The Worst Year for U.S. Airlines

By John S. DeMott

"Like lemmings throwing themselves off a cliff''

Sir Freddie Laker, the British businessman whose Laker Airways went bankrupt two weeks ago as a victim of the cut-rate fares it once pioneered, is not alone. U.S. airlines also have big problems stemming in part from a suicidal fare war that has been raging for months.

At a time when winter vacationers should be heading for sunny shores or ski slopes, boosting the fortunes of airlines, the carriers are reporting staggering losses for 1981 and predicting worse misery for 1982. Airline executives and industry experts would not be surprised to see one or more major carriers declare bankruptcy this year. They could, says Analyst Julius Maldutis of Salomon Bros., "repeat the Laker experience."

In trouble also are smaller, fare-cutting lines that either sprang up or grew rapidly after Congress passed the Airline Deregulation Act of 1978 to improve competition. New York Air lost $11.6 million last year. Passenger traffic was so slow at La Guardia Airport that "you could roll a bowling ball through the terminal without hitting anybody," said one airline official. Air New England shut down in October, throwing 400 people out of work. Daniel May, president of Minneapolis-based Republic Airlines, whose pilots and flight attendants have been asked to defer part of their pay to cut costs, cited some of the industry's troubles: "Low fares. The PATCO strike. The recession. High interest rates. They're just killing us."

Operating losses for the nation's twelve major carriers may have reached $500 million last year, a record flow of red ink coming after losses of nearly $280 million in 1980. Revenue gains during 1981 were not enough to offset rising costs from increased fuel prices, wages, landing fees, and lost income from the air-traffic controllers' strike and reduced passenger traffic because of the recession.

The biggest problem has been wildly slashed airfares on the most popular runs. The result is a hodgepodge of pricing that makes little economic or business sense. As of last week, it cost only $77 to fly from New York City to southern Florida on some flights but $168 to go to Myrtle Beach, S.C., about 500 miles closer. The bargain fare to Los Angeles was $149, but it cost $169 to fly a little more than a third as far, to St. Louis.

The price war bewilders even Eli Timoner, chairman of Air Florida, which helped touch off the round of cuts that every other airline feels obliged to match. Things are out of hand, says Timoner, and the time has come to raise fares. Earnings for Air Florida's fourth quarter are expected to be down sharply. "It's like lemmings throwing themselves off a cliff," says he. "There's no logic to it at this point. It's unbusinesslike."

Long-troubled Pan American World Airways last year was the industry's leader in losses. During 1981, it flew about $360 million in the red. To raise money, Pan Am two years ago sold its headquarters building in New York City and made $294 million. Last year it sold its profitable chain of Intercontinental Hotels for $500 million. To sharpen a sagging management, Pan Am's board of directors encouraged William Seawell to retire last year and named C. Edward Acker, then the boss of Air Florida, as new chairman.

Acker still hopes to pull Pan Am out of its tailspin. The airline may begin subleasing its office space in the Pan Am Building and is considering moving its headquarters to Miami or some other city, where costs are lower. It may also chop more employees from its payroll; it has already let go 4,000, leaving 30,000, and cut salaries 10% across the board. Finally, Pan Am is trying to sell two of its Boeing 747 jumbo jets, although finding buyers is tough. Insists Acker: "We have over $200 million in cash. We are a long, long way from a cash crisis." What Pan Am and the industry need, he says, "is a good 15% fare increase. With that we'd be healthy."

Continental Air Lines, which has furloughed 1,500 people, sustained a $60.4 million loss last year. United ran up a loss of $123.3 million in the fourth quarter, a startling reversal of the $40.6 million profit it earned during the same period in 1980. Even Delta, long the profit-making model for the industry, was hurting. Its fourth-quarter earnings were off 81%.

Not all airlines are in trouble. Piedmont, which flies mainly in the mid-Atlantic states, doubled its earnings to $32 million in 1981. The income of Denver-based Frontier Airlines was up 38% last year, to $31.9 million. Ozark earned $17 million in 1981, its first profit in three years.

Airline creditors hope that recovery comes before they must declare their borrowers in default. Some are easing repayment terms. Braniff's bankers, for example, rescheduled $161 million of debt that was due Feb. 1.

The troubles in the skies are hitting aircraft manufacturers almost as hard as the airlines. Boeing, the largest maker of civilian planes, saw its earnings plunge 42%, to $96 million, in the fourth quarter. The company plans to cut its Seattle work force by 5,000 people. Reduced demand for airplanes also forced McDonnell Douglas last week to cancel a deal with Fokker BV of The Netherlands to build a 150-passenger jet. The St. Louis company expects to absorb a $50 million loss on DC-10 orders that Laker Airways had placed but cannot pay for.

Meanwhile in London, Sir Freddie was down last week but certainly not yet out. A loyal British public had rallied behind him and donated some -L-3 million ($5.5 million) to a Freddie Friendly Fund to help him launch another carrier. Laker and Roland ("Tiny") Rowland, managing director of Lonrho Ltd. and one of Britain's most talked-about businessmen, were considering joining forces in a new flying venture that could be airborne by April. --By John S. DeMott. Reported by Christopher Ogden/Chicago and Bruce van Voorst/New York

With reporting by Christopher Ogden/Chicago, Bruce van Voorst/New York

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