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Truce in the FARE WARS? Ailing carriers slash costs, look to passengers to save industry


Well, travelers, the nation's airlines are in a real financial mess -- and to help clean it up, they want you to start paying your fair fare.

After losing $8 billion over the past three years, the carriers are laying off thousands of workers, cutting wages, eliminating flights and replacing jets at many airports with smaller turboprops. And they're trimming some passenger comforts -- no meals on short flights, chicken instead of beef on longer ones.

As the economy picks up, the industry's outlook for 1993 is brighter.

Still, real improvement hinges not only on economic growth but also on the airlines' ability to end fierce fare wars. In 1977, slightly more than a third of all passengers traveled on discounted fares; by 1991, nearly 95 percent were flying at reduced rates.

"It all comes down to fares," said Bobby Harper, a spokesman for Delta Air Lines, the nation's third-largest carrier. Delta lost $1 billion in recent years.

"We're right in the middle of something monumental in this industry," he said. "This is the shakedown from deregulation. And it isn't over yet."

Since the 1977 deregulation gave airlines the flexibility to go anywhere and charge anything, they have seen good and bad times. But none has been so devastating as the past three years, when the combination of recession, war and terrorism caused passengers to shy away from flying.

Since 1988, two major carriers -- Pan American World Airways and Eastern Airlines -- have gone out of business. Continental Airlines and Trans World Airlines are in bankruptcy and several others appear perilously close.

"The invasion of Kuwait stuck us with higher fuel costs. Then when fighting broke out, our traffic took a nose-dive in 1991," said David Swierenga, economist for the Air Transport Association, which represents most of the nation's airlines.

To fill half-empty planes, airlines began offering incredibly low fares, like last summer's 2-for-1 ticket deal. In some cases, airlines that were in bankruptcy proceedings, and thus protected from creditors, offered low fares, driving down prices even further.

At times, fares changed daily, almost hourly. Last year, the Official Airline Guides processed 80.2 million air-fare changes, up from 1991 when 78.6 million changes were noted.

"Fares were by far the main culprit for the airlines' $2 billion loss last year," said Lee R. Howard, president of Washington-based Airline Economics Inc.

Airlines will boost fares 4 percent to 6 percent this year, he predicted. But he added that much larger fare increases are needed before the industry can turn a profit.

Last fall, fuel prices started dropping and fares rising -- by as much as 15 percent on some routes. But that glimmer of hope faded two weeks ago, when Northwest offered a discount fare of 20 to 40 percent whenever groups of two or more travel together.

A day later, Delta moved to undercut Northwest, launching the first fare war of the new year. "It's really scary," said Mr. Harper of Delta. "I don't know where . . . it's going to end."

It all began after federal deregulation, as U.S. airlines rushed to increase their market share with new routes and costly hubs. During the 1980s, they hired nearly 200,000 additional workers and bought billions of dollars worth of new planes. And they expanded international systems, while increasing daily domestic departures by 1.5 million.

That gave passengers a greater choice of flights and fares than ever before. Yet industry revenues have been flat -- 12.3 cents per passenger mile in 1981 compared to 12.7 cents in 1991. While deregulation benefited passengers, the airlines never learned to handle it, analysts say.

"In a deregulated environment, they never learned to compete in such a way to protect their profits," said Harold E. Shenton, vice president of Avmark Inc., a Virginia-based aviation management consulting firm. "They generated an awful lot of unprofitable flights and hubs. And their reaction was 'If we don't make money, let's spend more.' "

No longer.

The Big Three -- American, United and Delta -- have announced more than $15 billion in capital spending cuts through 1995. United says it will lay off 2,800 employees and has canceled plans to hire another 1,900. Delta plans to cut wages and slash its dividend by 83 percent. Northwest will lay off more than 1,000 workers.

All this sounds familiar to USAir, the largest carrier at Baltimore-Washington International Airport. Since 1990, USAir has cut flights, furloughed 6,000 workers and received pay and benefit concessions from most of its 46,000 employees.

Meanwhile, the airline also has cut marginal or unprofitable flights -- the number of daily USAir flights at BWI dropped from 249 to 192, for example. And the airline has scrapped more than a third of its jet flights, opting for more cost-efficient commuter flights.

"For whatever reasons, USAir had to go through its retrenchment and restructuring a little earlier than others," said Jay Hierholzer, director of marketing at BWI. "In terms of BWI, most of the pain is over."

But for other cities, it's just beginning.

The hub system -- which uses strategically located airports as exchange points for passengers flying to and from outlying cities -- is an expensive reminder of the airlines' explosive growth in the 1980s.

Today, there are simply too many hubs, too close together.

Several smaller hubs, including USAir's at Dayton and Northwest's at Milwaukee, were eliminated last year. Of the 32 that remain, a half dozen or more will disappear this year, according to some analysts.

In addition to cost-cutting, financially troubled airlines such as USAir will be trying to improve their bottom lines through alliances with strong international carriers.

Last week, USAir announced that British Airways had invested $300 million for a 20 percent stake in USAir. The announcement came just one month after pressure from U.S. regulators forced British Airways to back away from a $750 million deal that would have yielded more control over USAir.

While the airline industry acknowledges that it has caused some of its own problems, it's also looking to the federal government for help.

In December, the industry's trade group asked the Federal Aviation Administration to modify costly government regulations, including drug testing, and urged Congress to enact tax laws to promote growth and investment. It also called for modernizing the nation's outdated air traffic control system, which it says fTC causes billions of dollars in delays every year.

President Clinton has promised to propose tax incentives and looser regulations.

Still, the key to recovery will be filling those empty planes with passengers paying higher fares.

"In the long run, passengers will have to pay for the full cost of the service," said Mr. Swierenga. "If that doesn't happen, more carriers will go out of business, less service will be offered, and prices will go up."

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