isn’t a problem because it’s not getting worse-but then, airports aren’t growing, either. “We should start spending that 8 percent … federal ticket-tax money to expand existing airports,” says Phil Bakes, former Eastern CEO.
Now here’s an unpopular suggestion: ban, or at least tax, those genteel kickbacks known as frequent-flier programs. Killing the freebies (which are a powerful incentive to fly on a single large airline) would go a long way to making a more level playing field. Simply taxing the benefits could make them less attractive and blunt the big guys’ advantage.
Foreign airlines can’t own more than 25 percent of the voting shares of American carriers. “The only long-term hope for many of the airlines–besides the Big Three-is foreign merger,” says one airline director. Of course, foreign ownership carries problems-many international airlines are state-owned, which would introduce some unfairly deep pockets to the market. But change is unlikely: no one wants to embrace foreign buyouts, especially when many countries put tough restrictions on U.S.-owned lines. Even if the United States changes its rules, don’t expect foreign airlines to rush in: SAS, which bought more than 18 percent of Continental, lost big when the Houston-based carrier slipped into Chapter 11.
American Airlines says the system doesn’t need fixing because it ain’t broke. Gunn of American says, “Everybody’s got strengths and weaknesses. We’ve got frequent-flier programs. But smaller, younger airlines like Southwest have much lower labor costs … You just can’t try to regulate perfect competition anywhere. So why try here?” You won’t get any argument from lucky vacationers on $200 cross-country round trips this summer. Or from satisfied customers who say more control by the strongest airlines will only mean better service all round. But it may not always mean lower fares. So for now, enjoy the ride.
