'No frills' airlines nip at the heels of industry giants

When the breakfast roll came, 30,000 feet over south Jersey, it was dropped unceremoniously on my fold-down tray - no plate, no napkin. When the beverage cart arrived, somewhere over the foggy Rhode Island coast, most of the passengers had given up hope and devoured their small, dry danish. Pampered, we weren't. But for a $39 Washington-to-Boston flight, nobody griped.

Not all of the new ''no frills'' airlines nipping at the heels of the veteran carriers are quite that spartan. Still, a growing number of people are willing to forgo in-flight meals and tote their own belongings aboard a handful of new carriers which have sprung up since the industry was deregulated in 1978.

There's some question as to how long the newcomers in the skies can continue to undercut the fares of the established carriers. But there's no doubt that in 1981 - a year most airline executives would like to forget, due to the air controllers' strike and a sluggish economy - the companies with bargain prices did a booming business.

The airlines offering the stiffest challenge to the trunk lines are PEOPLExpress, New York Air, Midway Airlines, and Air Florida. Although a few regional Western airlines have expanded their operations somewhat, the biggest price wars have been in Eastern and Midwestern business centers.

PEOPLExpress, which took to the air last May, flew an increasing number of passengers each month through December despite disruptions in service due to the air controllers' strike. New York Air, which started up in December of 1980 and was the first to rival Eastern's Boston-New York-Washington shuttle, flew 1.6 million passengers in its first year.

A few regional carriers have tossed their caps into the big-time ring since deregulation began. Air Florida, which began in 1972 as a one-plane hop from Miami to St. Petersburg and Orlando, now services the Eastern US, Europe, Central America, and the Caribbean. Its ''revenue passenger miles'' (RPMs) - a more accurate measure of productivity since it accounts for the number of miles and passengers flown - was up 160 percent last year.

In contrast, financially troubled American Airlines last week announced a 1.3 percent decrease in RPMs and a $34.8 million loss in the fourth quarter of 1981.

Piedmont Aviation has been in business since 1948. But its new ear-catching radio jingle declares: ''We've only begun - we're up and coming, shining like the sun.''

So it seems. With an expanded route system and ''hopscotch'' flights that cost as little as half the price of some nonstops, the company's RPMs jumped 36. 9 percent during 1981. Rather than challenge the large carriers for dominance in large cities, Piedmont has adopted the big-fish-in-the-little-pond strategy and targeted medium-size cities such as Denver and Richmond, Va.

Another important statistic is ''load factor'' - the percentage of seats filled. The Chicago-based Midway Airlines, which started flying a few months after deregulation began, reports a load factor of 59.1 in 1981, up from 50.0 in 1980. One of the behemoths, Eastern Air Lines, experienced a sharp drop in load factor from 61.3 percent in 1980 to 55.8 percent last year.

What's giving the smaller guys the edge?

''They don't have the large, entrenched costs that we do,'' complains a Trans World Airlines (TWA) official. The airline maintains its own food service kitchens in a number of cities, as well as costly maintenance hangers. Most of the no-frills carriers serve no full meals, partly because the flights usually are less than two hours long. Some charge extra for beverages and snacks.

''Because we're new, we're not encumbered with a lot of the stuff the others have built up - mainly high overhead and employee benefits,'' says Doris Nielsen , a spokeswoman for New York Air. Most of the young carriers have a predominantly nonunion staff at the low end of the pay scale. In contrast, flight attendants for United Airlines have an average 12 years of seniority.

Other advantages for the newcomers:

* Most have domestic-only, short-to-medium-haul flights that all originate and terminate in the same city (New York Air, New York; PEOPLExpress, Newark, N.J.; Midway, Chicago).

* Some have no baggage-handling service, either onto the plane, or between connecting flights. PEOPLExpress charges a $3 fee for anything other than carry-on luggage.

* Some lines operate in less-congested (but often less-convenient) airports, in order to schedule more flights per day. Midway Airlines, for example, flies into Midway Airport instead of O'Hare and the PEOPLExpress lobby at Newark International Airport is sequestered in what was many years ago the original airport terminal.

* Lacking stiff union work rules, the younger carriers can train pilots and flight attendants to rotate into a variety of ground jobs, such as ticket sales and reservations.

''Under regulation, unions were able to negotiate a lot of work rules,'' explains Daniel Kaplan, director of the Office of Economic Analysis at the Civil Aeronautics Board. United Airlines, for example, agreed to have three-person crews in its two-engine 737s, even though the Federal Aviation Administration had approved the aircraft for a two-pilot team. The union just recently conceded a return to the two-pilot system.

Pilots for regional specialist Southwest Airlines average 71 hours of flying time a month, according to Mr. Kaplan, while unionized carriers average 60 pilot hours a month at best.

The small airlines don't have all the breaks, however. Certain economies of scale operate in favor of the giants.

''For one thing, they can operate larger aircraft,'' explains Mr. Kaplan. ''Wide bodies have a lower cost-per-seat on transcontinental flights.'' Large airlines also are more capable of supporting gate facilities and reservations networks. At crowded airports, some of the smaller companies don't have a computerized advance-reservation system, some have to rent gate space from their larger competitors.

''Ironically, I don't think (most of the large carriers) have taken advantage of these economies of scale,'' says Kaplan.

But there are some indications of belt tightening. Unions have capitulated to smaller wage increases and an easing of work rules. Almost all of the major carriers are abandoning their least fuel-thrify aircraft; more-efficient Boeing 757s and 767s will be in the air late this year. United's new-model 737s have no kitchens and 125 ''slimline'' seats; the older versions accommodated 113 passengers.

One of the biggest problems facing the big carriers is high interest rates. Kaplan says Eastern Air Lines has a 75 percent debt-to-total investment, while the No. 1 profitmaker, Delta, is at 18 percent. The industry average is a high 59.5.

''We're fuel-intensive, labor-intensive, and capital-intensive, and that takes a lot of money,'' says Eastern spokesman Tom Myers.

While the established companies are starting to economize, the newcomers may soon find their costs - and their fares - climb closer to those of their big brothers. TWA spokeswoman Sally McElwreath says no-frills companies purchased older, used planes, that are fuel-eaters and may not comply with impending 1985 noise standards. ''They're going to have to replace them,'' she says, ''and that's going to catch up with them eventually.''

''I don't think (airfares of budget lines) will creep up to the level of established carriers - I think the established carriers will find the'll have to reduce their costs,'' says Kaplan. ''They've lived under very sheltered environmental regulations, and there was not much incentive to cut costs.''

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