Shootout in the Skies

By John DeMott

As the air-control system rebuilds, Pan Am sets off an air-fare battle

A full-fledged price war was under way in U.S. skies last week, defying most rules of economics and common sense. It happened at a time when the walkout of nearly 12,000 air controllers was forcing airlines to curtail their schedules and pack passengers sardine-style into the planes that are still flying. Unlike many recent air-fare battles, the combatants were not the small upstart carriers or the thriving regional airlines. This time the big trunk lines that dominate air-traffic lanes were fighting it out. What is more, the price war was touched off by Pan American World Airways, which lost $217.6 million during the first half of the year and would seem to be in no position to start offering loss leaders.

The discounting came at the onset of the betwixt-and-between season for airlines, that relatively slow period between Labor Day and Thanksgiving, when summer tourists have gone back to work and winter ones have not yet begun to head for southern beaches or northern ski slopes. While more than two-thirds of airline coach passengers routinely fly on some sort of discount ticket, like Super Saver, the new cuts slashed prices even deeper and had no restrictions on travel.

Pan Am started the fare slashing two weeks ago, when it began offering reductions of from half to two-thirds off standard economy-class tickets on all domestic flights, including such popular runs as New York-Miami, New York-San Francisco and Los Angeles--Hawaii. The carrier cut the cost of a New York-Los Angeles ticket from $478 to $219, and billed it in huge newspaper ads as "the lowest unrestricted fare of any major airline." To lure passengers to its international flights, where it still makes most of its money, Pan Am offered travelers a coupon that would allow paying customers to take along one family member free to cities on Pan Am's worldwide system.

Not to be outdone, Eastern Air Lines bought big chunks of ad space to ballyhoo fares "that are so dramatically different, we're not even calling them fares any more. They're Eastern's Unfares." TWA quickly followed with cuts of its own. It started charging only $99 for its four daily New York-Miami runs, and ultimately dropped the price to $69. It also offered a free first-class ticket for domestic or international flights to passengers who had logged 50,000 miles with TWA.

One by one, other big carriers were drawn in. Starting Oct. 1, United plans to slash its transcontinental rates by as much as 44%, lowering a first-class tick et from New York to the West Coast from $1,340 to $750. Complained one United official: "People are charging fares that do not cover costs. But you have a choice of being competitive or giving up a large slice of the market."

In triggering the price cuts, Pan Am hoped to reverse almost a decade of near continuous losses that have rolled up $1 billion in debts for the carrier, forced it to sell its headquarters building in New York City and its Intercontinental Hotels subsidiary and finally, in August, to name a new boss, C. Edward Acker, 52. The successful chief of Air Florida, Acker replaced William T. Seawell as Pan Am's chairman.

Acker seemed to be getting the results he wanted with his bold inaugural scheme, as Pan Am's reservations lines were jammed with bargain-hunting travelers. Said he: "The phones are literally ringing off the wall." In the four days after the cuts were announced, reservations rose from 21,729 to 36,622, a 59% jump. "We had to do something dramatic," said Acker. "We wanted to make the world aware of us again."

Acker used such tactics as chairman of Air Florida to build that airline in just four years from a tiny carrier serving only cities in Florida to a Might) Mite that flies to Washington, New York London and Amsterdam. He turned Air Florida into a paradigm of what the Airline Deregulation Act of 1978 was supposed to foster: increased competition, more flexible fares and easier entry for newcomers or smaller carriers into markets long dominated by the major airlines.

But industry executives were skeptical about Acker's ability to transfer his Air Florida tactics to Pan Am. Most doubted that Air Florida's chairman, Eli Timoner, who originally hired Acker to run the airline, would let his former colleague get away with it. Said Timoner: "No one beats Air Florida at its own game." True to that boast, the airline posted $69 New York--Florida fares, undercutting both Eastern and Pan Am.

Many airline men were angry last week over what Pan Am had wrought. Snapped Neil Effman, TWA's senior vice president for airline planning: "I am not sure who can win this war. We may all end up losers. This industry has been marching toward bankruptcy like a bunch of lemmings, and we at TWA are not going to follow them over the cliff. Managements who engage in this kind of tit for tat should be fired." TWA tried to keep its cuts selective. Although it reduced prices on some flights, it maintained the normal $129 fare from New York to Orlando.

