Deregulation aids takeoff of new entries in airline industry

No snacks, no free drinks. Just a seat to sit in and a fare lower than anyone else's. That's the offer some new airlines made when they first entered the market after deregulation in 1978. People could either take it, or leave it. They took it.

Of the 32 new entrants since deregulation, the three largest carriers - PEOPLExpress, New York Air, and Midway Airlines, have kept fares consistently low. This has put pressure on the rest of the industry to match rates. PEOPLExpress drove American Airlines from the New York-Buffalo route.

''The strategy of the new entrants was to come in with lower costs and charge lower fares,'' says Ron Moreno, an airline analyst with Smith Barney, Harris Upham & Co., a brokerage firm.

Foremost, the new entrants were able to save by setting up business with used planes and nonunion workers, Mr. Moreno says.

''New entrants who buy equipment at low cost and who operate on a free market in terms of work flow (non-union labor) have a cost advantage of real magnitude, '' says Wolfgang Demisch, an analyst with Morgan Stanley. an investment banking firm. ''You are looking at people fighting for survival now, where cost differences of a cent a seat mile loom large.''

PEOPLExpress has the lowest costs in the industry - 5.5 cents a seat mile. (Costs for other airlines range up to around 11 cents). ''Employees are key,'' says Edward Stukane, spokesman for PEOPLExpress Airlines Inc., based at Newark International Airport in New Jersey. ''We train them in all areas of operations. Two weeks from now they may be in ground operation or some staff function. They put more productive hours in because they work in other areas.''

All PEOPLExpress employees are also on a profit-sharing plan and are required to own stock in the company - a greater incentive now that it has pulled itself up to profitability.

However, cost wasn't the only tool new entrants used to chip away market share from the major airlines. ''We (the new entrants) were more flexible, because of our size, and management came in with a fresh approach,'' says Neal Meehan, president of Midway Airlines Inc., based in Chicago. Mr. Meehan used to head New York Air.

But if low fares were the major reason passengers began to fly the new entrants, what happened when carriers like Eastern, USAir, and Northwest began to match the fares?

''It's not merely the cost differential that allows a new entrant to survive; . . . they have to find a service niche, or a differentiating characteristic,'' says Mr. Moreno at Smith Barney.

At New York Air and Midway, this tip is being heard.

''Competitors were inclined to meet our prices. We needed to become more of a distinctive airline,'' says Michael Levine, president of New York Airlines Inc., which started in Dec., 1980. (Texas Air Corporation, which used to own 67 percent of the New York Air, recently jacked that up to 80 percent with a substantial new investment in the airline.)

Mr. Levine said New York Air, based at La Guardia Airport, went back to the drawing board to figure out just what their East Coast business travelers wanted.

It then removed some of the seats in their planes for more room. It gives away the New York Times to its passengers. It also has ''distinctive'' snacks - such as ''the flying nosh,'' which consists of a fresh bagel and cream cheese brought to you in a red glossy bag.

Analysts hope these changes will stop the airline from circling around in the red. Third-quarter losses totaled $3.8 million. ''It's still too early to tell what will happen to them,'' says one analyst.

Midway, on the other hand, has not performed too badly since its start in November 1979. It dove $5 million in the hole in 1980, gained $7.6 million in profits the next year, and through the first three quarters of this year has squeeked into the black by $270,000. Mr. Meehan complains, ''The industry prices its product like a commodity [where one item resembles another and prices fluctuate rapidly] and we want to get out of that.''

Eleven of Midway's 15 markets are also served by major carriers ready to match fares. Midway, which runs all its flights through Chicago's Midway Airport , is planning ''a new product'' for the second quarter of 1983. It could involve fare increases, Mr. Meehan said, but the carrier will still keep its rates below normal coach fares.

The product will be geared to the business traveler who makes more than 20 round trips a year. Without pinpointing details, Meehan said Midway will correct such complaints as ''hassle at the airport, separation from your luggage, airline food, and being stuffed in seats where you can taste your knees.''

PEOPLExpress believes it's found its niche - by basing its traffic hub in Newark and flying to secondary airports. With 20 aircraft, it will stick with no-frills service. ''We are not taking on the big guys,'' says Larry Martin, general manager of PEOPLExpress.

But it is expanding. Recently it opened at Burlington, Vt., and Hartford, Conn. The West and possibly London are next.

After four quarters of net losses due to the air controller's strike, start-up costs, and Florida fare wars, the airline has been profitable for the last two. ''We expect to end this year profitable,'' Mr. Martin said.

Because PEOPLExpress is tops in cost control. According to Hambrecht & Quist, the investment banker, the airline (along with Southwest Airlines) has ''adjusted the best to deregulation.''

But analyst Mark Daugherty at Dean Witter Reynolds Inc. hedges this estimate somewhat. ''It's a matter of them getting staying power,'' he says.

Next: Competition puts a new twist in airline marketing.

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