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Airline fare war refought with memos, flip-charts American accused of predatory pricing


GALVESTON, Texas -- With videotapes, flip-charts, enlargements of once-secret memos and thousands of tTC documents, armies of lawyers in U.S. District Court in Galveston are re-enacting the airline fare war of 1992.

In an elegantly restored courtroom with carved wooden panels and silk drapes, Continental Airlines and Northwest Airlines are trying to draw blood, demonstrating that American Airlines engaged in "predatory pricing." That means setting fares so low that American would lose money, but so would its weaker rivals, who might be forced out of business.

Continental and Northwest say American's policies cost them at least $1 billion last year. American Airlines, whose executives deny they engaged in predatory pricing, say Continental and Northwest stumbled because of mismanagement.

For many people at the Galveston courthouse, the anticipated highlight of the trial will come next week, when Robert L. Crandall, the chairman of American Airlines' parent, AMR Corp., takes the stand.

Mr. Crandall is known for his outspoken views, and his grilling at the hands of Joseph D. Jamail, the folksy Houston lawyer representing Continental, is much awaited.

"Joe Jamail is no wilting flower," said the presiding judge, Samuel B. Kent, of the man best known for winning a multibillion-dollar judgment against Texaco Inc. in 1985 for his client, Pennzoil, in a fight over who would acquire Getty Oil. "I may have to eat a power bar that day."

Of the testimony so far, the highlights have been the appearance yesterday of Robert R. Ferguson III, president and chief executive of Continental Airlines, and of John Dasburg, chief executive at Northwest Airlines, last week.

Mr. Ferguson testified that he believed American's pricing strategy and its half-price summer sale last year delayed Continental from emerging from bankruptcy, derailed the airline's ambitious improvement plans and thrust the airline into a fight for survival.

After Continental matched American's new and lower fares in April 1992, Mr. Ferguson said, the airline lost $30 million a month and an additional $60 million to $70 million during the summer fare war.

By July, he said, Continental had only two days' worth of cash on hand, about $29 million, but managed to win concessions from some lessors of its planes so it could continue operating.

Mr. Ferguson said that American's deep fare cuts were "both predatory and below cost." If Continental and Northwest had gone out of business, he said American could have raised prices by 10 percent to 20 percent in selected markets.

On cross-examination, Irv Terrell, a lawyer for American Airlines, produced a Continental marketing report on the airline's plans for fall 1992 that said American's pricing strategy left business customers "up for grabs" and had the effect of "leveling the playing field." Mr. Ferguson said he did not recall seeing the document.

Mr. Ferguson will be back on the stand this morning.

At the heart of the case is what American Airlines called "value pricing," introduced on April 9, 1992. The airline said the approach was a way to end the confusion of ticket prices by offering only four fares: first class, coach and two discount fares requiring advance purchase.

In court documents, American has denied pricing its fares below its costs.

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