Travelers will probably not enjoy the cut-rate prices for long. Fares should bounce back to normal levels in mid-November and early December, when the holiday and winter travel season gets started. Indeed, once the price war is over, airlines are likely to make up for the lost revenue by pushing prices to levels higher than before the battle began.

Compounding the confusion in the skies was the fact that the effects of the firing of the air controllers continue to work their way through the industry.

The labor trouble last week seemed no closer to being settled than seven weeks ago, when the controllers walked off the job. Only 37 of the 12,000 controllers fired by President Reagan (out of the Professional Air Traffic Controllers Organization's total membership of about 15,000) have been rehired. And even they have to prove that they have not participated in the strike but have missed work because of illness or some similar reason. Nearly all the fired controllers are likely to appeal their dismissals, and this process could take several months.

The Federal Aviation Administration continues to echo Reagan's tough position that this is no longer a strike but a challenge to the law of the land. The agency maintains that the strike is officially over and that the workers will never be able to return to their jobs. PATCO gamely insists that its mem bers will eventually be back in their towers. Meanwhile, the FAA is continuing its efforts to take away PATCO's rights to bargain for workers with the Government. The Federal Labor Relations Authority is expected to rule on the issue this week.

The union and its supporters are also still trying to persuade pilots and passengers that air travel is no longer safe. Warned Lawyer F. Lee Bailey, one of the founders of the air controllers' union and a pilot himself: "Air commerce is not a giant sandbox in which PATCO and the Government ought to be playing war games."

U.S. air lanes are now being monitored by some 10,000 controllers, about 7,200 fewer than before the strike: 5,700 of them are PATCO members who refused to walk out or nonunion controllers; 3,000 supervisors; 850 military draftees; and 450 new employees. The FAA has nearly 900 students enrolled at its academy in Oklaloma City, which has gone on double shifts for the 17-to 20-week courses and is planning to increase its training capacity still further. Even at that, it will be perhaps three years before the controller system is fully restaffed. It is unlikely that the number of controllers will ever reach its prestrike levels. The FAA has identified 3,000 controller jobs as "redundant" and says that it will not fill them.

For the airlines, the PATCO walkout is not nearly as damaging as had been feared. Many carriers are using it as an excuse to lay off unneeded employees, sell fuel-inefficient aircraft, trim unprofitable routes, goad pilots into working more hours a month and otherwise shape up their companies. Says an official for Braniff, one of the biggest money losers among airlines: "The industry is doing house cleaning it should have done anyway."

Many of the big carriers are now doing well because their large aircraft, which were often flying half full before the controllers went on strike, are carrying more passengers, since the FAA is allowing fewer flights to take off. Their load factors--the number of paying passengers on each plane--were often up during the month of August as compared with a year ago (see chart). Fewer nights carrying more passengers can mean profits for airlines that had been losing money because of the industry's excess capacity. Said Transportation Secretary Drew Lewis: "We feel we will have a more competitive airline industry than we had before the strike."

Wall Street's airline industry watchers agree. Says Analyst Julius Maldutis of Salomon Bros.: "We believe that the current schedule of fewer flights will become institutionalized. Load factors will rise sharply, fuel consumption will fall, and price wars and discount fares will become a fond and distant memory." Analysts estimate that airlines, which collectively earned only $75 million in 1980, could earn $400 million to $600 million this year, and perhaps as much as $1 billion next year.

Industry observers, however, are worried about one unexpected fallout from the controller walkout: the "reregulation" of the airlines. The Civil Aeronautics Board began dropping restrictions on airline routes and prices in 1977 as a way of lowering ticket prices for travelers and making the carriers more economically efficient. Now, to maintain safety in the skies the FAA is limiting the number of flights and the availability of seats. That move could channel business to some carriers by fiat and shut others out, making service and fares less competitive and defeating the goals of deregulation. The end result would then be less friendly skies for new competitors and higher ticket prices for passengers. --By John DeMott. Reported by Gisela Bolte/Washington and Frederick Ungeheuer/New York

With reporting by Gisela Bolte, Frederick Ungeheuer

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