Falling Fares To Test Airlines' Staying Power
FRANCINE LAPORTE of Brooklyn knows she got a bargain in the latest round of air fare wars but does not see how the industry can possibly come out ahead.Skip to next paragraph
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"A few weeks ago I spent $840 for two round-trip tickets to San Francisco for my husband and me," says Mrs. LaPorte, a French major at Hunter College who is taking the trip as a graduation present. "Now both of us are going for $420. The airlines have got to be losing money."
Many analysts agree that the industry cannot recoup in added traffic what it is losing in revenue with the current 50 percent slash in domestic discount fares.
"What we thought might be a chance of a break-even year for the industry is now turning into a loss - maybe even comparable to last year's $2 billion loss," says Lee Howard, president of Airline Economics Inc., publishers of an airline quarterly that tracks industry economic trends. "I'm having a tough time seeing the logic of this."
Any projected turnaround in airline industry earnings has been postponed until at least 1993, says Barry Gordon, president of the John Hancock National Aviation & Technology Corporation, a mutual fund specializing in aviation.
The newest chapter in the air fare wars began early last week when Northwest Airlines announced a promotional two-for-one discount fare in which adults accompanying a child could fly free. A day later American Airlines, which in April had introduced a simplified four-tier fare structure that it expected the rest of the industry to follow, countered with a deep 50 percent cut in all restricted domestic discount fares. Other airlines quickly matched the American plan. Even Northwest by week's end was adver tising that its family fare had "grown up" and that everyone "gets 50 percent off." Battle for market share
Mr. Howard calls the latest turn a "oneupmanship" fare war in which American, rather than matching Northwest's fare, outdid it. "American wants to stay in control," he says.
"I suspect that Northwest was testing the waters and has found them very unpleasant," says Severin Borenstein, an economist at the University of California at Davis. "American responded with a very drastic short-term cut, and I think it has really shocked people in the industry.... The other airlines hear the message loud and clear."
In the meantime, passengers by the tens of thousands are rushing to take advantage of some of the lowest fares in years before the offer expires at midnight Friday. In most cases, travel must be completed by Sept. 13.
Only 10 to 25 percent of the seats on any flight carry the new low prices. Most travelers have been willing to endure two and three hour waits at the ticket counter and steadily busy phone lines.
Many in the central airline ticket office on 42nd Street here were jubilant about the results. One woman, pushing a baby in a stroller, announced, "I was going to Fort Lauderdale anyway but this really clinched it; I got a round trip for $157." Mrs. Luemisher Jordan took the subway in from the Bronx and waited two hours to exchange a previously purchased $265 round-trip ticket to Chicago for one at $125. "It was worth the wait," she says. Summer profits at risk
Summer is usually the peak season for leisure travel and the time airlines make most of their money. This year, summer bookings have been running only 2 to 3 percent above last year. Northwest's move was aimed at stimulating traffic and getting at least a brief competitive edge.
Whether American's proposed simplified fare structure will hold for the industry over the long term is still an open question, says Paul Karos, an airline analyst with First Boston Corporation.
Some of the financially weaker airlines are still offering a lot of corporate discounts, Mr. Karos says.
One point on which most analysts agree is that the net effect of the new short-term discount fares is likely to further consolidate the number of airlines flying.
"A few more airlines could go by the wayside, and this is going to make the weak weaker," Mr. Gordon says.