Florida 'air wars' send one airline into bankruptcy
At the right price, people seem willing to fly anywhere - even to steaming Florida in the middle of July. After Eastern Airlines announced this week an indefinite $198 round-trip fare from New York to Florida, spokeswoman Paula Musto said the airline's reservation system ''had its busiest single day in 18 months.''
Over the last few years, new airlines such as People Express and Northeastern International have opened up the Florida market, attracting passengers through lower fares. Promotional efforts by the major carriers have also had an impact. Now Eastern, attempting to regain market share and create an even bigger Florida market, is saying to these carriers, ''We're going to be competitive with you,'' Ms. Musto explains. If there's anything the airline has learned, it's that the market ''is extremely price sensitive.''
It's exactly this price sensitivity, and the management challenge of how to deal with it, that forced Air Florida to make an emergency landing on the bankruptcy runway last week. It wasn't as if Air Florida had been piloting empty planes. The Miami-based airline reported that in May its planes were about 65 percent full and in April they were 70 percent full - quite respectable figures.
It was debt that tripped them up, says Robin Cohn, Air Florida spokeswoman. Had ''devastating fare wars'' as well as recession not come along, she says, the airline might have been able to hurdle its debt, not fall over it.
Shortly after deregulation in 1978, the company went through a rapid expansion. But then fare wars - involving the Florida market - and the entrance of low-cost carriers changed the picture. The increased competition, along with a nasty recession, cut into Air Florida profits. Last year, the company lost $39 million; the year before it was $93 million. The airline started to regroup itself, knocking off routes and reducing costs. But the defensive moves were not enough. Even with a 10 percent pay cut this spring, a $5 million loan, and the sale of four jets, Air Florida still had to seek protection from creditors holding $221.4 million of debt.
Air Florida has until July 25 to present a detailed plan for future operations to the bankruptcy court. ''We are working now on a plan to resume service,'' Ms. Cohn says. The company wants to return to its Miami-London route, ''as well as selected Caribbean and domestic routes, as quickly as possible,'' she said, but she could not say when this would happen.
On Monday, a federal bankruptcy judge allowed the company access to $4 million in receivables to help keep operations going and pay the salaries of the 115 workers - mostly management - recently rehired. Air Florida has also worked out a plan with World Airways in which Air Florida will lease a DC-10 jet for Air Florida's Miami-London route. Air Florida was forced by the bankruptcy judge to give up two other planes it was leasing, leaving nine planes at its disposal.
The fact that Eastern, Delta, and Pan American are adopting lower fares from New York to Florida does not make this a particularly attractive route for any ''new'' Air Florida that might evolve, analysts say. Should the airline rise again, ''it would have to take the path of least resistance,'' says Mark Daugherty, an airline analyst at the Dean Witter Reynolds brokerage firm. ''Coming up the East Coast is the most resistant,'' he adds.
Ms. Cohn explains that before bankruptcy, the strongest routes for Air Florida were from the Midwest, where the airline was feeding traffic to its Miami hub and then dispersing it to other AirFlorida destinations, such as Central America, London, and the Caribbean. ''We could see positive reults from this hub and spoke system,'' she said. As far as fare wars on the East Coast go, ''we're aware of what's happening in the environment.''
According to competitors in this ''environment,'' Air Florida's grounding hasn't made much of an impact. ''They had shrunk into such a shadow of their former selves that the impact is not great,'' says Eastern's Paula Musto. None of the major carriers are rushing to take over the domestic routes abandoned by Air Florida, she says, because during the summer, at least, there is too much capacity already. However, Eastern has filed with the Civil Aeronautics Board for Air Florida's Miami-London route.
It's a guessing game as to whether Air Florida will fly again. Unlike Continental Airlines, which filed for bankruptcy with $35 million in unrestricted cash, Air Florida is in desperate need of cash. It already has labor costs that are below the industry average, and while it is trying to whittle them down even further, its real needs are financing along with marketing savvy, says Dean Witter's Mr. Daugherty.