Deregulation USA: The Victors and the Vanquished

But while there have been some large casualties of airline deregulation, a hard core of major airlines is emerging which looks set to rule the roost like falcons in a hen house. Recent US airline mergers and acquisitions have included United’s buyout of all Pan Am’s Pacific operations, the takeover of giant Eastern Airlines by Texas Air/Continental and Northwest Orient’s takeover of Republic.

Most US airline executives and analysts expect a further major shakeout of airlines over the next three to four years.

In addition to this, most major airlines are taking smaller regional and commuter airlines under their wings so that all aircraft appear in the larger airline’s colours and they work entirely out of the large airline’s reservation system – effectively making them slaves to feed the giants. (refer p61, May 86 AA)

In this way the names and logos of a lot of airlines are rapidly disappearing. On July 1 for instance, Westair in San Francisco was the latest regional airline to become part of the United Express programme. Under this pact –

All Westair’s 22 aircraft flying between San Francisco and 12 nearby cities will be repainted in United colours; United Express public contact employees will wear uniforms similar to United’s; the airlines share United’s designator code on passenger tickets and in its huge Apollo reservations system; United’s mileage plus programme of free travel or- benefits for frequent fliers on its aircraft will be available to local and connecting passengers and Westair will also participate in Silver Wings Plus; United will handle reservations for United Express passengers who will receive advance check-in and seat assignment on both United Express and United Airlines; the airlines will have joint advertising.

United has already made a similar pact with Air Wisconsin for operations out of Dulles airport in Washington DC. It will also begin operating as United Express from Chicago later this year, along with Aspen Airways.

So how are the majors managing to compete with their lean and hungry fare-slashing smaller competitors?

In May, United carried nearly 4. 6 million passengers and flew 5. 27 billion revenue passenger miles. It set passenger boarding records at two of its largest hubs – Chicago and Denver, with over a million people boarding its aircraft in Chicago alone.

Its load factor was 67. 6 per cent and figures were up considerably on last year when an extensive pilot strike disrupted its operations, but failed to stop United introducing a two-tier pay scale, to make it more competitive with smaller airlines.

American Airlines, United’s biggest competitor, reported flying 4. 13 billion revenue passenger miles in May, up 1. 7 per cent from the same month last year, but its load factor fell from 70. 3 per cent to 65. 7 per cent. It reported that its traffic for the first five months of 1986 rose 13. 1 per cent over the previous year.

With figures like these, it is little wonder that United Chairman, Dick Ferris, believes that deregulation has served the public interest much more effectively than regulation and that the continuing industry shakeout will not cause any harm to travellers’ welfare.

He said the total annual benefit of deregulation in savings to travellers was $USS. 7 billion, from lower fares, added frequency and an increase in single-airline service, which travellers find convenient.

Such effects are spreading beyond the US and touching countries like Australia, where airlines like Qantas risk feeling the effects more than Ansett or Australian Airlines.

United plans to double its size in the Pacific in the next five years, be profitable in the Pacific this year and benefit from the fast growth the Pacific region will see in the next 25 years, according to its President and Chief Executive Officer, Mr Jim Hartigan.

He recently told a sales meeting in Singapore that United believes its Pacific load factors will continue to increase because the peak travel season is ahead, the decline in the value of the dollar will work in United’s favour, that US travellers are more comfortable vacationing in the Pacific and Pacific travellers will be travelling to the US.

“The beauty of this deal with PanAm is not so much what we bought today but the potential it gives us for almost unlimited expansion in the future,” he said.

Of course, arguments continue, about such subjective judgements.

The Wall Street Journal recently cast doubt about United’s prospects but United officials claimed the story was out of step with the rest of the business press and was “one reporter’s point of view which dwells on the past and fails to address the positive, aggressive steps United has taken in recent months. ”

But neither was the Wall Street Journal kind to the deregulator’s darling, People Express.

People Express, often eulogized by economists as an example of a cheap-fares airline which would prosper under deregulation, is facing increasing pressures on its viability and has recently introduced proper first class service in an attempt to win some of the business traffic which major airlines use to help subsidise low-fares travellers.

The Wall Street Journal said People’s operations had deteriorated badly, leaving many travellers in the lurch.

“Flights are being overbooked by huge margins, bags are being lost by the thousands, passengers complain that bargain fares are boosted unexpectedly and planes are chronically late,” it said.

As a result, the airline has shot to the top of the charts in passenger complaints. Despite this, Chairman Donald Burr claims People has “Absolutely the best service”.

Deregulation was considered necessary to break up the huge railways’ monopolies in the US in the last century and it appears that the airline system may be heading for oligopoly if not monopoly.

The airline market is certainly more contestable than rail, since aircraft do not need tracks, but experience is disproving the economic theory that the mere threat of competition will keep fares and prices down.

Airlines which have tried to compete with majors like United out of a number of large cities throughout the US have generally retired from the field, unable to break the hold of the well-established major airlines.

While there is competition, the major airlines will reduce their fares to compete with a newcomer, but as soon as the new airline gives up the unequal struggle, the fares go back to their old higher levels.

Thus it is possible to fly from New York to Honolulu cheaper than from Boise, Idaho, to San Francisco, just a few States away.

Now then, what about that little airline you plan to start when the two-airline policy is thrown open?