Path: bloom-picayune.mit.edu!snorkelwacker.mit.edu!news.media.mit.edu!americast.com!usa-post Newsgroups: usa-today.bonus From: usa-post@AmeriCast.Com Organization: American Cybercasting Approved: usa-post@AmeriCast.com Subject: bonus Wed, Apr 22 1992 Date: Wed, 22 Apr 92 05:41:50 EDT Message-ID: 04-22 0000 BONUS: Airline price war hot and heavy USA TODAY Update April 22, 1992 Source: USA TODAY:Gannett National Information Network How low can airfares go? Apparently, as low as American Airlines Chairman Robert Crandall is willing to drive them in his bid to remake the airline industry. Crandall says he's not out to kill smaller competitors such as TWA and America West. But experts and airline executives - including Barbara Beyer, president of airline-consulting firm Avmark - don't believe him. "I have a feeling he'd fly people for nothing if that's what it takes" to squash his smaller competitors, Beyer says. HOW MUCH WILL IT TAKE TO SQUASH AMERICAN'S COMPETITORS? Airfares already are low enough to cause serious financial damage to just about every airline in the USA, especially weaker ones such as TWA. The industry today is like a scene from Star Trek, with Crandall as James Kirk holding the USS Enterprise at full throttle while Scotty yells, "Cap'n, she can't take it anymore! She'll break up!" WHAT'S THE SHORT ANSWER? Fares can probably slip a bit lower on some routes where TWA or America West try to nibble at and annoy American. American says it will not further lower fares; it will only respond to others' price cuts as it did Monday. Big slashes aren't likely unless TWA, which set off the latest round of cuts, decides to go on one last, desperate suicide mission to win market share. WHAT IS THE BIGGEST BATTLE? Lately, the most visible struggle is TWA vs. American, and it has been dragging the rest of the industry - which has lost $6 billion the last two years - into the trenches. Earlier this year, TWA, operating under Chapter 11 bankruptcy-court protection, began cutting ticket prices in an effort to get a rush of new passengers and quick cash to stay afloat. WHEN DID THE PRICE WAR START? Two weeks ago, American announced a new pricing plan, which cut and supposedly simplified airfares. The move was a response to a variety of things - TWA, flier outrage at high business fares and the problems and costs of maintaining a web of fares for every route. TWA responded a few days later by offering prices lower than American's. American charged back Monday, slicing fares to match most competing fares, especially those on TWA. Bigger airlines - Delta and United - have quickly lined up with American each time. Others have bucked some changes, and Southwest has stuck with its own niche fares. HOW DOES CRANDALL FEEL ABOUT COMPETING WITH BANKRUPT AIRLINES? TWA and other second-tier airlines - especially those operating under bankruptcy proceedings - have clearly made Crandall angry. He grumbles, in clear reference to them, "The airline industry is only as smart as its dumbest competitor." TWA Chairman Carl Icahn publicly says he is sure Crandall wants "to drive airlines out of business" - including TWA. On The MacNeil:Lehrer Report Tuesday, Icahn said, "I'm not really criticizing (Crandall). ... American is doing what they think they have to do." At every push and shove, the industry has to join. That's why fare wars have gotten so intense. HOW HAVE PASSENGERS REACTED? Conventional wisdom is that fliers will almost always buy tickets on the lowest-fare airline. Fliers have little brand loyalty, and service is nearly identical on all major carriers. So an airline offering low prices on a route would gain market share. A higher-priced airline would lose share. The result: Every time one airline cuts fares or offers better ticket-buying terms, the others rush to match it. IS THERE A HITCH TO LOWER FARES? American wants to make fliers buy discount tickets 21 days ahead. This week, the industry forced a trim to 14 days. The initial mover was TWA. American did not match. But when Continental, Northwest, United, USAir and America West copied TWA, American had to. The latest cycle has meant that business fares had fallen 33% from March 1 to Monday, says American Express. By Tuesday, another few percentage points were sliced. A seven-day-advance-purchase, round-trip ticket between New York and Los Angeles stayed at $520. A similar Dallas-San Francisco fare dropped from $430 to $340. HOW HAS THE RECESSION AFFECTED FLYING? Despite an initial surge of calls to airline-reservation offices after the fare cuts of two weeks ago, lower fares aren't drawing huge numbers of new customers who wouldn't fly otherwise, experts say. So airlines are fighting for a steady number of fliers, trying to fill their excess capacity. On average, airplanes fly 40% empty. The situation favors huge airlines such as American, Delta and United, which together have 54% of the market. They have the most extensive systems, so they can offer more nonstop flights. And they have the newest planes. HOW IMPORTANT ARE NONSTOP FLIGHTS? Auditor Herbert Parker of Asea Brown Boveri in Windsor, Conn., says that if he could get a nonstop flight and not have to pay any more than an additional $100 round-trip over the cost of a connecting flight through a hub, he'd take the non-stop. Parker is one of USA TODAY's Road Warriors - a panel of superfrequent business travelers. Seven other Road Warriors contacted said the same thing. WHY ELSE IS THE TIME IS RIPE FOR AMERICAN TO PICK A FIGHT? The recession, which socked airlines with huge losses last year, left smaller carriers financially weaker than big carriers. Last year, American had $10.8 billion in assets (a measure of resources) and a debt-to-equity ratio (a measure of indebtedness) of 64%. TWA had less than one-fourth American's assets, $2.3 billion, and twice its debt load, a 118% debt-to-equity ratio. Icahn says his airline has far lower operating costs than the major airlines, but others in the industry dispute that. CAN AMERICAN WIN? If the current fare-cutting game of chicken keeps up, American could easily outlast TWA - "in six months max, maybe less," Beyer says. Still, the fare war has gotten bad enough that even big carriers will come out wounded. They won't be anxious to make it worse. "We had forecast that the industry would do better than break even this year," says Lee Howard of Airline Economics. "After the latest moves, we have a strong suspicion it will be another loss year for the industry. We just don't think carriers are in a position to cut fares further." HOW WILL IT END? Financial pressures may make the fare wars peter out on their own. If TWA, America West and other smaller competitors can hang on, they'll probably keep things interesting. They'll be desperate enough for passengers to keep their fares low. Another possible finale: The smaller carriers won't be able to take the heat and will fold. American, Delta, United, Northwest, USAir and maybe Continental, which is also operating under bankruptcy protection, would control the domestic market. "And then fares will go way up," says Beyer. "There will be good deals on tickets until you see the other airlines falling by the wayside." Bonus Editor: Michele Coleman. (1-919-855-3491) Making copies of USA TODAY Update (Copyright, 1992) for further distribution violates federal law. This article is copyright 1992 Gannett News Service. Redistribution to other sites is not permitted except by arrangement with American Cybercasting Corporation. For more information, send-email to usa@AmeriCast.COM