Boston — Passengers who flew Trans World Airlines this holiday season were almost left out in the cold - and on the ground. The airline, seeking productivity improvements from its workers, was threatened with a strike by the Machinists Union. Three days before Christmas a tentative agreement at the last minute averted a walkout.
Since 1978 the bargaining process has become much more difficult, says American Airlines' vice-president of planning, W. G. Kaldhal.
Everything, including union negotiations, changed for the airlines at the close of 1978, when deregulation took effect.
''In a regulatory environment airlines felt they could give higher wages and better work rules because the Civil Aeronautics Board (CAB) would back the cost with higher fares,'' said William Gregory, editor of Aviation Week and Space Technology magazine. ''Any time an airline started losing money, the CAB granted fare hikes,'' echoed United Airlines spokesman Charles Novac. ''We were like a cartel.''
No more cartel. Friendly skies have turned intensely competitive for the domestic carriers. New air routes, new ''no frills'' carriers, fare wars, one bankrupt airline, and union concessions have all come along with deregulation.
But not only because of deregulation.
External factors in the last four years have thrown the industry for a loop. No one expected a three-year slump, a 137.5 percent rise in fuel costs, or an air controllers' strike.
Combine this ''triple whammy'' with a whole new way of doing business and you get an industry ''which won't adjust until seven or eight years from now,'' said Mr. Kaldahl.
Balance sheets show the airlines are not yet at home with deregulation - or the other factors involved. This year a record $400 million to $500 million operating loss will stain industry financial statements, says George James, senior vice-president of economics and finance for the Air Transport Association of America. That estimate tops last year's $421 million loss and a $222 million loss the year before.
But this frustrating news doesn't mean every airline is on its last wing. ''The regional airlines (such as Piedmont, Ozark, Southwest, and Frontier) have been the No. 1 beneficiaries of deregulation. So have some new entrants like Midway and People Express,'' said Mark Daugherty, an airline analyst with Dean Witter.
On the eve of deregulation the regionals had a lot going for them. With two-engine planes, they were flexible enough to develop short- and long-haul routes. And with well-defined markets, they could build up ''hub and spoke'' routing.
For instance, USAir (Allegheny Airlines prior to 1979) has always used Pittsburgh as its hub. There, it picked up passengers coming off the Allegheny Commuter service and directed them onto USAir flights.
Since deregulation, the whole concept has intensified. The commuter service carries more passengers (2.6 million in 1981 vs. 1.8 million in 1978) and USAir has added 16 more gates at Pittsburgh. In addition, more USAir flights connect with each other at Pittsburgh.
The USAir strategy is to help support itself with this kind of feeder traffic. It still uses only the Pittsburgh hub, but since deregulation it has expanded the ''spoke'' reach to Florida, Arizona, New Orleans, and Texas. In the spring the airline will also serve Los Angeles and San Francisco from Pittsburgh. ''We are more than ever a hub-and-spoke operation,'' said David Shipley, spokesman for USAir.
Besides routes, the company added profits, with one loss year in the last 10. In early 1981, when revenues topped $1 billion, USAir was reclassified as a ''major'' airline. For the first three quarters of this year net earnings are up by about $9 million from the same time last year.
For the most part, older major airlines, or trunks, as they are called, couldn't deal with deregulation when it arrived, said Alfred Norling, airline analyst at Kidder, Peabody & Co.
''They had committed themselves early in the decade to fleets which fitted each management's concepts of route structure, assuming the structure would remain fairly constant. Deregulation ruined that,'' Mr. Norling explained.
The big fuel increase also left them in a bind because of the large, inefficient aircraft that most of the trunks were flying. ''We were caught in a Catch-22,'' agreed American Airlines' Kaldahl.
Airlines had a predefined route structure under regulation, Mr. Kaldahl continued, and when the controls over routes were lifted, many of the major airlines were left fighting over the same area. Today, ''there is just too much capacity in the skies for everybody,'' states Neil Effman, Trans World Airlines senior vice-president of airline planning.
To make things worse, the regionals - in their aggressive hub-and-spoke expansion - began stepping on the toes of the majors. Since 1979 the majors have been slowly losing market share. In 1979 the trunks flew 92 percent of revenue passenger miles. Last year, the regionals inched up to 12 percent and trunks slipped to 88 percent.
