Airlines getting fewer, fares going higher
Boston — The airline industry's fare battles may be coming to a close -- and ticket prices for American travelers going up. During the past two years, a rush of mergers and bankruptcies has consolidated the industry, giving dominance of the skies to fewer giant airlines. For travelers, that means an end is coming to the seven years of ultra-low ticket prices they have enjoyed.
``A new day is dawning in the airline industry,'' says Marc Klee, a securities analyst with National Aviation & Technology Corporation, a mutual fund.
``The airline consolidation wave isn't over yet and the industry will continue to evolve into an oligopoly,'' Mr. Klee says. ``One of the consequences of that is that prices are going to firm up.''
Oligopoly is the ungainly word that industry observers have used to describe the inward, anticompetitive spiral the airline industry is experiencing under deregulation.
But for the airlines, the end of fare wars should mean better revenues and thus sounder financial footing. This has encouraged investors in airline stocks, who have bid up the issues the past two days as United, American, and Delta have announced ticket price increases.
``The minute People Express went down the drain [a sale to Texas Air Corporation of Houston is pending], that changed the ballgame,'' says Frank H. Cassell, a transportation expert and professor at Northwestern University's Kellogg School of Business.
``We're now in the fourth stage of deregulation and the industry is headed back toward an oligopoly,'' Professor Cassell says. ``I knew the fares would rise. That's what we predicted all along.''
Cassell says the fourth stage as he sees it includes a nearly completed industrywide shakeout; an abating of fare wars; ticket prices edging upward; and the rise of the ``mega-carrier.'' Indeed, a number of analysts have predicted the industry will be dominated by six to eight carriers.
Just before Frontier Airlines filed for bankrupcty in August, Robert Joedicke, senior airline analyst at Shearson Lehman Brothers, told the Monitor: ``You can pass whatever legislation you want, but once you create free competition you have to take what you get, and what you get is an oligopoly.''
As part of the further consolidation, the Department of Justice said Wednesday in a letter to the Department of Transportation that it didn't believe Texas Air Corporation's purchase of People Express was anticompetitive.
That decision surprised some industry observers who had thought there would be antitrust questions.
People Express competes directly with Texas Air's New York Air carrier and with Texas Air's recently acquired Eastern Airlines. The Eastern takeover was approved this week by the Department of Transportation, which has final approval on airline mergers.
``We were a bit surprised by the Department of Justice's approval of the Texas Air-People Express mergers,'' says Klee.
The department had voiced objections to the less obviously anticompetitive mergers of Northwest and Republic, as well as TWA and Ozark. ``This one seemed to be the most anticompetitive of the recent merger proposals,'' Klee says.
Texas Air chairman Frank Lorenzo also got another big boost Thursday when unions at Frontier agreed to quit blocking the sale of Frontier gates and planes.
Other stumbling blocks facing Mr. Lorenzo over the sale of People and Frontier remain. But if successful, the Texas Air conglomerate -- comprising Continental, New York Air, People Express, and Eastern -- would be the noncommunist world's biggest airline, with a fleet of more than 600 planes.
The price increases announced by major carriers this week will initially affect business fliers the most. But those fliers who have enjoyed coast-to-coast fares as low as $99 may not be seeing these any longer.
United was the first to increase prices, hiking one-way fares by $10 for trips under 1,000 miles and $20 for trips beyond that. The fare boosts were applied on about 80 routes originating from United's major hub in Chicago. First-class fares, priced at 150 percent of regular fares, will rise by $15 and $30. A regular one-way fare from Chicago to Los Angeles will rise from $410 to $430.
Analysts say that in the longer term, broader-based fare increases, more restrictions on discount fares, and fewer cut-rate tickets are likely.
During the deregulation era the ability to lower operating costs and control passenger flow has been central. This has given rise to the much-ballyhooed hub-and-spoke system that has helped airlines keep passengers flying from point to point within their own system.
Using a large city airport as its center of operations, airlines have been able to encourage fliers through discounts to take indirect flights through the hub.
Cassell says the cost and inefficiencies of flying have been transferred from the airlines to the traveler. He says his wife decided to save money on her flight from Chicago to Syracuse, N.Y., last week. She did save $150, but was forced to fly to Detroit first, then wait two hours for the next flight. Total travel time was about six hours.
Now that competition is easing, industry experts say customers will once again find it increasingly difficult and more expensive to fly to less traveled spots, since those routes will be cut back. Travelers will also spend just as long waiting in hub airports for connecting flights, but get lower discounts.
People Express-initiated fare wars, perhaps more than anything else, shook up the industry after deregulation. But in the end, analysts say, People was hurt by management mistakes, lack of a sophisticated computer system, and weaker finances than the rest of the industry.
Now that People is about to be absorbed by Texas Air, the spoiler is gone. But there aren't any tears from their competitors, only a little lamenting elsewhere. People's passing, it seems, lends itself more to wry observation.
``The strategy of the major airlines has been one of `defense in depth,' '' says Cassell. ``They just decided to wait them out.''