Airlines: All's War in Fares

"The new fares are generating profits and new passenger traffic. "

--United Airlines President Richard Ferris

"These fares just generate price wars. "

--Delta Air Lines Marketing Vice

President Joseph Cooper

As in Rashomon, the Japanese legend made into a movie, airline executives have widely differing views about the same phenomenon: in this case the spreading cut-rate fares on U.S. and transatlantic flights. What is beyond dispute is that the often bewildering variety of bargains offered by the eleven long-haul lines is stimulating a rush to pleasure travel. That in turn is helping to give the industry a much needed lift.

After years of dismal earnings, the major carriers registered a combined record $600 million profit last year, up from $343 million in 1976. Profits this year are expected by several Wall Street investment analysts to rise to the $700 million area. True, much of the recent increase has come not from flying but from plane sales, tax credits and hotel subsidiaries. Indeed, some carriers--Eastern, TWA, Northwest, Western--show declining operating profits. But the competition for passengers, especially nonbusiness travelers who make up 48% of the traffic, is certain to remain intense. So the number of low-cost fares will probably grow.

Three more bargain plans were proposed last week. Starting March 18, United Airlines will expand its Super Saver plan, which currently knocks 30% to 45% off normal economy fare on coast-to-coast flights. Discounts of 30% to 40% will be available to travelers in all 110 cities served by United for trips of more than 900 miles. American Airlines, the originator of the Super Saver fare, retaliated with an extension of the plan to all 52 U.S. cities that it serves, beginning March 23. Unlike United, American will set no distance requirement.

Meanwhile, Pan American unfurled its "Round the World in 80 Days" fare, which will be offered on a stand-by and reserved-seat basis beginning March 17. Travelers on stand-by will pay $999 for economy class, a discount of nearly 45%, and are permitted eleven stops within 80 days anywhere in Pan American's global network. Passengers with reservations, which must be made 30 days in advance, pay $1,199 and are allowed unlimited stopovers.

The price war on domestic routes is prompted by several factors beyond merely trying to attract new customers. A new regulatory reform bill is now before Congress and stands a good chance of being enacted. Some airline executives fear that it could permit a flock of small, new airlines to enter the market. A number of the established carriers believe that one way to counter such legislation is to prove, by cutting prices, that they really are competing against one another.

The drive for lower fares is also being pushed by the chairman of the Civil Aeronautics Board, Alfred Kahn, a former Cornell economics professor, who has long criticized the wastefulness and rigidity of regulatory agencies. Since becoming chairman last June, he has told airline chiefs that he would welcome applications for innovative fare cuts, and the CAB in effect has been pursuing a course of deregulation by approving just about any low-budget plan that it gets.

Price reductions on the transatlantic run are a response to competition from the Advance Booking Charters and, especially, Freddie Laker's Skytrain, which continues to pack them in by offering--on a first-come, first-served basis--a $236 New York-London round trip; basic economy fare on scheduled lines is $626. Pan American and TWA are doing well with their own low-cost fares. One is a stand-by fare of $256, and another is a budget fare, also $256, that requires passengers to buy tickets three weeks in advance of their flight; customers can pick the week that they want to go, but the line assigns the day.

The scramble for new business has led some carriers into trouble. For example, Delta proposed a Super No-Frills plan from New York to Miami at $55 to $75, but specifying that only a tightly packed, 244-seat, stretched-out DC-8 could be used. Eastern and National responded by seeking the same deal for their regular 199-seat DC-8s. Despite Delta's objections that such a lower-load plan would lose money, the CAB granted approval to Eastern and National, and Delta felt compelled to go along. Now executives at all three lines complain that, though traffic is up, profits are down on the run. Says National President Lewis B. Maytag: "The impact of the fare will be to divert passengers, who would have traveled anyway, to this potentially unprofitable $55 fare."

On the other hand, the coast-to-coast Super Saver plan used by United, American and TWA has proved to be a profitable winner. Since April, on American alone, more than 450,000 passengers have taken advantage of the plan's discounts. Expecting even heavier traffic this summer, all three lines are remodeling the interiors of their DC-10s and L-1011s to accommodate more passengers, squeezing in nine seats across instead of eight and narrowing the aisles.

Despite the increase in traffic and the brightening prospects in general, some lines still have a long way to go before they will be healthy enough to finance all the new planes they will need in the years ahead. Cautions Joseph Lorenzo, director of pricing at Continental: "Too many uneconomic fares could drive some carriers out of the market, reducing competition and bringing higher prices in the long run. I've got to believe that the industry's sense of survival will prevail."

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