With low rates, new entrants such as Midway, People Express, and New York Air also poked at the flab of the major airlines. The new entrants kept rates well below everyone else's because they started up with used planes, paid lower nonunion wages, and skipped some on-board services.
But the competition has stirred up change among the majors. One change is fare wars and discounting.
For instance, at TWA (one of the competitors in the New York-Los Angeles $99 fare war) about 80 percent of the passengers now ride on discount fares. This compares with 45 percent in 1979.
The resulting ''low yield is a major contributor to our losses,'' said TWA's Mr. Effman. For the first nine months of this year, TWA's domestic division lost million.
''Discount fares, even though they turn out to be destructive, aren't due to naive management,'' said Mr. Norling of Kidder Peabody. ''It's the recession that almost dictates this kind of discounting.'' Recovery will end fare wars, he says.
While TWA and other majors aren't giving up the fare wars yet, they have been busy restructuring their routes. ''The trunks are adopting their own hub-and-spoke strategy,'' said David Kaplan, chief economist for the Civil Aeronautics Board, the industry's regulatory agency, which is scheduled to be phased out by 1985. United uses Chicago, Denver, Los Angeles, and San Francisco. American is building a stronger Dallas hub; TWA is concentrating on St. Louis and Kennedy Airport in New York; and Delta has been trying to add more hubs besides Atlanta - such as Dallas.
These route strategies, some analysts say, are making the majors more like the regionals and the regionals more like the majors. In Denver, they are bumping against each other.
''United, Texas International, and Continental have been aggressively expanding in Denver,'' said Larry Bishop, the spokesman for Frontier Airlines Inc., which also operates out of Denver. Their presence, he explains, has been one reason behind Frontier's first quarterly loss in a decade. Mr. Bishop adds that the competition's expansion has happened in the last year or two - after Frontier had already been expanding into their territory.
''The majors have discovered they need to start feeding themselves and they are getting into the shorter hauls and medium markets.'' There are no more monopolies, he said.
With this kind of competition, no airline can ignore cost control. This year's 6 cent drop in fuel costs has helped somewhat. Unfortunately, many of the airlines - there are exceptions - are not in the kind of financial position to heavily invest in new fuel-efficient fleets.
But labor costs, which account for about 38 percent of total costs, are being whittled. In an unpromising economy, the airlines are looking for concessions. And with bankrupt Braniff as a warning, they are getting them - ''especially the most financially troubled carriers,'' says an analyst.
Pan American World Airways, struggling to stay alive, recently won $43 million in 1983 concessions from its pilots. In August, Continental and American also won pilot concessions. At TWA and Eastern pilots have accepted a one-year wage freeze. And at United last year, the union agreed that two pilots could substitute for three-man pilot crews flying Boeing 737s and 767s.
But not just pilots are affected. At Pan Am and Continental last year all employees agreed to a 10 percent cut in wages. About 30,000 industry employees aren't exactly worried about management's demands - these are workers who, since 1978, have lost their jobs.
Unless the economy picks up, a few more Braniffs may occur, analysts and executives say. However, the industry itself now warily says it is ''possibly positioning for recovery,'' in the words of industry economist George James. With interest rates down, fuel costs steadying, aggressive cost controls working , and perhaps a consumer-led recovery next year, the airlines may begin to turn around.
If the stock market is any gauge of what investors see for the future, there may be something to this idea of reversal.
Standard & Poor's air transport index - which tracks American, Delta, Pan Am, Northwest, and United - has been up since June. It floated up with the stock market rally and has kept on rising. In the second week of August it closed at 39.63. By Dec. 22, it ended the day at 68.67.
''The market moves on expectations,'' Thomas Canning, an S&P airline analyst said. ''Expectations now are that the economy will be better next year.
''Despite rumblings to put some sort of regulation back on the books (Air Florida, Republic Airlines, World Airlines, and Capitol Airways have been talking about a need for a price floor), the rest of the industry is uninterested.
''Though it's been painful, it's helped us,'' says TWA's Effman.
''Deregulation has been a plus for us,'' acknowledges Frontier's Bishop. ''It's allowed us to expand. Things wouldn't be so bad if the economy weren't so bad.''
Next: How the new entrants have faired.